French entrepreneurs benefit from 'second chance' rule

Prior to the pandemic, French businesses were reaping the rewards of several years of reforms. A combination of changes to labour laws and a wealth of funding had led to a new wave of startups, and a clearer path to growth within France.

As the pandemic recedes, a change made back in 2013 is helping French businesses get back on track. New research shows that a major policy shift by France's central bank has had a huge impact on the business landscape - and may have precipitated the rise of French startup culture.

Until 2013, entrepreneurs whose business went into liquidation were automatically placed in a database by the Banque De France for three years. Information from this database was made freely available to all banks in France, giving them detailed information on more than 140,000 entrepreneurs.

Failure is a natural part of business, and it's not uncommon for someone's first business to fail. Data from the United States suggests that around 20% of businesses fail within a year of opening, rising to half of all businesses within five years.

These failures are often teaching moments, highlighting errors in planning, execution and conceptualisation. Entrepreneurs who emerge from liquidation with the will and energy to start another business are better positioned to create a more comprehensive business plan, and execute it more effectively.

On top of this, not all liquidations are as a result of poor management. Companies may sometimes be liquidated if they reach the end of their lives without being in financial peril, or as a result of restructuring. Yet it seems that this database may have painted all entrepreneurs with the same brush.

Unfortunately for those French startup founders prior to 2013, it seems most didn't get a second chance. The record of liquidations counted against these entrepreneurs, particularly young entrepreneurs with fewer failures, and less experience. Banks were less willing to lend them money, leaving many people unwilling or unable to start up again.

The policy shift from 2013 saw the end of this database, meaning that entrepreneurs with failed past ventures would no longer immediately be flagged. While banks still had access to court documents listing past corporate failures, they would have to weigh up whether this research was necessary.

What this has led to is a change in outlook from French banks. Rather than being strict on all liquidations, banks now tend to only research older entrepreneurs, who are more likely to have failed in past ventures. While there is no specific evidence of a relative increase in startup funding, the statistics do seem to bear this out.

A new study in the Journal of Financial Economics shows that entrepreneurs in France are now 19% more likely to start another venture under the new rule. Working in conjunction with the Banque De France, they concluded that “the suppression of the flagging system strongly facilitates restarts for younger entrepreneurs.”

While starting a second business is no guarantee of success, the confidence this gives entrepreneurs - and the potential funding - cannot be overstated. Where France once suffered from a lack of startup talent, with many entrepreneurs feeling the need to move elsewhere, startups now have the ability to take risks, and find funding opportunities within the country.

Startups in France are now benefiting from a much more supportive government and a better developed startup infrastructure, as our Starting a Business in France in 8 Steps article shows. With the tech industry booming in hubs across the country, France is becoming a startup destination, rather than a stepping stone.

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