Small and Medium-sized Businesses: Access to Finance
Lord Berkeley
To ask Her Majesty’s Government what steps they are taking to improve access to finance to small and medium-sized businesses.
Lord Berkeley (Lab)
My Lords, it gives me great pleasure to introduce this short debate on improving access to finance for small and medium-sized enterprises. There has been much concern among the SME fraternity about their business health, but I detect little evidence of success in the government policies in that direction so far. I think they feel hard done by by this Government. However, as the National Audit Office said in a recent report:
“SMEs play an important role in job creation. Three-quarters of all new jobs in the UK are created by SMEs”.
That is an amazing figure, really. The report continues:
“It is therefore important that SMEs with potential are able to obtain the finance they need so that they can grow”.
Any trawl of the Government’s website, and of the BIS page in particular, will show the enormous range of support that the Government offer. The Enterprise Minister, Matthew Hancock, set out the Government’s offer to SMEs in December. Many people find the list a bit confusing. Behind all that, the message that the SMEs give is that the biggest problem is a lack of finance. It may not be there and it may be very expensive. Equally importantly, they may need even more finance than they would otherwise because government departments, large companies and others are taking so long to pay their bills that more working capital is required just to keep the business going. I shall speak a bit more about that later.
It is good for the Government to say that they are doing so much, but the experience in the field is rather different. I have a couple of examples. Five or 10 years ago a good friend of mine developed a restaurant in London that is doing extremely well, and has extended it to three or four branches. I saw him yesterday and he said, “I want to expand further, not just in London but to some of the regions—Manchester, and Bristol eventually”. He has a very good track record and is comparatively risk-free, but he found that he could not get the kind of finance that he might have been able to five years ago, and has had to beg round to get enough just to take things further. This can be seen as just a London issue, but it is not—he wants to go to Manchester and other places where jobs are surely important.
Then there is the infamous case of the Royal Bank of Scotland, which was extensively written about by the Sunday Times in the autumn. A gentleman called John Morris, who is not an SME but sadly received the SME treatment, was trying to do up a house into luxury apartments and, towards the end, when he needed £2.5 million to sort out the snagging—there must have been a lot of snagging in that building, but there we are—the Royal Bank of Scotland pulled out at the last minute, causing his cheques to bounce. I will not repeat the long story, but effectively they put him into liquidation, took the building into their property arm and used it. The inference is that they would then develop and sell it and make a lot of money and that the poor man would be left with nothing. He now seeks to sue RBS over claims that the assets were unfairly seized by the property company.
I understand that the Business Secretary, Vince Cable, has called on City watchdogs to examine this very serious allegation. Lawrence Tomlinson, the multimillionaire enterprise tsar, has published a report. What he has said is quite clear. I have a summary of his findings, which show that the,
“RBS is engineering a business into default in order to move the business out of local management and into their turnaround division … This then generates revenue for the bank through fees, increased margins and the purchase of devalued assets by their property division”.
His conclusion is:
“Without competition in the banking sector, these scandals will continue to come to light and ever more business will be hurt in the process”.
I certainly agree with that. The Government need to deal with this issue of size, lack of competition and a certain degree of arrogance, especially as they own RBS.
There is another issue that I touched on earlier. It is the question of finance needed for late payments by big companies. This was debated in the debate to which I contributed on 24 May 2012. That is some time ago. We had a lot of discussion about big companies like National Grid, which seems to have a late payment policy, and even then it does not comply with it. Some 34% of suppliers had to wait 91 days to be paid, according to Dun & Bradstreet. That process seems to be carrying on now.
I found the Question this afternoon on NHS Property Services to be interesting. This is a wonderful example of late payment. NHS Property Services is in trouble because the hospitals and other buildings that sit on its property were late in paying rent. So part of the NHS is not complying with, presumably, its own procurement procedure and is putting another part of the NHS into financial trouble. If the NHS cannot pay itself on time, what hope does anyone else have? I hope that the Minister will make some comment on this.
I am pleased that 18 months—or perhaps it is two and a half years; I cannot count—after this was raised, the Prime Minister has announced a consultation. The headline of an article from 16 October 2013 on the announcement says that, “Government could launch fines for late payment”. The article also mentions,
“a YouGov report suggesting that some 85 per cent of small businesses have endured late payment over the last two years”.
That is a big percentage. The article goes on to say:
“Outstanding payments to SMEs are now thought to exceed £30 billion, and the average business waits 38 days for payment”.
It is not clear to me what if anything the Government are doing about that. Perhaps the Minister can tell me where that has got to. It is a big problem, so how will this be enforced?
There has been a lot paper but a lack of finance, and late payments are causing a lot of problems. In its report of November 2013, Improving Access to Finance for Small and Medium-sized Enterprises, the National Audit Office is critical of the Treasury and the banks. It basically says that the Treasury needs to make things simpler and easier to understand, and urges the business bank to be more flexible and,
“target SMEs’ lack of awareness”.
