Manifesto pledges to help smaller businesses

As the gen­er­al elec­tion approach­es, all polit­i­cal par­ties are des­per­ate­ly try­ing to per­suade small and medi­um-sized enter­pris­es (SMEs) across the coun­try they are the ones who can help them.

While the coali­tion gov­ern­ment has focused heav­i­ly on this sec­tor, includ­ing launch­ing the Fund­ing for Lend­ing scheme (FLS) to boost the sup­ply of cred­it to SMEs, as well as imple­ment­ing the Busi­ness Bank, not every­thing has been suc­cess­ful. There’s still a lot of room for improve­ment in terms of access to finance and help­ing small busi­ness­es to export abroad.

Phil Orford, chief exec­u­tive of the Forum of Pri­vate Busi­ness, says: “We believe that the next gov­ern­ment must put in place fur­ther mea­sures in order to tru­ly sup­port small busi­ness­es. As our mem­bers tell us on a week­ly basis, the growth of UK SMEs con­tin­ues to be under­mined by the spi­ralling cost of doing busi­ness, suf­fo­cat­ing red tape, a lack of con­fi­dence and bul­ly­ing tac­tics from big busi­ness­es.

“As such, we are call­ing on polit­i­cal par­ties to put small busi­ness inter­ests at the heart of their elec­tion man­i­festos and for the next gov­ern­ment to put the back­bone of the British econ­o­my – small busi­ness – at the top of the polit­i­cal agen­da.”

When it comes to help­ing SMEs access finance, it is fair to say the FLS has not been a great suc­cess despite changes made by the Bank of Eng­land and Trea­sury so it focus­es on busi­ness­es instead of house­holds.

This is high­light­ed by the fact that the lat­est fig­ures from the Bank revealed net lend­ing to SMEs through the FLS, which pro­vides cheap cred­it to lenders on the con­di­tion they pass on attrac­tive bor­row­ing costs to busi­ness­es seek­ing loans, dropped by more than £800 mil­lion in the final quar­ter of 2014.

In order to thaw the frozen cred­it routes, the Fed­er­a­tion of Small Busi­ness­es (FSB) has called on the next gov­ern­ment to increase com­pe­ti­tion in the bank­ing sec­tor by low­er­ing bar­ri­ers to entry and mak­ing it eas­i­er to switch between finan­cial providers.

It also wants it to pro­vide long-term back­ing for the Busi­ness Bank so it has the means to iden­ti­fy and tack­le mar­ket fail­ures and pro­mote alter­na­tive sources of finance, includ­ing peer-to-peer lend­ing and pen­sion-led fund­ing, which have become increas­ing­ly pop­u­lar over the last cou­ple of years as the tra­di­tion­al lend­ing paths remain large­ly blocked.

“Access to finance remains a con­cern for many small firms, with the reces­sion painful­ly high­light­ing the defi­cien­cies in the UK finance mar­ket,” accord­ing to John Allan, the nation­al chair­man of the FSB.

All three par­ties are keen­ly aware that access­ing finance is still a huge prob­lem for SMEs

“At the heart of the prob­lem is the over­ly con­cen­trat­ed nature of bank­ing pro­vi­sion, with four banks account­ing for 85 per cent of small-busi­ness lend­ing. As well as pos­ing risks to finan­cial sta­bil­i­ty, the high lev­el of con­cen­tra­tion restricts com­pe­ti­tion and choice.”

All three par­ties are keen­ly aware that access­ing finance is still a huge prob­lem for SMEs. In Feb­ru­ary, Prime Min­is­ter David Cameron unveiled gov­ern­ment plans to plug a £1‑billion finance gap to help firms grow and to cre­ate some­thing sim­i­lar to Germany’s Mit­tel­stand.

When it is ful­ly up and run­ning, the so-called Help to Grow scheme will choose 500 fast-grow­ing com­pa­nies each year and enable them to become mid-mar­ket play­ers through loans and pri­vate fund­ing, which will be issued by the Busi­ness Bank.

