Businesses: Small and Medium-Sized Enterprises

Baroness Cohen of Pimlico Excerpts

Tuesday 6th May 2014 Lords Chamber

[Baroness Cohen of Pimlico (Lab)]

I thank the noble Lord, Lord Cope, for securing and introducing this debate on a subject so vital to our economy. Indeed, our report goes on giving. This is effectively the second debate that we have managed to have on it, and I very much welcome it. I also thank the noble Lord, Lord Livingston, for feeding as many of us as could be assembled in a hurry to discuss the report when he was appointed.

Britain Open for Business sets out an impressive range of services and improved delivery of those services, but it still does not seem to me to be directed towards the smaller end of the market—the smaller medium-sized companies, if I may so describe them, the really small companies and, above all, the problem of start-up. At one level, that is fair enough. In the short term, the big wins in increased exports must come from concentrating on larger and medium-sized companies. However, we need to look beyond them. In any case, they are reasonably well placed to access the information they need, once you prod them into action. We heard many views that smaller companies may not be able to spare a hand from the day-to-day business to put in the effort to export, and it is there that we need to concentrate.

Since our report was completed, and after reading the Government’s formal response, Britain Open for Business, I have been thinking about how the national goal of increasing exports can be achieved. Let us be clear that at the moment it is not a success story. Our balance of payments on manufactured goods is worsening. We must improve. I believe that means putting in the hard, long-term slog to get smaller companies into exporting.

In this context, when we think about concentrating on larger companies, the example of the proposed takeover by Pfizer of AstraZeneca stands as a kind of living, breathing horror about what can happen to your larger companies. As an ex-director of the London Stock Exchange and a director of many companies in my time, I say that fine words about carefully considering takeovers by foreign companies do not really come to much when you find yourself faced with a bid of 30% more than the existing stock market price. That tends to overrule any amount of careful consideration, partly because not to take account of such a stock market price increase would be damaging to the interests of shareholders. The Government—and we, when we are once more the Government—will have to think about how we protect jobs and vital national infrastructure in a reasonable and measured way.

For the moment, however, I am thinking about developing some more vital national infrastructure. I come to the report’s particular concerns and targets. The whole committee was started at the request of the noble Lord, Lord Popat, then a Back-Bencher in your Lordships’ House. He won the right to set up the committee that we are still discussing.

Small and very small companies need lots of encouragement and advice and access to finance at reasonable prices if they are to export and grow. We indentified a critical role in the advice and support for the LEPs and chambers of commerce. There is almost nothing about LEPs in Britain Open for Business, but I will not have a go at that one because my noble friend Lord Haskins will be speaking later in the debate. He chairs a large LEP and will be able to tell us.

We are not yet offering enough help, both advisory and financial, and we lack the culture to provide it. The noble Lord, Lord Heseltine, in another report, identified this gap and noted that is was filled in other European countries by the chambers of commerce. There is work to be done here. We were told on our travels that some chambers were inactive or unwelcoming. There is nothing in Britain Open for Business about how they might be revitalised. They could indeed be given funding to improve. Like everyone else, they need competent central organisers, which many cannot afford. I recommend this and wonder whether the Minister will comment on this in his reply.

We could also think more carefully about how small companies get started. This has been a lifelong interest for me. Although two of the companies that I have helped are restaurants and have never exported a thing, I could have done better if I had thought about it. That is also particularly true of whether we can find a way to help our immigrant business men and women, who can see a market in their countries of origin for goods made here. We met a couple of such businesses in our travels, one exporting curries and chutneys to the Indian subcontinent. Of course, this business had none of the obvious difficulties in exporting: it knew its markets, what to sell and to whom. There were none of the usual problems of language barriers. It would be well worth while for UKTI to consider zeroing in on such companies as a particular sector and helping them to grow. We noted that the owners of these businesses were careful people, only using such finance as could be generated within immediate family and friends. I have been there. This is how I worked but, with better information and advice, we could have grown faster.

