Business as usual?
Civitas, 1 November 2010
Today the government outlined a number of measures to help small and medium sized businesses. Wanting to create an ‘entrepreneurial decade’ David Cameron has asked Lord Young to carry out a ‘brutally’ honest investigation into how small and medium sized businesses can be supported by removing burdensome regulations and opening up public procurement opportunities. Such moves are welcome, however the Coalition Government still has a long way to go to champion small and medium sized enterprises (SMEs), especially if some of their initial policies are anything to go by.
Following the comprehensive spending review David Cameron has been keen to promote private enterprise as the creator of growth and jobs that will fill the void left by the stripped down public sector. The Government rightly realises that private sector growth will be vital for Britain to emerge from the recession and weather the painful, but necessary, spending cuts. However some of the Government’s policies designed to help businesses do not adequately address the needs of SMEs.
Access to credit is vital for any start-up, small or medium sized business, yet at a time when the country needs firms to be able to find finance, credit facilities, especially those offered by the main UK banks, have dried up. In response the Government announced an extension and an increase to the ‘Enterprise Finance Guarantee’ (EFG) scheme. The scheme promises to make up for the inability of many businesses to post collateral and encourages banks to lend to firms who, without the guarantee, would be deemed too risky. In essence the scheme is a good idea and builds upon the ‘Small Firms Loan Guarantee’ (SFLG) scheme, however there is one aspect of the scheme that has aroused complaint from SMEs: the state’s liability was capped at 9.75% of a bank’s loan portfolio. The result of this is that a bank will be careful not to extend too many risky loans so that over 9.75% of the loan portfolio does not go into default. The worry for SMEs is that this will discourage banks from lending to what they perceive as ‘risky’ business types, generally viewed as smaller firms. Thus although the EFG is a laudable scheme it may not produce the benefits for SMEs that the government wishes.
A similar problem is evident in the £1.5 billion ‘business growth fund’ that has been proposed by the UK’s largest banks and supported by the government. The fund will invest in firms with a turnover of £10 million or above, therefore it will ignore small and some medium sized enterprises that do not have this level of turnover. Although this is not a government scheme it is noticeable that the government has not pointed out this failing to the banks, perhaps because it knows that banks will not want to set up a fund that invests in smaller, ‘riskier’, and lesser profitable enterprises. The government’s own ‘regional growth fund’ outlined last week must take into account the needs of SMEs, however the seemingly toothless ‘local enterprise partnerships’ which will replace the ‘regional development agencies’ seem an odd way to ensure start-ups and small businesses are not forgotten.
This is not to say that the Government has not suggested some important reforms that could improve conditions for SMEs. In particular moves to make it easier for individuals to start-up businesses should be welcomed, and making self-employment seem an attractive option for young people is an obvious, if difficult, area of reform. In this case the government could seek to emulate France where registering a new business online takes 10 minutes and then a firm can immediately start invoicing. Furthermore, Cameron is right to order an investigation into government procurement opportunities for SMEs, although it is worth noting that we have been here before with the 2008 Glover review which proposed 12 key recommendations which could improve access to government contracts for SMEs. These were mostly ignored and so it remains to be seen if the new Government will only commission an investigation or whether they will actually act on its findings. Some early indications are not promising with Lord Young and government advisor Sir Philip Green seemingly issuing contradictory ideas about the payment of government contractors.
It is not right to write-off Cameron’s promise to support SMEs as mere rhetoric yet, however it is important that his government recognises the key issues facing SMEs: credit access, regulatory burdens and levelling the business playing field (especially in terms of government procurement). With this done it is important that the Coalition brings in real reform to help SMEs, steps taken so far by Cameron and co leave a lot to be desired.