Small Business Start-ups (Scotland)

Wednesday 14th May 2014 Westminster Hall

16:00

[Mr Iain McKenzie (Inverclyde) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Crausby. I thank the Minister for taking time out of his busy schedule to come to this debate. I am delighted to have secured it, because we are all aware of the importance of small businesses to our economy. Small businesses are the lifeblood not only of regional economies, like Scotland’s, but of the overall UK economy.

Scotland has at last seen much-needed growth in the small business sector and that should be welcomed, encouraged and further developed, because small businesses account for over half of private sector employment in Scotland—just over 1 million people. Today we are looking at just short of 350,000 small businesses in Scotland. A great many of our unemployed who find work do so by joining or setting up their own small business. Scotland has seen an increase in small business start-ups over the last year. As I said, almost 350,000 small businesses were operating in Scotland in 2013-14, all with fewer than 50 employees. The Federation of Small Businesses in Scotland represents some 19,000 of those.

However, it is not all good news on start-ups and small and medium-sized enterprises. According to Scotland’s insolvency service, the number of Scottish-registered companies becoming insolvent or entering receivership increased in 2013-14. The total of recorded insolvencies last quarter was higher than the previous quarter, although when compared with the equivalent quarter of the previous year, it was slightly lower. The Scottish Government’s website acknowledges that, stating that the number of Scottish-registered companies becoming insolvent or entering receivership in 2013-14 increased. This could be because the recession has lasted so much longer than anyone expected, with the increased figures for insolvencies reflecting, perhaps, that not all Scots business owners are trying to operate more effectively in relation to the current market conditions. Alternatively it could be, as I will go on to highlight, that the quality of a start-up and support for it should be as important, if not more so, than quantity.

Although I welcome this growth in Scotland’s small business start-ups, in Scotland there are clearly many reasons for increased start-ups. Even the reduction in the number of unemployed people in Scotland has been slower than in the rest of the UK, perhaps reflecting people’s inability to find employment with bigger or established employers. It may not be so much that Scotland is finding its entrepreneurial confidence, as the fact that for many in Scotland the only route out of unemployment has been to start up their own business. Figures released recently by the Global Entrepreneurship Monitor show that Scotland now has more entrepreneurs than at any other point in its illustrious history.

Whichever reason people accept for the increased number of small business start-ups in Scotland—I would not encourage increasing unemployment as a way of increasing business start-ups—SMEs now account for more than half of private sector employment in Scotland. As I said, that underlines the important role of small businesses in our economy and communities. A recent survey of Scottish SMEs found that the vast majority had an annual turnover of less than £100,000.

Across Scotland there are hot spots and cold spots for start-ups. It is not surprising that Edinburgh and Glasgow are popular locations for start-ups, along with Aberdeen. That is obviously because those are large cities with lots of other businesses, making it easier for people to trade and form associations with giants on their doorstep.

What could be the reason for the cold spots—places where there are fewer start-ups? In many areas, including my constituency of Inverclyde, it could be because of a narrow economic base in the past. In such areas, there is over-reliance on a small number of large employers as a consequence, sometimes concentrated in a particular sector. That makes these communities vulnerable to outside economic pressures, meaning that the effect of an industry-wide decision, such as the electronics industry deciding to cut costs by moving manufacturing east, is more acutely felt.

In Inverclyde, over the years, we have seen a drive to replace heavy industry with electronics manufacturers and then replace them with financial services companies. Those will, in turn, if the pattern follows, be replaced by whatever is deemed to be the next big thing. Each of these is a major global industry subject to external factors that we cannot control, but it is into their basket that we happily place an entire community’s future.

A better way would be to broaden the economic base by having a greater number of businesses operating in a broader range of sectors and crucially, for the long-term health of the economy, encouraging and nurturing more home-grown businesses with a real stake in and ties to the area. We should not just try to attract some foreign inward investment that can skip off elsewhere the first time it does not get its own way.

How could we go about broadening that economic base? What support is there at present for start-ups and SMEs in Scotland? Boosting start-up numbers has been the major priority for Business Gateway and UK Government initiatives such as the New Enterprise Allowance are to be welcomed. There are also good programmes, such as Entrepreneurial Spark, Bridge 2 Business and, of course, the extra services provided by local authorities to supplement the core Business Gateway offer.

In terms of usage, the Federation of Small Businesses in Scotland’s most recent member survey found that 20% of members had used Government-funded business support, such as Business Gateway, in the last year and 11% had used other, local government-funded support. However, many had also used Entrepreneurial Spark.