In fact, the incentives available to friends, family and investors in general to invest in start-ups have been immeasurably improved by the introduction of the small enterprise investment scheme which allows top-rate taxpayers a concession of 50% on any investment after the enterprise in question has been trading for a few months. This last was introduced after our report and the Government are to be congratulated on it. When we are once again the Government, we should keep it.

Small businesses have difficulty servicing debt. When I was in the start-up business, like the careful Indian businessmen we met, I tried to depend as little as possible on a bank. However, if you have to take on debt, the new government scheme, which allows small companies to borrow up to £10,000 at about half the rate that any bank would offer, provides a welcome and timely piece of help and encouragement for start-up companies.

In conclusion, we do not yet do enough to encourage very small businesses and small business start-ups. Our report recommended several measures that would help, including working through LEPs and chambers of commerce, which are not yet happening. The SEIS and the government loan scheme are of real value on the financial side, but they are necessary rather than sufficient. We and UKTI could do more, possibly by concentrating more attention in this sector, particularly with people who have a natural route to exports to the countries from which they come. Start-ups are difficult and so are very small companies, but they are the medium-sized and larger businesses of the future. I ask the Minister what the Government’s further plans are to provide increased services to this most critical area.

Small and Medium-Sized Enterprises

Baroness Cohen of Pimlico Excerpts

Wednesday 26th June 2013 Lords Chamber

[Baroness Cohen of Pimlico]

My Lords, I would also like to thank the chairman of this committee, who has paid such graceful compliments to me and to the clerk. It must have been pretty discouraging for the chairman to have his treasured clerk and a senior member of the committee both flat on their backs sending him comments on the report from hospital on mobile phones. I commend him for staying steady through that.

I formally declare my interest as a director of the London Stock Exchange, a facilitator of equity for small and medium-sized companies and, no doubt any day now, a facilitator of raising equity for banks—several of them.

I should like to talk about one of the missing links in all this, which is the shortage of actual bank lending for small and medium-sized companies. The committee’s subtitle was Roads to Success: SME exports—Select Committee on Small and Medium Sized Enterprises. However, as a witness from one of the big banks observed, the companies best equipped to export were those that were well managed, profitable and solidly financed—qualities that you would want in any company, but even more so in a small company launching itself on the less predictable and more difficult field of exporting, particularly exporting outside the EU.

So far, so reasonable and I am sure that we can all agree about the need for well managed and well financed companies. But what part are the big commercial banks —RBS, Lloyds, HSBC and Barclays—playing in the financing of SMEs? Our report identified major discrepancies between the banks’ fair words about lending to SMEs and what the SMEs’ experience had been. I quote the report:

“Few SMEs had a kind word to say about banks”.

No, indeed, they noted that lending, even to SMEs with full order books, strong collateral and strong cash flow, had dried up. Onerous guarantees were being demanded, including that directors put their houses up as security, which is lazy banking.

Most of my colleagues on the committee and I were, on the whole, inclined to believe the SMEs’ account of the relationship. Our own experience as well as external facts support the SMEs’ views on the matter. Even the Secretary of State for Business, Innovation and Skills described the banks as having had a collective nervous breakdown in the financial crisis. If they had had several different nervous breakdowns it might have worked better, but they had exactly the same one. It involved reacting identically by cutting their costs—to be fair, in the only way that a bank can cut its costs quickly—by making savage redundancies, drawing in regional networks and sucking all the power back to the centre. That leaves authority and a great deal of regional expertise vested in people who do not know their customers and whose authority in many cases is limited to a lending power of something like £50,000, which does not get you very far.

It was also clear—to us, at least—that a good many managers were simply terrified to lend except on a rock-solid covenant. They are petrified of making the bank’s position worse. They wish only to do their best for head office and to follow its agenda of getting rid of any loan or customer viewed as even slightly doubtful, and of raising the prices being charged to less doubtful customers. UKTI, we began to observe, was beginning to perform a secondary and very useful role of wandering around finding bank financing for people. That is interesting, but not what it was set up to do.

