“I started out with nothing. But after 15 years of working all hours and little sleep, I still have most of it left!” That was the rather sad comment made to me by a man who ran his own small business for years, but wonders whether it was worth the effort. The UK economy depends on small business, but too many are struggling to survive. The Chancellor of the Exchequer, George Osborne, claims “We are all in it together.” I beg to differ!
According to BIS (The Department of Business, Innovation and Skills) there were an estimated 4.9 million private sector businesses in the UK at the start of 2013, of which 99.9 % were SMEs (Small and Medium Size Enterprises). UK Small Business accounts for nearly 60% of private sector employment and nearly 50% of private sector turnover. So this is a vital sector of the economy, now and moving forward.
But there is a problem. The National Audit Office Report of November 2013, exciting titled Improving Access to Finance for Small and Medium Sized Enterprises, stated that the flow of new bank term lending to SMEs fell by 23% between 2009 and 2012. Furthermore 70% of SMEs have loan applications rejected and get no alternative finance. Loan rejection rates in the UK are about twice that in France and Germany. The current shortfall to SMEs is about £11 billion and is projected to reach about £22 billion by 2017, if the problem is not addressed.
The SME Finance Monitor 2013 report by market research company BDRC Continental showed that businesses with the confidence that they have a chance of getting finance are more likely to expand. But only 35% of SMEs planning to apply for finance believed that their application would be successful. Consequently a staggering 270,000 businesses that wanted to apply for finance never eventually did so.
But in order to address the SME problem, it has to be analysed in more detail. What are the main issues? In my opinion, lack of competition is a big one. It cannot be right that only four banks control 85% of all small business lending. Banks are also very risk averse these days. There is pressure on them to reduce their leverage and improve their capital reserve ratios, to avoid ever having to to be bailed out by the Government again. I support the proposals for a new British Business Investment Bank and a Green Investment Bank, provided they do lend and are genuine competitors to the existing banks. The Government has launched a variety of initiatives to help small business. But as The Federation of Small Business points out the initiatives are not co-ordinated and are too confusing. More than 3,000 regulations, including those relating to employment, health, safety and the environment have now been identified for removal. In its Report the National Audit Office was critical of the Treasury and the Banks. It concluded that the Treasury needs to make advice to small business simpler and the Banks need to be more flexible in their approach to lending applications.
It is also vital that funds for SMEs are sourced locally by those familiar with local business. Gone are the days when most small firms were on first name terms with their local bank manager, who knew them and their families. Now Banks have automated systems and credit scores on their clients. The public sector also has a role. Government contracts are a lifeline to many in the SME sector. Yet Governments are notoriously bad at paying bills on time.
The British Bankers Association produced a Report in July 2013 pointing out that the Banks need to do far more to reach underrepresented groups such as the ethnic minorities. When you consider that ethnic minority business contributes an estimated £30 billion per year to the economy, this matters. It found that not enough people know about such initiatives as Mentorsme.co.uk, which helps provide business mentors. Having the funds, but without the skill and experience to use the money wisely is just a recipe for failure.
There is an alternative source of funding which has been hailed as the new challenge to the more conventional source of funding through the banks. It is peer-to peer lending (not members of the House of Lords lending each other money!), but Crowdfunding. This is where a a group of individuals network and pool their money, usually via the internet, to support projects initiated by other people or organisations. There are various types of Crowdfunding models, but there are specialist company websites which provide a “platform” to bring together the originator of the idea with the funding crowd. In 2013 the Crowdfunding industry was said to be worth about £2.5 billion worldwide. I have some concerns in that Crowdfunding is still unregulated. But I understand the FCA (Financial Conduct Authority) is about to regulate it in April of this year.
At last there are signs that the Government is starting to take this SME problem seriously. The Treasury Select Committee announced recently that it will examine complaints by Small Business about banks, especially the lack of lending. Andrew TyrieMP, Chairman of the Committee , said: “Like individual customers, SMEs have been badly treated by their banks”. He added, “Regulatory and other impediments to competition need to be removed, enabling SMEs better to take advantage of new sources of finance. More competition can also drive up standards.”
The inquiry has just started and will look at how small companies are generally treated by the banks, how lenders provide access to financing and will also review competition in the Banking industry. It will hear evidence from key organisations such theBanking Taskforce Appeals Process, which handles appeals by Small firms when their lending applications have been rejected. Representatives from the Federation of Small Business, Confederation of British Industry and the Banks themselves will all give evidence.
Most small business owners realise there is no magic wand to growing a company and making it a success. Not everyone can appear on TV shows like BBC’s Dragons’ Den and get help from millionaire mentors. Patience and persistence are vital qualities that any small business owner must have. But as the economy gradually improves, so should access to finance. So the message to any would-be entrepreneur, with a good idea, is not to give up. Seek and Ye Shall Fund.
To view, “Seek and Ye Shall Fund,” in Endeavour Magazine, please click here.