The restrictive impact of student debt on SMEs

US research has found that areas with higher student debt have much lower small business creation, and this could have worrying implications for small businesses in the UK too.

Burdened with debt

The Federal Reserve Bank of Philadelphia used Equifax consumer credit statistics and data from the Census Bureau running from the year 2000 to 2010, and found that a one standard deviation increase in student debt correlated to an average 25% fall in very small businesses (one-five employees).

The report’s authors believe that many students find themselves so burdened with debt that they’re unwilling, or unable, to take on any more to start a business.

While English students are not yet as indebted as their American counterparts, recent changes to tuition fees and student loan systems mean that undergraduate debts may soon hit an average of £44,000, an amount that could hang over them well into their 50s. If they continue to postgraduate education, the amount increases further still.

The new trend

Writing in The Economist, Lynn Martin, Director of the Centre for Enterprise at Manchester Metropolitan University, says that the small number of loans given under the UK Start-Up loan scheme since 2011 suggest that UK students are also becoming risk averse in the face of mounting debts.

Worse still, many of these same students are ‘capital lite’, meaning they have few assets. A trend unlikely to change following the introduction of the new Mortgage Market Review (MMR) guidelines, which mean that student loan repayments are now considered in mortgage applications.

Currently, UK SMEs often use their homes as security for business loans. But this ‘capital lite’ generation is far less likely to have that option open to them. Or at least will only be able to consider it much later in their lives. So at best we might see new SMEs growing more slowly in the absence of access to loans. At worst we could see at lot less SMEs in the future.

99% of UK businesses are SMEs. They employ 81.6% of the UK workforce and have a combined turnover of around £3,300bn. If SMEs suffer, the wider economy suffers. This is a trend that must be understood, and existing SMEs must support one another for the sake of a stable, productive economy.

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