Give entrepreneurs a second chance

In a new report, “Overcoming the stigma of business failure – for a second chance policy”, the Commission argues that:

• Business closure and bankruptcy are something natural and not a synonym for fraud.
  
  
• In general, past mistakes make failed entrepreneurs “stronger”.
  
  
• Stigma deters failed entrepreneurs from deploying their increased potential.
  
  
• A second chance policy would benefit the EU’s economy.

The report suggests ways to change attitudes to bankruptcy, supporting businesses at risk of failing and actively supporting people to have a second try.

Only 1 in 20 bankruptcies involve fraud, but in the EU the general public often perceives bankruptcy as a criminal affair. As a result, Europeans are reluctant to take up opportunities for self-employment and entrepreneurial activities, because they are afraid of bankruptcy.

The Commission suggests a publicity campaign to show that making several attempts goes hand in hand with a normal learning process, research and discovery.

An example of an attempt to overcome the stigma is the German START AWARD which has a category called RESTART, to provide financial support to entrepreneurs setting up a second business.

There is also a call for reforms to insolvency law, with the report pointing out that making a fresh start after bankruptcy can be challenging from a legal standpoint. In many countries bankruptcy law treat everyone in the same way irrespective of whether the bankrupt was fraudulent or through no obvious fault of the owner.

It should be recognised, says the report that entrepreneurs who fail can start again. Bankruptcy law should include a clear distinction between the treatment for non-fraudulent and fraudulent bankrupts. In the UK, for example, all bankrupts are subject to some restrictions but honest bankrupts are discharged within a maximum of 12 months. Bankrupts whose conduct was dishonest, reckless or culpable may have restrictions imposed upon them for up to 15 years.

Many entrepreneurs lack the resources and experience needed for successful crisis management and conceal their problems until it is too late. While the number of insolvencies cannot be reduced to zero, early support will help keep insolvencies to a minimum.

For example, Denmark is introducing a pilot early warning system to help viable enterprises that are headed for insolvency owing to temporary problems, by giving them practical know-how and advice.

There should also be active support for those starting out for the second time, by removing barriers to public finance schemes and persuading banks and financial institutions not to let negative credit ratings stand in the way of restarters.