I do not know whether that is going to happen. It may be that the Minister will tell us a bit about the business bank, but it is not going to directly lend or invest in businesses. What is it going to do? Will it actually help small businesses? I do not know. According to the House of Commons Public Accounts Committee, the answer is basically that the bank will not do very much. The committee’s report recommends:
“The departments should use the establishment of the British Business Bank to start managing the various schemes as a coherent programme”.
There is a lot more there.
I agree with Ed Miliband, the leader of the Labour Party, who says that this problem has been going on for a long time. There is too much power concentrated in too few hands in the banking industry. Four banks control 85% of small business lending. They are not lending, give poor customer service and are risk averse. I support his proposals for a Green Investment Bank and a new British business investment bank, provided that it lends.
In conclusion, small businesses need a climate in which to flourish, which they do not have at the moment. They need confidence. Who is winning? The big boys are winning at the moment. Small businesses need long-term stability and the debate about Europe is not helping. It certainly will not help small businesses. I could go on but we are having a debate about Europe tomorrow. I am much looking forward to the contributions from other speakers, who are much more expert than I am, and to the Minister’s comments.
Earl Attlee (Con)
My Lords, I should point out that this is a topical QSD and is limited to 60 minutes, even though it is last business, as provided for in the Standing Orders. Noble Lords have four minutes, and when the clock shows four minutes, they will be into their fifth minute.
Lord Berkeley
My Lords, it says on today’s lists that the debate is time limited to 90 minutes.
Earl Attlee
My Lords, that is why I came to the Dispatch Box. There is a slight error on the list. The timings are correct but the overall time suggested is not correct.
Lord Sheikh (Con)
My Lords, I should like to thank the noble Lord, Lord Berkeley, for introducing this debate on an important subject. I express an interest in this debate as the chairman of an insurance organisation that helps smaller organisations to place their insurance covers.
I have always supported the cause of SMEs. I echo the words of the Prime Minister earlier this week when he said that SMEs are key to Britain’s economic recovery and make a great contribution with their innovation, hard work and determination. They make up around 99% of all private sector businesses and provide nearly 60% of private sector employment. During this Parliament, a number of measures have been brought forward to help SMEs grow. Among them are the cutting of £l billion-worth of red tape and the extension of small business rate relief. The Government have also worked to make Britain’s tax system more competitive, with corporation tax being the lowest in the G7 and a £2,000 tax cut on national insurance contributions coming in from April 2014.
The problem that SMEs have in accessing finance has dominated debate in recent years, but some important steps have been taken. The £1 billion British Business Bank aims to increase the supply of capital to SMEs and introduce more competition to the banking sector. In addition, businesses that would otherwise lack adequate security for a loan are being helped through the enterprise finance guarantee.
It is also important to remember that banks are encouraged to lend to SMEs. The Government hope to do this by allowing banks to borrow from the Bank of England at cheaper than market rates through the Funding for Lending scheme. More also needs to be done to allow more people to start their own businesses. The Start Up Loans initiative was created to help people to get their businesses off the ground. As someone who promotes Islamic finance, I was very pleased with the recent announcement by the Prime Minister that start-up loans will also be available on Islamic principles. However, we are in a competitive world and there is always more that can be done.
Despite multiple support schemes for small firms, research has suggested that unfortunately there has been limited success. The Federation of Small Businesses has said that current business support is congested and confusing. Many SMEs still struggle to access the finance they need, and recently overall lending to SMEs has fallen. I ask the Government for an explanation of what is being done to ensure that the right support is targeted at the right businesses.
I also believe that more should be done to make these schemes act as a coherent programme rather than a collection of separate initiatives. I ask my noble friend the Minister what, if anything, is being done to this effect. We also need to get more of the UK’s large businesses to play a supporting role for SMEs. Often big businesses do not pay small suppliers promptly. Small firms suffer cash-flow problems because work is not paid for in the agreed time, and they spend valuable time chasing payments.
As someone who has promoted the undertaking or more overseas business, I believe that all exporters, no matter how small, should be able to access high-quality government support. In conclusion, the Prime Minister has said that we are in a global race, and more SMEs should build overseas connections and be involved in enhanced trade.
Lord Stoneham of Droxford (LD)
My Lords, in the brief time available to me, I should like to indulge the House with a parable based on a true story. When I studied the Industrial Revolution at university, I always associated a man called Henry Cort, the inventor of Cort’s puddling process in iron-making, with Abraham Darby, Ironbridge and the northern industrial areas. When I came to live near Portsmouth, I discovered that he was a supplier to the Navy, and, having patented his process, he built a new iron mill at Fontley, four miles from where I live. He needed funds for his new foundry and he borrowed £30,000—worth over £2 million now. He got the funds from Adam Jellicoe, chief clerk of the pay board of the Royal Navy, who secured the money on the patents registered by Cort.