Entrepreneurial Spark is a new and fast-growing incubator for start-ups, launched in January 2012 and backed by a trio of Scottish entrepreneurs. It is based in three sites: Glasgow, Edinburgh and Ayrshire. It describes itself as a business accelerator for early-stage and growing ventures. It works in a collaborative office environment suitable for building teams. Businesses receive free IT and wi-fi and also have access to business advice and support, with a pool of more than 50 specialised mentors. If there is one thing that I have learned when speaking to new businesses, it is that they value that mentoring. They also receive networking opportunities, workshops, pitch practice and more, offering greater confidence and, hopefully, opportunities to their new business.

However, still and all too often, SMEs and those thinking of starting up feel that the system is stacked against them. Businesses are struggling with rising costs and a lack of finance. The UK is the only member of the G20 without a dynamic industrial strategy. In the USA, the head of the United States Small Business Administration reports to the President. Yet in the UK no one reports to the permanent secretary in the Department for Business, Innovation and Skills or is solely responsible for small businesses.

Looking at finance, 26%—a sizeable number of businesses with growth ambition—stated that it was “likely” or “very likely” that they would seek external finance to grow their business. Banks are still not lending money at a rate to support the demand to grow. That is in stark contrast to what is taking place on the continent, in Germany, where more than 1,000 banks provide about two-thirds of lending to small and medium-sized business. SMEs here are held back because they cannot obtain finance on reasonable terms. Recently, the Treasury Committee heard of a dossier of complaints from 1,000 small firms against RBS’s controversial restructuring division.

Even if they get the financial backing, there are still other problems affecting small businesses’ growth or even survival. For example, late payment was considered to be a big problem for Scottish SMEs. Big organisations can manage late payments more easily than SMEs—quite simply, late payments put SMEs out of business. More than 1,600 companies have signed up to the voluntary prompt payment code, although many are making much of their sign-up and then not actually meeting the requirements of the code. The code has been described by the FSB in Scotland as “pretty toothless”, with those who fail to uphold it subject to no rebuke; they are not even named and shamed.

Rising business rates are also putting a heavy burden on small businesses. More than one in 10 small businesses say they spend the same or more on business rates as on rent. Rising energy prices are hitting them hard, too; those can be the second biggest cost that businesses face. Even technology seems to be failing small businesses in Scotland. The ability to communicate speedily via the internet through faster broadband connection is patchy or even non-existent in some areas. Slow, old copper wire connections still exist in abundance, and many areas of Scotland are still unable to connect to a superfast fibre-optic line, which could have a major negative impact on the future growth, competitiveness and even survival of Scotland’s small businesses. What are the Government doing with the Scottish Government to get better broadband connections across Scotland?

Clearly, many things can be improved to give small businesses an opportunity to flourish in Scotland. One of the first things that both Governments could discuss is improving attitudes to entrepreneurship among Scots to help people, especially young people, realise that a career in business is a realistic option and a good thing to do. Reports suggest that encouragement to improve attitudes towards entrepreneurship is happening in some areas, but there needs to be a better focus on the cold spots for start-ups.

In my constituency of Inverclyde, our education team has been engaging with secondary school fifth-year pupils to encourage awareness of entrepreneurship and business careers. In our “The Recruit” programme, which is established along the lines of “The Apprentice” television programme—the only difference being that our local businesses say, “You’re hired”—students begin a year-long intense introduction to business.

Once people have taken the plunge and started their business, we need to help them sustain those businesses and assist more in helping them grow. We know that the key stages in any business’s life—or, rather, the major hurdles to growth—are becoming an employer and employing the first member of staff, and moving out of the home office or garage and into the first premises. Targeted help, such as using some of the retail space lying empty in towns as incubator space for businesses, would be a good idea.

Assisting in the promotion of SMEs through events such as small business Saturday encourages people to buy local and small. The idea of small business Saturday started as a US shopping event held on the Saturday after Thanksgiving, one of the biggest shopping periods of the year. The event helped to put $5.5 billion into the pockets of independent shops and local service providers in the US. The small business Saturday idea was replicated in the UK in December 2013, just before Christmas. The initiative had cross-party support from more than 200 MPs, including the Prime Minister, and the day was backed by a third of all UK local authorities. We need more regular events that support and promote small businesses.

My Labour-controlled council in Inverclyde currently offers a marketing grant to SMEs, which is open to companies with registered offices in Inverclyde that have been trading for at least six months. The scheme provides free marketing advice and up to £1,000 of funding to cover 50% of marketing costs. I am glad to say that, to date, 48 companies in my area have benefited from the grant. Advertising helps local businesses across the country to reach new customers, increase sales and grow. It would help if start-ups received support for advertising and marketing. What steps will the Minister take to help start-ups and smaller companies to advertise?

Labour believes that business is the solution to achieving continued economic success. We must back businesses and support our wealth creators as part of the race to the top. To achieve that, Labour has promised a freeze on energy bills until 2017, which we believe will benefit small businesses across Scotland, and continued help by reforming the energy market. Both those promises are important, as energy costs are one of the largest overheads for businesses. Let us also support small businesses by cutting business rates in 2015 and freezing them in 2016, rather than going ahead with the Government’s corporation tax cut for the largest firms. That will help every SME and start-up across Scotland.