The banks, of course, are not doing this for fun or all of their own volition. In the valedictions given to Stephen Hester, the retiring—I suppose we are calling it that—CEO of RBS, the Government’s agenda is clear. He was praised for cutting costs, for terminating less than solid lending and for getting more profit from his better lenders. That is commendable if you are, as he was, trying to save a bank and return it to profitability. However, it is absolutely not useful if you want to coax small and medium companies to grow and prosper.

In all this, as in other matters, all the big banks, including those that the taxpayer does not largely own, have been doing the same painfully pro-cyclical things, such as cutting down on regional staff and centralising and standardising their procedures to the point where it is doubtful that the Archangel Gabriel and staff would have got a loan, at least if they applied in Hull or in Liverpool, even with a personal guarantee.

Again, much of this has been at the Government’s behest. If you demand that very large amounts of regulatory capital be held against business lending, banks will seek activity where less capital is required, such as investment management, as UBS did, or safe-as-houses, low loan-to-value mortgages, which is where many banks are going.

The banks are not only swinging in line behind the Government’s and the regulator’s wishes but adding a few refinements of their own, such as seeking personal guarantees to support lending and charges on directors’ own houses. Nothing more inhibiting to enterprise could be managed and the worst of it is that they all do the same thing.

What we need is either a radical change sparked by the Government—who else?—or a new banking system. So far, the Government’s offer has consisted of exhortation, which is never useful in my experience, an embryo bank, which may well be useful but we do not know yet, and the Funding for Lending scheme. This fund would be fine if it is not also hypothecated on lending on housing. It is pretty clear that the bulk of this cash will inevitably go to mortgage lending. It is easy, can be secured on bricks and mortar and you get the equivalent of a personal guarantee with it because there is a person living in the bricks and mortar who really wants to hang on to it. I think an anxious bank manager struggling to do safe profitable lending for his employer would much prefer mortgage lending to business lending to SMEs; why would they not?

The signs of a new and more useful banking system—more innovative and differentiated—are beginning to appear but they are small and delicate. I hope that the business bank announced by the Government will be useful, but it is far too soon to tell. There are other hopeful but small and new organisations such as the Funding Circle and experiments in crowd funding. We also heard from Bibby Financial Services, which took an amazingly robust view of its ability to get good loans for its customers from some of the 600 foreign banks with branches in this country. Those are all useful, but none will secure enough lending for serious growth any time soon. For that, you need your country’s big commercial banks back in business, spreading out again into the regions and no longer terrorised by their recent history or some ill considered regulation.

Meanwhile, it is to be hoped that more equity funding will fill at least some of the gap. Very few companies get by without any equity base and in these hard times companies are looking to equity to fill some of the void left where bank lending should be. I commend a couple of government schemes—the Enterprise Investment Scheme and the small companies investment scheme. They enable high taxpayers to invest up to £100,000 per annum more or less free of tax and have been the foundation of a lot of start-up companies. Again, this is not the revolution, but it is a help.

That help is much needed. We heard, discouragingly, that other private sector sources of venture capital have slumped to the point where about 60% of venture capital raised last year came from government sources as opposed to about 10% from government sources in 2007. I would guess that we were no more than holding our own in raising private sector venture capital for privately held SMEs.

The equity story gets better as you approach the public markets. I am a director of the London Stock Exchange and, as such, responsible for the AIM market. If a company is big enough to get on to AIM, it typically increases its turnover by 37% and employment by 20% in the first year after admission to the market. There are other important advantages to do with visibility which make growth and exporting easier for SMEs. Wearyingly, it is also true that it is much easier to get a bank loan if you are a publicly quoted company.

Equity can never be the whole story. Entrepreneurs, the life-blood of the SMEs, are often very unwilling to give away as much equity as present-day conditions require. I suspect they are, like all of us, waiting for things to get better before they try to raise money. On present form, we could be waiting some time and that is a tragedy for the people we met in the regions and for many others who could expect to be cheerfully and gainfully employed. We need our big banks now, not cowering behind the barricades of the regulators in London. They all need to get out more.