One might wonder how the chief clerk of the pay board of the Royal Navy could afford such a vast deal. He had, of course, a ready source of funds and—you guessed it—he was the Robert Maxwell embezzler of his time. The money had come from the Navy payroll. Poor Mr Cort. The Navy took his patents, and although 8,200 puddling furnaces were built by 1820, Mr Cort saw no financial benefit from his innovation. When the Navy purchases fell back, his foundry bankrupted him. He died in dire straits and is buried in Hampstead.
The lessons of that story for small businesses are as important today as they were then. First, sources of secure funding are absolutely essential for the establishment and growth of small businesses. Secondly, just as important is the guidance of mentors and advisers to innovators if an idea is to reach its commercial potential. Thirdly, funds for SMEs have to be sourced locally by those familiar with local businesses who lend and by small businesses which do not have the time or resources to go further afield. Fourthly, the public sector has a role. The public sector rarely wins prizes for business innovation but it can be a valuable partner to small businesses. It is a purchaser of goods. It should be committed and forced to pay its bills on time but it also can provide seed-corn funding to reduce risk and leverage other sources of funds.
Sadly, our banking system has delocalised just when localism was most needed. The Government have spawned an array of new funding schemes, including the business bank and the green bank, which are all great initiatives. But where does an SME go when it needs to get help and easy access to funds?
Reverting to my local area, we must not underestimate the role of local economic partnerships in providing a hub of activity, advice and funding for SMEs. My local LEP, the Solent LEP, has brought together Portsmouth and Southampton, which is a huge achievement in itself. It is backed by local authorities, chambers of commerce, the universities and local businesses, both big and small. It is now using the regional growth funds to encourage new business development linked closely to job creation.
Bridging the Gap is one of the initiatives to help businesses get going and expand to create specific jobs. The idea came from one of our local MPs, Caroline Dinenage, and it has the support of the local newspapers, the Portsmouth News and the Southern Daily Echo in Southampton, which are keen to have good news stories. They publicise the initiative, which it is hoped will ensure that local businesses can get initial funding and then leverage that with other funding. LEPs are at an early stage but the aim should be for them to become hubs for local business development and job creation, with local authorities, universities and local businessmen driving the development of business and job growth.
Lord Bilimoria (CB)
My Lords, I thank the noble Lord, Lord Berkeley, for bringing this debate before the House at this crucial time for our economy, particularly with regard to SMEs. I have started a business from scratch. There were two of us and we were even smaller than an “S”; then we were an “S”; then we became an “M”; and now I have a joint venture with a large multi-billion global company. I have been there and done it, and seen how difficult it is to raise finance as a growing business. SMEs are the engine of our economy and they need funding to grow.
Confidence is beginning to return to business and businesses want to grow and invest but there is difficulty in raising money. I do not want to banker bash but a number of issues need to be raised, including poor banking lending practices, punitive charges, interest rates, difficult guarantees, the exclusion of certain loans from approval and the changing relationship with banks. In the early days when I started in business, senior bank managers had experience. Now there is a lack of experienced managers. Bank managers do not have the authority to lend more than £50,000 in many cases. I know that many SMEs struggle to raise finance.
Bank managers are terrified of taking the risk. They weed out applications that they think are doubtful. The lack of lending means that businesses cannot grow, innovation suffers, our exports suffer and we become uncompetitive as a country. I hope that the business bank will help the situation. Can the Minister advise us when the business bank will come into operation and action? Awareness continues to be an issue. The Government have a number of schemes but, from what I have seen, just over 50% of businesses know about it. However, that means that more than 40% of businesses do not know about all the support that is available. What are the Government going to do about that?
There are horrible stories about banks which continue to bully SMEs through either restrictive covenants or excessive charges. They find excuses to call in loans, to take security or to break covenants. This is terrifying for a business. Often you can see them extracting extra interest charges, invoking covenants in the original facility letters or instructing new valuations with costs to be met by the borrower. When it comes out lower, the bank may increase the margin, call in the loan or ask for capital repayments. This is distressing for businesses which quite often are just abiding by making payments. I know of personal examples of businesses that have been bullied and have had to pay up to £100,000 worth of excessive legal fees and valuation fees when they have been making their payments and, in the end, they were absolutely fine. Extortionate fees are still being charged and in many cases high street lawyers are conducting the cases. Will the Minister take this up with the banks to make sure that excessive legal fees are not charged by banks?
Will the Minister meet the CEOs and directors of the banks to address all these issues—the valuations, the legal fees, the aggressive attitude and the lack of funding—so that we can have a brighter way forward? Will he also update us on all the government and BIS-led initiatives that exist of access-to-finance schemes—loan guarantees to SMEs, loans for start-ups, the EIS scheme, the Enterprise Finance Guarantee, the Seed Enterprise Investment Scheme. There are so many schemes. Will the Minister tell us what is going on with these schemes? There are also growth accelerators. There are a plethora of them. How effective are they and are they succeeding?