What more can be done? We need to improve access to finance for SMEs. Small businesses constantly rank access to finance as the biggest barrier to growth. Labour has committed to creating a British investment bank, along with a network of regional retail banks with a responsibility to boost lending in their areas. We also believe that “make work pay” contracts will share with small businesses the tax benefits to the Government of a living wage. We will address the exploitation of workers through zero-hours contracts, bogus self-employment, agency working loopholes, blacklisting and other practices that help bad employers gain an unfair advantage.

The Government need to encourage more SMEs to bid for Government contracts and become part of their supply chain. Development of both ease of tendering and relationships with SMEs through procurement would, hopefully, assist more SMEs to bid for and win Government contracts. I believe all those measures will help good SMEs to compete and grow, and they will also aid and encourage further small business start-ups across Scotland.

16:14

[The Minister for Skills and Enterprise (Matthew Hancock)]

It is a pleasure to respond to this debate. The hon. Member for Inverclyde (Mr McKenzie) thanked me for being here, but that is my duty, not least because, as the Minister for Skills and Enterprise, I am responsible for small business. I take particular umbrage at his criticism that nobody in the Government is responsible for small business. Indeed, rather than small business being supported through an independent agency separate from Government, it is at the heart of the Government’s agenda here in the UK, hence the plethora of measures over the past couple of years to make life easier for small business.

I start by reflecting, acknowledging and supporting the figures that the hon. Gentleman mentioned on the growth of small businesses. There are more entrepreneurs in Scotland than ever before, and they are building on Scotland’s historical strength in exporting entrepreneurs the world over. It is good to hear that that, which has been going on for centuries, continues.

As someone from a family with a small business background, I am passionate about strengthening the small business environment across the whole UK. Of course, some of these issues are devolved, but the UK Government have been taking steps to strengthen the position in Scotland. I will set out some of those steps, and I will also respond to some of the points that the hon. Gentleman raised.

The hon. Gentleman called for a British investment bank, and I am delighted to say that in the past 12 months we have opened the British business bank. Of the £782 million of loans to and investments in smaller businesses, £35.4 million was in Scotland—a £20 million increase in support compared with the previous year. The British business bank brings together the management of all Government lending and investment programmes into a single, commercially minded institution that includes some of our most popular schemes.

The hon. Gentleman mentioned the new enterprise allowance, which is important in helping unemployed people to start businesses. The start-up loans and the enterprise finance guarantee schemes have been benefiting start-ups and small businesses across the country, including in Scotland. We launched the start-up loans programme in Scotland in March, and it has already helped nearly 300 entrepreneurs to set up their own businesses, with a total investment of just under £1 million. In the Inverclyde constituency, nine individuals have benefited, with more sure to follow.

Likewise, since May 2010, 850 Scottish businesses have been supported by the bigger enterprise finance guarantee scheme to the tune of £109 million, with just under £1 million of that sum going into the Inverclyde constituency. The enterprise finance guarantee is for slightly bigger businesses, whereas start-up loans are targeted at people at the very start of building their business. Some 7,500 people have signed up to the new enterprise allowance in Scotland.

Those are targeted schemes. We have also improved the tax system for small business that applies across the whole UK. That includes the launch of the seed enterprise investment scheme, which incentivises people to invest in smaller and growing businesses. We have also expanded the enterprise investment scheme for slightly bigger businesses. Those schemes are hugely popular, and we announced in the Budget that the seed enterprise investment scheme will be made permanent—we introduced the scheme for a few years as a trial—in part because of its popularity and its impact on ensuring that Britain is the best place to start and grow a business. That is our goal.

The hon. Gentleman talked about the breadth of sectors—an important point—and growing home-grown businesses and businesses that come from the communities that serve as their customer base. The best thing that the Government can do in that is support the ideas that people have, rather than trying to give direction, by supporting all small businesses to start and grow—not only by reducing regulation, taxes and barriers to growth, but by putting in place the infrastructure, skills and support necessary to help them.

[Mr McKenzie]

Will the Minister not also say something about the mentoring factor, which I have already highlighted? A lot of small businesses need that in the initial stages of set-up and afterwards, to take them past the many pitfalls and hurdles that they will encounter.

[Matthew Hancock]

The hon. Gentleman is absolutely right. The start-up loans scheme has mentoring built into every loan. The reports we get back show that the mentoring is as important as the money in helping businesses to expand. There are mentoring schemes on a local level—he mentioned his local authority—at the level of the Scottish Government and at a national level.