In its busi­ness man­i­festo, launched at the end of March, Labour pledged to increase com­pe­ti­tion with at least two new chal­lenger banks on the high street as well as to cre­ate a British Invest­ment Bank along with a net­work of region­al banks to boost lend­ing for small busi­ness­es to grow.

The Lib­er­al Democ­rats, mean­while, want to ensure that the state-owned banks sup­port lend­ing to busi­ness, as well as sup­port­ing more diver­si­ty in the bank­ing sys­tem, with a wide range of mutu­als, co-oper­a­tives, cred­it unions and peer-to-peer lenders, and low­er bar­ri­ers to mar­ket entry for banks.

When it comes to alter­na­tive sources of finance, Adam Taven­er, co-founder of Alter­na­tive Busi­ness Fund­ing and chair­man of pensionledfunding.com, believes the coali­tion gov­ern­ment has been high­ly proac­tive and effec­tive in the area, albeit “rather late in the day”.

The result of this shift can be seen in the Small Busi­ness, Enter­prise and Employ­ment Act, which received Roy­al Assent last week.  Key mea­sures con­tained in it force high street banks to refer SME appli­cants  they have turned down for finance to plat­forms designed to sign­post them to suit­able alter­na­tive fun­ders.

“Who­ev­er wins the elec­tion, it is vital that this direc­tion of trav­el is main­tained. The inher­ent­ly dan­ger­ous sit­u­a­tion caused by con­sol­i­da­tion and retrench­ment of the big play­ers has been recog­nised at min­is­te­r­i­al lev­el, and they have act­ed to diver­si­fy the sources of finance avail­able to SMEs,” says Mr Taven­er.

“A reliance on four main providers of fund­ing to a sec­tor which pro­duces half the nation’s GDP is insane­ly risky, and thus the ini­tia­tives to encour­age a thriv­ing SME finance ecosys­tem and a col­lab­o­ra­tive approach are both log­i­cal and eco­nom­i­cal­ly pru­dent.”

Anoth­er vital area where SMEs need more sup­port is export­ing. Experts are con­cerned that many SMEs are not try­ing hard enough, if at all, to break into new growth mar­kets as the euro­zone, the UK’s main trad­ing part­ner, strug­gles to recov­er and prob­lems in Greece flare up again, increas­ing fears that it could leave the Euro­pean Union.

Sus­tain­able future eco­nom­ic growth will rest on busi­ness­es invest­ing and export­ing more, not on con­sumer spend­ing and debt

The CBI, which rep­re­sents tens of thou­sands of busi­ness­es across the coun­try, says that while the UK’s export per­for­mance has improved, it has not matched its ambi­tions against a tough eco­nom­ic back­drop and argues it is vital for the next gov­ern­ment to redou­ble efforts in its first 100 days in pow­er.

“Sus­tain­able future eco­nom­ic growth will rest on busi­ness­es invest­ing and export­ing more, not on con­sumer spend­ing and debt. While the onus is on busi­ness­es to be ambi­tious, the gov­ern­ment has an inte­gral role in sup­port­ing firms to get into new mar­kets and nur­tur­ing indus­tries with the great­est poten­tial,” the CBI says.

“An exports strat­e­gy must also address key under­ly­ing dri­vers of export per­for­mance, such as increas­ing avi­a­tion capac­i­ty, sign­ing free-trade agree­ments and improv­ing access to finance, par­tic­u­lar­ly for medi­um-sized busi­ness­es. And, giv­en that the impres­sion cre­at­ed about the UK’s open­ness to migra­tion mat­ters huge­ly to for­eign firms look­ing to trade with British busi­ness­es, a prag­mat­ic posi­tion on migra­tion should be seen as inte­gral.”

Tack­ling late pay­ments and reform­ing the huge­ly unpop­u­lar busi­ness rates sys­tem are the oth­er most impor­tant issues for SMEs across the coun­try. In terms of what can be done on late pay­ments, the Con­ser­v­a­tives say they will force big busi­ness­es to be open about pay­ment terms, while Labour has pledged to imple­ment stronger require­ments for large firms to report on their record on late pay­ment, includ­ing the action they have tak­en to com­pen­sate their sup­pli­ers.