The noble Lord, Lord Berkeley, mentioned the Tomlinson report. It was reported in the Telegraph by Louise Armitstead that more than 1,000 companies have come forward with allegations of morally wrong treatment at the hands of the Royal Bank of Scotland’s restructuring division. Lawrence Tomlinson had told the Treasury Select Committee that his “dossier” of cases against RBS’s global restructuring group has “continued to grow” since he published the report. He claimed that RBS was “killing off” small businesses for its own profit. This person is the entrepreneur in residence at BIS and he recommended that RBS and the Lloyds Banking Group be divided into three separate banks. Does the Minister agree that that is the correct course of action? Tomlinson argued that despite the financial crisis, British banks are still too big to fail and too big to regulate. He said that without radical action there would be,
“nothing to stop 2018 becoming another 2008”.
Lord Leigh of Hurley (Con)
My Lords, I thank the noble Lord, Lord Berkeley, for introducing this important debate. I speak as someone who has spent the past 30 years advising SMEs on corporate finance matters and I draw noble Lords’ attention to my entry in the register of interests which discloses that I am the senior partner of Cavendish Corporate Finance. My focus has been on advising SMEs on their exit strategies, but that has included helping them to raise finance.
In my opinion, this country has a superb track record of encouraging entrepreneurs to start businesses and grow them, and I was personally encouraged by the pro-business environment of the late 1980s under the previous Conservative Government to start my own business. My partner and I each invested £10,000 with a commitment to each other not to draw a salary for a year because we knew that no bank would back us. Accordingly, I have always believed that it is not governments who create jobs but businesses like mine.
Life has moved on since those days and there is increasing recognition that help and assistance has to be given to SMEs, which are the backbone of the British economy, as the noble Lord, Lord Sheikh, said, and more importantly will be the engine of growth. It is clear that the Government are doing an excellent job in facilitating the proliferation and growth of SMEs, unlike the traditional banks, as the noble Lord, Lord Bilimoria, said, whose central control of decision-making, depriving local managers of important decisions, and in some instances disgraceful behaviour, should be investigated by the Minister.
Under the coalition agreement, however, the start-up loans scheme has been a tremendous success with a staggering 10,000 start-up loans being celebrated late last year, as noted in this House. Encouragingly, the number of private sector businesses in the UK has increased to 4.8 million at the start of 2012, which is a record. The Government have encouraged SME entrepreneurs in a variety of ways. More than 3,000 regulations, including those relating to employment, health and safety and the environment, have been identified for scrapping or improvement through the red tape initiative and businesses are now allowed much more flexibility when downsizing.
The one area that does need attention is financing. I remember as a university economics student in the 1970s studying the equity gap, which some may remember was defined in the Wilson report. At that time, a huge problem was financing equity investment into SMEs. I was particularly pleased to see the EIS and SEIS schemes, which have enabled entrepreneurs to raise seed capital from friends and family, helping them to make the big decision to start up.
I warmly welcome the success of the business growth fund, which I see being extremely active in the marketplace carrying out equity investments in businesses. I am keen to see the implementation of the business bank, which should have some £4 billion and will match Germany’s KfW, which has done so much to help the German Mittelstand with much greater numbers. I note the concern of the House of Commons Public Accounts Committee that the main challenge is not new initiatives but, as the noble Lord, Lord Bilimoria, indicated, making sure that SMEs are aware of the plethora of financial help and assistance now available to them. This is the right direction of travel. There is currently a huge range of financial assistance being offered by this Government to SMEs—the problem is communicating that to entrepreneurs.
Finally, I wish to raise a point of concern about peer-to-peer lending—this is not meant to refer to debts between Members of the House of Lords but to crowd funding. Although hailed as the new disruptive technology to challenge the banking industry, and thus welcome, I have some concerns about it and am pleased to note that from April 2014 the industry will be regulated by the FCA. It is still currently a tiny industry, but I wish to express concern at its huge rate of growth. There needs to be much more examination of how the money is lent and the experience of management in making loans and spreading risks for lenders. Peer-to-peer lending should provide a further excellent opportunity for access to finance for SMEs. However, we need to be prepared for failures ahead, as history shows that the current tremendous economic growth, created by coalition policies, will lead to businesses overtrading and could lead to defaults on such borrowing.
Viscount Hanworth (Lab)
My Lords, small and medium-sized enterprises, SMEs, depend mainly on commercial banks to provide finance via loans, overdrafts and credit cards. According to the evidence from a National Audit Office report, lending to SMEs was negative in almost every month from June 2011 to August 2013, which is to say that, during the period, adequate finance was not forthcoming from the banks. We are told that 37% of SMEs use no external finance. More of them use credit cards or overdrafts than loans. Loan rejection rates in the UK are around twice those of France and Germany and, of those SMEs whose loan applications are rejected, 70% can find no alternative sources of finance.