Ensuring that there is simplicity in the communication of the available schemes is important, and we are bringing those schemes together to try to ensure that the various offers that the Government have to support businesses to grow are clear. Smaller businesses in particular do not have time to navigate through the large bureaucracy inevitably involved in government. It is our job to ensure that the offer is consumer-focused and focused on and responsive to the needs of individual small businesses.

The hon. Gentleman mentioned the industrial strategy, and it is a great credit to this country that we now have an industrial strategy that covers many different sectors and brings together the players across the country, including the Government and various Government agencies, as well as businesses large and small in different industries.

For too long, Britain was an outlier in not having a proactive approach to industrial strategy, with the view that the Government should not have a say. That was in the heady days of new Labour and seemed to be the religion of the Department for Business, Innovation and Skills and its various forerunners. That has changed over the past few years, and there is now strong cross-party support for industrial strategies that actively support the growth of businesses and sectors and that try to improve the links between Government and business—they are inevitable in almost any sector—to support growth and jobs.

The hon. Gentleman mentioned prompt payment, a vital part of the effectiveness of the business environment. We have recently consulted on strengthening prompt payment to improve transparency and on putting the prompt payment code on a statutory footing. We have also asked whether we should go further and say that there should be a statutory limit on the length of payment terms. We will publish the results of that consultation shortly.

We put all options on the table and we had a large number of responses. The goal is to improve not only the length of payment terms, but the certainty around them. There are two slightly different issues with prompt payment: one is how long payment terms are and the other is how frequently payments are made on the agreed terms. In both cases, failure by a client can have a negative impact on a small business.

[Mr McKenzie]

Does the Minister agree that some of the larger, more household high street names have been pushing out their payment terms? Although they have signed up to prompt payments, they have now pushed their terms well beyond that and are taking advantage of being associated with it.

[Matthew Hancock]

That is exactly what was looked at in the consultation, and we will publish the response to it shortly. The hon. Gentleman also mentioned small business Saturday. We saw the success of small business Saturday in the USA. The President of the United States is a passionate advocate of it, and we listened to him and introduced small business Saturday last year. I can tell the hon. Gentleman that it will take place on the first Saturday in December. I very much hope and fully expect that there will be cross-party support, as there was last year, to strengthen the institution and take it on to a higher level with even broader awareness. The awareness of small business Saturday in its first year was pretty amazing. It was high last year, and I hope that it can be higher still.

[Mr McKenzie]

Perhaps the Minister would consider holding two or three small business Saturdays a year.

[Matthew Hancock]

It could be said that too much of a good thing might be a problem. One for the time being is probably the right approach. The date was chosen because it is the busiest shopping day of the year. The run-up to Christmas is an important time, especially for retailers.

There is one important issue that the hon. Gentleman did not directly mention, although I am sure we are on the same page on it. The Union is an extremely important element in the support of small business across Scotland, not only in supporting exports—UK Trade & Investment supports exports right across the world—but because ensuring that we can trade within the United Kingdom without international borders is a huge strength to the Scottish economy just as it is a huge strength to the economy of England, Wales and Northern Ireland.

Other parts of the UK buy 70% of Scottish exports, which is more than Scotland exports to the rest of the world and four times as much as Scotland exports to the European Union. Borders matter. They reduce trade and labour migration and disrupt economic and cultural links. I very much hope that the hon. Gentleman is as supportive as I am of the larger UK economy, which provides Scotland with jobs, stability and security. The Union is absolutely vital and we will be passionately arguing for it in September.

[Mr McKenzie]

I share the Minister’s commitment to keeping the United Kingdom together and to having that larger trading area for businesses, be they small, large or even bigger enterprises. Does he believe that one of the benefits might be the linking up of supply chains from larger organisations in the rest of the UK with smaller businesses in Scotland? That would be put in jeopardy if the Union was not preserved.

[Matthew Hancock]

There are huge advantages to the Union in supply chains. I put it in a positive light: this great trading union has been very successful over a long period, and we want that success to be built on, rather than put at risk. When we think about small businesses in Scotland and how we can support them, an important element of that is supporting free trade within the United Kingdom.

The economy is growing and unemployment has come down throughout the country in the past year. There was good news today with the Bank of England’s forecasts for the UK, which were increased again. That shows that there is growing confidence in small business in Scotland and across the country. We know that the people of Scotland are passionate and tenacious in their support for and execution of business, whether large or small. We are equally passionate about helping them achieve their ambitions.

Whether businesses are large or small, they are all driving in the direction of trying to increase prosperity and jobs. It is not right to try to split off large and small businesses and propose tax increases for one part. It is far better to support the growth of all businesses and the incomes, jobs and economic security they bring to the people who run them and the people who are employed because of them.

I hope that this debate has been an effective airing of the support that the Government have for businesses in Scotland, as well as in the rest of the United Kingdom. Finally, I have no doubt that although we have done a lot to improve the environment for business in Scotland, there is much more to do.