On busi­ness rates, which are still based on 2008 prop­er­ty val­u­a­tions, Labour would cut them this year and then freeze them in 2016 for more than 1.5 mil­lion busi­ness prop­er­ties. George Osborne, the Chan­cel­lor, last month launched a review of the busi­ness rates sys­tem, with find­ings due to be released ahead of next year’s Bud­get.

In his final Bud­get speech before May’s gen­er­al elec­tion, Mr Osborne, who has been Chan­cel­lor since 2010, said the cur­rent busi­ness rates sys­tem has not kept pace with the needs of a mod­ern econ­o­my and changes to our town cen­tres, and needs far-reach­ing reform.

The FSB has also called for the cre­ation of the Small Busi­ness Admin­is­tra­tion (SBA), sim­i­lar to that in the Unit­ed States, to act as an anchor for small-busi­ness pol­i­cy across gov­ern­ment. This is some­thing that a Labour gov­ern­ment would intro­duce to “co-ordi­nate work across gov­ern­ment to ben­e­fit small­er busi­ness­es and cut unnec­es­sary reg­u­la­tion”.

John Long­worth, direc­tor-gen­er­al of the British Cham­bers of Com­merce, con­cludes: “The deci­sions tak­en dur­ing the term of the next Par­lia­ment will have a pro­found impact on our abil­i­ty to grow busi­ness­es here at home and trade across the world.

“For the life of the Par­lia­ment and beyond, we need a busi­ness plan for Britain – with gov­ern­ment across the UK focus­ing their atten­tion on cre­at­ing the best pos­si­ble envi­ron­ment for growth, aspi­ra­tion and enter­prise.”

CASE STUDY: ENTERPRISE INVESTMENT SCHEME

“The EIS is won­der­ful – it is fan­tas­tic for investors. Not enough peo­ple know about it and not enough com­pa­nies use it, which is a real shame.” Steve Lind­sey (pic­tured above) is a first-rate inven­tor and entre­pre­neur, but if he want­ed to quit and become an ambas­sador for the government’s Enter­prise Invest­ment Scheme, he’d be hired in a sec­ond.

Mr Lind­sey is a ser­i­al EIS user. He’s just closed his fifth fund­ing round for his com­pres­sor-blade mak­er Lon­tra, three of which have relied on the scheme. “All of our non-execs are now investors,” he says. “They came on board for their tech­ni­cal skills, but found the oppor­tu­ni­ty and the EIS to be real­ly attrac­tive.”

The EIS offers tax relief for investors. There is income tax relief, cap­i­tal gains tax exemp­tion and, if the invest­ment los­es mon­ey, the loss­es can be off­set. “EIS is free from inher­i­tance tax,” adds Mr Lind­sey. “A father of one of our board mem­bers invest­ed because he was wor­ried about inher­i­tance tax. It’s an extra car­rot to attract high-net-worth indi­vid­u­als.”

Lon­tra is a high-tech super­star, with an eye-catch­ing new design for water and air com­pres­sors. The firm is hop­ing to shake up a £19-bil­lion indus­try. “We have won grants for R&D,” reports Mr Lind­sey. “That is anoth­er ben­e­fit of the EIS. It can be used for match-fund­ing for grants. You can effec­tive­ly dou­ble your mon­ey.”

There are oth­er advan­tages. “Our EIS investors come with con­tacts and skills. We’ve found a lot of our investors through word of mouth,” he says. And EIS investors can be friend­lier than ven­ture cap­i­tal­ists. “We turned away a few VCs who want­ed spe­cial shares, with anti-dilu­tion and ratch­et claus­es. We pre­fer a fair and flat struc­ture, so all share­hold­ers have the same shares and rights.”

Lon­tra used the EIS to research and man­u­fac­ture. It is now rais­ing cash to expand. “Arti­cles like this are so impor­tant,” says Mr Lind­sey. “So many more busi­ness­es should be using the EIS.”