The present dearth of financial support is undoubtedly a consequence of the need of our large banks to reduce their leverage—they have been endeavouring to improve their reserve ratios by limiting their lending. The manner in which they are doing this has caused acute distress among many small enterprises. A recent edition of the BBC’s “File on Four” radio programme, “Default by Design?”, bore witness to this. The programme focused its attention on the practices of RBS, the Royal Bank of Scotland, 80% of which has been in public ownership since it was rescued from insolvency. The Tomlinson inquiry, which was briefed by Vince Cable to investigate the practices of the bank, has alleged that it has been sinking good businesses so that it can profit from their demise. The BBC programme provided evidence to substantiate this allegation, and some startling malfeasance was revealed. A subsidiary agency of the bank was able to acquire the assets of businesses that had been driven into financial difficulties by the effect of the interest rate swaps that the bank itself had foisted on the businesses.
Modern bankers deal with small businesses in a manner that differs markedly from traditional practices. Banks have become increasingly remote from local industry and commerce. In the past, a bank manager would be expected to have an intimate knowledge of his business clients and of their enterprises. Within our lifetimes, the number of private clients of banks has increased dramatically, but nowadays they are dealt with, not on a personal basis, but on a statistical or algorithmic basis, and the same methods are applied to small businesses. The algorithms of banking have two aspects. On the one hand, there is the matter of global resource allocation, which determines the size of the funds that are available for lending, as well as the threshold of creditworthiness. The second aspect is the assessment of the creditworthiness of the potential borrowers, which is also described as their default risk.
A callow young manager can nowadays handle the essential decision in respect of a loan application by a small business in a seemingly objective manner that requires no expert knowledge on his part. The decision depends on a credit score that is formed from an additive combination of measured attributes, both numerical and categorical, that are recorded in a computerised database. The aggregate score is compared to a threshold value, and the request for a loan is granted only if the threshold is surpassed. The typical basis for such decisions is a statistical analysis that covers a large sample of cases. This is a decidedly obtuse way of going about the business.
It is an undoubted statistical fact that a large proportion of start-up businesses are bound to fail. On the other hand, it is among such businesses that the most dynamic elements of a developing economy will be found. It used to be the task of a bank manager to exercise his judgment in discriminating between the businesses that would be viable and those that were bound to fail. The effect of the algorithmic approach is to deny funding to the majority of start-up enterprises on the grounds of the high rate of mortality of the group as a whole. This is profoundly injurious to our future prosperity and to the prospects for employment.
Another dire consequence of the modern approach can arise when, on account of a need to reduce its leverage ratio, a bank such as RBS decides to heighten the threshold that is applied to credit ratings. A group of businesses will then become liable to have their loan facilities withdrawn. It seems that RBS is far more adept at driving its decisions to foreclose on such businesses than it is in assessing their true prospects.
A hit squad called the Global Restructuring Group resides within the bank. The group is intended ostensibly to get businesses back in shape by providing helpful advice and, possibly, by restructuring the loans. Its true purpose seems to be to foreclose on those businesses in a manner that will be most profitable to the bank. This is the kind of abuse that the Labour Party has in mind when it calls for the restructuring of banks and the establishment of new banks to compete with the existing ones.
Lord Storey (LD)
My Lords, I thank the noble Lord, Lord Berkeley, for facilitating this debate. It has never been truer that, in a recovering economy, the importance of SMEs is paramount. I suppose that the direct answer to the question of what steps Her Majesty’s Government are taking to improve access to finance for SMEs is the fact that, at long last, the Government have established a business bank—a business bank that has set itself an impressive target of supporting £10 billion of new and additional lending; a business bank that will help small companies struggling to secure finance.
I was fortunate to sit on the Select Committee which looked at how SMEs could increase their exporting, and the published report, Roads to Success: SME Exports, is an important contribution to understanding the importance of SMEs to the economy and how we could have more of them exporting. We would certainly make huge economic progress.
The Select Committee looked at the barriers to exporting: why should a successful SME choose not to export? How could we encourage them to export more? As you can imagine, the reasons and solutions were complex and numerous, but one issue was paramount in their concerns: that, of course, was access to finance.
It is interesting to note that the SME Finance Monitor report by BDRC Continental showed that businesses with the confidence that they had a chance of getting finance were more likely to expand. However, there is a real deficit of confidence when it comes to SMEs looking to get finance. Only 37% of SMEs planning to apply for finance believed that their application would be successful, whereas the actual rates are a lot higher, at almost 67%. The research identified a staggering 270,000 businesses that wanted to apply for finance but never ended up doing so. The report identifies this lack of confidence in their chances of success as a key reason.
These figures show that SMEs often will not apply because they do not think that they will be successful, when actually the opposite is true. That may be why there is a feeling out there that banks are not being supportive. We need to give confidence to them to go for it. The British Bankers’ Association, with its Better Business Finance initiative, is attempting to increase this confidence by awareness-raising campaigns to change that mindset. The message is: approach lenders and you are likely to get the finance that you need to grow and, hopefully, export.
While I constantly hear that banks are doing all they can to prevent finance and lending, my observational experience is that the situation is not nearly as grim as is often painted. I recently met representatives from Santander to talk about how they are helping families in difficult times. The conversation turned to SMEs, and they told me of their ambition to be the SME bank of choice across the country, and how, in the first nine months of 2013, the bank had increased its net lending to SMEs by 11%, opened 15 new business centres, increased the number of relationship managers and established a capital growth fund of £2 million for fast-growth SMEs, which will include trade missions, mentoring and seminars.
That is just one bank, and I do not want to single it out. I know from other contacts and evidence that banks gave to the Select Committee that other banks are just as committed. Of course, we should also mention the successful Funding for Lending scheme.
I started my contribution to this debate by mentioning the importance of the British Business Bank. Since its launch, it has made an impressive start. Total lending and investment support is up by 65% for the first six months of 2013 compared to 2012; £600 million in new finance is now reaching smaller businesses; 10,000 businesses are already benefiting from its support. Access to finance is the lifeblood of SMEs, just as SMEs are the lifeblood of the UK economy.
Lord Taylor of Warwick (Non-Afl)
My Lords, I thank the noble Lord, Lord Berkeley, for making this timely debate possible.
One evening back in 2007, I was half watching the BBC TV business programme “Dragons’ Den”. A number of people with various hopeless and hapless business ideas had been crushed and humiliated by the comments of the panel. Then, up the stairs walked somebody completely different. He was a black gentleman with dreadlocks named Levi Roots. Instead of the traditional business presentation, he decided to sing his application while playing a guitar. It was such an impressive performance that Peter Jones and Richard Farleigh decided to invest in Levi’s Reggae Reggae Sauce.
Since then Levi has become a multi-millionaire and his sauces and ready meals sell in major supermarkets here and abroad. I was privileged recently to interview Mr Roots for the media. In addition to the surprise of hearing that Levi Roots’s real name is Keith, he was very frank and open about his success. He said that although he always knew he had a good product, he realised he could not take it further without the sort of mentoring and financial backing that he got from the Dragons. The banks were not interested. Levi was one of the lucky ones. But I wonder how many other Levi or Lavinia Roots there are out there.
The ethnic minority business sector contributes an estimated £30 billion per year to the UK economy, but evidence from the Black Training and Enterprise Group shows a gap between the aspirations of minority groups to set up their own business and the actual number who do. Only about 6% do, and the majority fail in the first year of operation.
In July last year, the British Bankers’ Association produced its Ethnic Minority Business and Access to Finance Report. It found that the banks need to do far more to reach underrepresented groups in the SME sector. It also encouraged ethnic minority groups to make full use of initiatives such as the website Mentorsme.co.uk, which helps provide business mentors; and it recommended a series of roadshow events across the country, focusing on inner cities. It also urged banks to link up with the various ethnic minority business groups.
There is something that the report did not mention which I would recommend. The banks and relevant government departments should build stronger relationships with faith groups, because many business people from ethnic minority communities are also members of the Pentecostal church, the mosque or the temple, depending on their faith.
Although the main theme of the debate is finance, I argue that mentoring is just as important, if not more so, in the early stages of a small business. A black teenager was dyslexic in a west London school in the 1980s. It was assumed that he was stupid, so he was put in a remedial class. He left school as a failure, but somehow he got into art college. A few people began to encourage and even to mentor him. That young man eventually went on to win the Turner prize, a Golden Globe and the New York Film Critics Circle prize, and his latest film, which he directed, called “12 Years A Slave”, may win an Oscar and is set to gross hundreds of millions of dollars. His name is Steve McQueen and he has become a huge UK film export. It is a British film because he and many of the main actors are British. Like Levi Roots, everything turned out well for Steve McQueen, but it could so easily have gone the other way. How many other Steve or Stephanie McQueens are we missing out on?
This is my last point. The Lord Mayor of London, Fiona Woolf—only the second female lord mayor since 1189—last week launched the Power of Diversity programme, a series of lectures and conferences to promote diversity. I am glad to say there are some banks involved in that. Hopefully we can soon say, truly, that diversity means business.
Lord Stevenson of Balmacara (Lab)
My Lords, I congratulate my noble friend Lord Berkeley on securing this debate and thank all noble Lords for their contributions. We have heard about the range, diversity and potential for growth and employment that exists in our SMEs. Surely it is common ground in this House that if Britain is to grow its way out of the current cost of living crisis that people are experiencing, and we are to build a balanced recovery that lasts, we need to do all we can to help our small businesses grow and create new jobs.
To create more and better-paid jobs, Britain needs more small businesses and it needs the best of them to scale up. A number of noble Lords have mentioned the resources and skills that are required here, including mentoring, but the main problem always seems to be, and comes back to, receiving finance. In this context, we have heard today about some rather difficult issues being alleged against the Royal Bank of Scotland, owned by the taxpayer. In the press today there are reports that Lloyds is cutting down its SME division. In his response, could the Minister tell us what is going on in our banks?
Several noble Lords mentioned the recently published NAO report. It shows that the flow of new bank term lending to SMEs fell by 23% between 2009 and 2012, that 70% of SMEs have loan applications rejected and get no alternative finance, and that the funding gap—the difference between the funding required by SMEs and the funding actually available—is currently between £10 billion and £11 billion but may reach about £22 billion by 2017. There is clearly a real problem here.
It is this sort of consideration that prompted the Labour Party and its BIS team to back a number of initiatives. The first was to support the UK’s first ever Small Business Saturday, which took place on 7 December. It resulted in an additional half a billion pounds of trade going to small businesses. Initiatives like this can help, but we also think that the Government need to do more to ensure that firms get access to the financing capital they so desperately need. That is why we believe that there should be greater competition within the banking sector. We need something that every other G8 country has—a proper state-backed lending institution and, alongside it, a network of regional banks that really understand local business needs. Will the Minister confirm that the current work on a British investment bank in his department will help resolve that problem?
We will also go further. My noble friend Lord Adonis recently published a report on a recommendation to establish a UK small business administration, which we intend to set up if elected in 2015. This would create a step change in the opportunities for small businesses from government procurement, improve the quality of support available, and operate alongside the British investment bank and the network of regional banks I mentioned. Will the Government also match this initiative?
Lord Popat (Con)
My Lords, I thank all those who have contributed, particularly the noble Lord, Lord Berkeley, who initiated this important and timely debate. I say that it is timely because a lot is happening, although there is a lot more to do. In my response I shall outline the measures that the Government are taking to improve access for our small and medium-sized businesses through schemes such as Funding for Lending, the creation of the British Business Bank, and by increasing competition in the business finance market.
The UK economy is recovering from the biggest financial crisis in generations. Alongside the Government’s strategy for deficit reduction, we have committed to ensuring that businesses can obtain the finance they need for investment and growth. The Bank of England’s most recent Trends in Lending and credit reports show that confidence is beginning to return, helped by interventions such as the Funding for Lending scheme and the British Business Bank. However, we recognise that challenges remain for smaller businesses.
Let me start with Funding for Lending. In April last year, we extended the Funding for Lending scheme to bring non-bank credit providers into scope. We also increased the Funding for Lending allowance that banks earned by lending to SMEs. In November, additional changes and incentives were announced to focus the scheme still further on encouraging lending to SMEs, the sector of the economy where it is now most needed. The evidence to date is that Funding for Lending has kept the overall cost of credit to SMEs down, which has helped in a tough trading environment. However, with the recent changes there is scope for it to do even more to encourage SME lending.
A number of noble Lords, including the noble Lord, Lord Berkeley, mentioned the British Business Bank. Substantial progress has been made in setting up the bank, which will be fully operational in the autumn of this year pending state aid approval. We will need European approval to get the state aid approval through. The chair, the senior independent director and the chief executive officer are in place. Collectively, they have strong financial sector backgrounds and small business lending experience—from the private and public sectors, but most importantly from the banking and regulatory sector—so we will have a good team to run our new British Business Bank. The British Business Bank will support economic growth by bringing together public and private sector funds to create more effective and efficient finance markets for our small and medium-sized businesses. It will do this by bringing together the management of existing government loan guarantee and investment schemes, and it will have the flexibility to develop new initiatives to form a comprehensive package of support for UK businesses. I will outline this in more detail.
Existing British Business Bank schemes are already delivering. They supported total lending and investment of £650 million in 2013, an increase of 70% compared with 2012. As of the end of 2013, over 25,000 smaller businesses were benefiting from British Business Bank support. The Government are determined to build on this level of support. We have developed a new wholesale loan guarantee programme that will make small business lending more capital-efficient for banks, thus incentivising them to increase lending to businesses. Through the British Business Bank, a £300 million investment programme is designed to increase the supply and diversity of finance available to SMEs through non-bank lending channels. It operates on a commercial basis, with the Government investing on equal terms to the private sector. This includes challenger banks and peer-to-peer lenders. Overall, as my noble friend Lord Storey mentioned, the British Business Bank’s resources will help to unlock up to £10 billion of additional financing for smaller businesses over the next five years.
The third point is on competition, which was mentioned by the noble Lords, Lord Berkeley and Lord Stevenson. Alongside the British Business Bank, the Government are also taking steps to increase competition and choice in traditional banking and raise awareness of the support available. There has been an acknowledged overreliance on our four biggest banks, which between them account for 85% of business current accounts. However, action on a number of fronts is being taken to change this. First, two new banks, Williams & Glyn Bank and the Trustee Savings Bank, are being spun out from the Royal Bank of Scotland and Lloyds Bank and will establish a significant presence in the banking market. Other challenger banks such as Metro Bank, Shawbrook, Aldermore and Cambridge & Counties are also growing in scale and significance.
Secondly, significant changes have been made by the financial regulators to reduce the entry barriers for new banks. New entrants now face lower capital liquidity requirements and approval processes have been streamlined. These changes are already making an impact; there are currently more than 20 applications for banking licences being considered by the financial regulators so, given time, we will have real competition and a real regional presence as well. Apart from the five we already have in place with Williams & Glyn and the TSB coming forward, those 20 new applications will, I hope, mean that we will have a substantial number of new banks in the market and that competition will close some of the problems we currently face. Thirdly, the Office of Fair Trading is currently undertaking a market study of SME banking. We await the findings with great interest and will consider them carefully.
Other work to increase competition includes the introduction last September of a seven-day switching service, which makes it far easier for consumers and small businesses to switch their current accounts. In December 2013, more than 83,000 customers switched their current accounts, an increase of 54% on the equivalent figure in December 2012.
A couple of noble Lords mentioned awareness. The banks are playing their part. Last week, the major banks launched a campaign aimed at restoring confidence among small businesses that finance is available. In other words, they are inviting SMEs to apply with a view to lending money to them. A core element of the campaign is raising awareness of the appeals process. If an SME has been rejected by the bank or is unhappy with the conditions it is offered, it now has a right to appeal. To date, more than 8,000 appeals have been submitted, of which more than 37% have been overturned, facilitating an additional £40 million of lending. The scheme provides a vital reassurance that banks will consider all lending applications thoroughly, but it needs greater visibility to encourage more businesses to seek funding. The banks’ campaign to address this is welcome.
The Government also recognise that more needs to be done to raise awareness of their own schemes. The noble Lord, Lord Bilimoria, mentioned a number of government schemes that are in place. We have launched the “Business is Great” campaign, a marketing campaign using digital and traditional media channels to raise awareness among SMEs of the support that is available.
The noble Lord, Lord Storey, mentioned the difficulty that SMEs have in getting export finance. I was privileged to set the remit of and be in the ad hoc committee chaired by my noble friend Lord Cope, which the noble Lord, Lord Storey, mentioned. The committee met a large number of SMEs and listened to the difficulties of raising money. I am pleased to say that the committee’s report has been published. It made recommendations to the Government, and the Government have taken action through UKTI and have come up with a number of schemes to help SMEs to learn more. One in five SMEs exports. If we achieve a figure of one in four, we will clear our huge deficit on external trade. I commend the contribution of that committee because it made a hell of a difference. Unfortunately, for my sins, I had to step down to join the Front Bench.
Credit conditions for SMEs are improving. The noble Viscount, Lord Hanworth, mentioned that there is not enough lending. SME gross lending was 39% higher, year on year, in November 2013, and net lending has been positive in three out of the past nine months, but I accept that although gross lending has gone up, net lending has gone down. Lately, it has picked up. In nine out of those 12 months, net lending dropped, except in the past two or three months when it started to pick up. This is partly due to many schemes that are now available for SMEs to borrow money, not necessarily from their traditional banks.
A number of issues were raised. I will try to be as brief as possible in view of the time, and I will be very happy to write to noble Lords. The noble Lord, Lord Berkeley, mentioned the lack of finance. We have come up with a number of schemes. He mentioned existing businesses that want to grow. I agree with him. The restaurant he mentioned was a classic example of a successful SME business that goes to the bank to borrow money with a view to expanding. From what I have heard, and from having been an SME for 30 years, I know that it is very difficult to raise money, and quite often the banks want to renegotiate existing loans, adding covenants and higher margins. It is difficult for existing successful businessmen to raise money because the banks want to renegotiate and renege on the original contract. I accept that that is an issue that a large number of SMEs face. We have heard stories recently about the banks pulling the plug at the last minute.
The noble Lord, Lord Sheikh, said that SMEs are key to our recovery. Of course they are. They are the engine of the economy. There are 4.6 million SMEs. The good news is that since 2010 about 460,000 SME have been created. The noble Lord mentioned late payments; I will certainly cover that in my letter.
The noble Lord, Lord Bilimoria, mentioned a number of things, some of which I have addressed in my speech. On the relationship between customers and banks, the noble Lord is right. It is important that banks have a good relationship with their customers. Quite often, from what is said, the banks appoint lawyers from their panel of solicitors, who tend to charge a lot more than the market rate. The banks are effectively checking the work done by the customer. There is the same problem with valuation. The banks should really give their customers a choice, whereby those customers can negotiate legal and valuation fees. The noble Lord has asked me to see whether I can have a meeting with the banks’ chief executives; I will endeavour to do so.
The noble Lord, Lord Leigh, whom I commend on his experience in this field, mentioned regulation and the equity gap. On regulation, the Government’s policy is, “One in, two out”. In the past three or four years, we have managed to get rid of a large number of regulations, saving SMEs £850 million.
My time is up. I would be delighted to write to noble Lords who have raised points which I have missed.