Small Businesses

Baroness Burt of Solihull Excerpts

Tuesday 7th September 2010 Westminster Hall

[Jeremy Lefroy]

My hon. Friend makes some important points. He is one of the most expert Members in this subject, and I agree with him. It is important to increase capital and the banks are doing so. Their total profit in the past year was £15 billion, so they are gradually increasing capital, particularly as some are not paying dividends. But financing the recovery is of greater long-term interest, not only to the nation, but to the banks, and I entirely support what my hon. Friend said.

Another point arising from the survey of banks is that businesses are currently repaying debt rather than borrowing more. One bank made a net repayment of £1.4 billion during the last quarter, so money is coming out of the small business sector rather than going into it. Banks have also increased their lending to all sizes of company, including SMEs, and one reported that lending to SMEs was up by 38% during the past eight months, albeit to only £1.4 billion. Another lent £10.9 billion to SMEs during the 12 months to March 2010, and approved 80% of applicants.

That is the story from the banks’ perspective. The picture is of some increase in lending to SMEs, combined with a cautious approach by businesses to borrowing, with many reducing borrowing rather seeking an increase. From their point of view, there does not seem to be a major problem with capacity. However, a survey in February by the Institute of Directors—I declare an interest as I am a member—paints a somewhat different picture, because 57% of directors said that their application for finance had been rejected by their bank and 83% of those who were declined for bank finance were not offered information on the Government’s enterprise finance guarantee scheme. That worries me.

Tellingly, one in five businesses which said that they needed additional capital did not investigate bank loans or overdrafts because they believed that they would be declined, saddled with disproportionately high costs or required to comply with requests for security that they did not have.

[Lorely Burt (Solihull) (LD)]

The hon. Gentleman is making some powerful points. Does he agree that one reason why companies are reticent about approaching banks is the exorbitantly high rates that they are charging in interest and administration fees? The five biggest banks made £15 billion in the first half of this year. Are not the rates that they are charging part of the problem? Many companies are repaying loans because they cannot afford to hang on to them.

[Jeremy Lefroy]

My hon. Friend makes a powerful point, and I am sure that she has received many representations from her constituents about the matter. I totally agree with her. The problem is perhaps not so much interest rates, some of which have come down to reasonably low levels, although not all, but the charges. I have heard of charges being trebled. I raised the point with the Minister in the House, and he said in his powerful reply that he would not put up with that and would speak to banks if hon. Members contacted him with representations. I have done so, and I am sure that other hon. Members would like to do so. It is not acceptable for banks to use a shortage of credit as an opportunity to hike up charges, as some have done.

The picture is of some increase in bank lending, but the survey from the Institute of Directors paints a rather different one. Comparing data with a survey in 2001 shows that the number of those surveyed who were financing their businesses through bank loans or overdrafts had declined from 85% to 64%, with 20% now financing their business to some extent through credit cards, which is unsustainable.

The annual survey by the Federation of Small Businesses —again, I must declare an interest because a company of which I am a director is a member—is even starker. Of more than 10,000 who were surveyed, 31% said that fairer bank lending would be key to improving their prospects. The FSB concludes that

“SMEs have lost confidence in the banking sector.”

It pushes for greater competition, including the creation of a post bank, which I have long supported.

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[Justin Tomlinson (North Swindon) (Con)]

My hon. Friend has been making some excellent points, and I am sure that all of us will relate the various issues he has raised to our constituencies and businesses. The holy grail for the banks seems to be to provide customer relationship managers. Does my hon. Friend feel that they will really be given the flexibility and authority to make decisions about lending money? Do they have applied business experience to enable them to make the right decisions?

[Lorely Burt]

The computer says no.

[Mr Jones]

I thank my hon. Friend—and I hear the comment by my hon. Friend the Member for Solihull (Lorely Burt), making that very point. Many business people, particularly those who have been in business a long time, feel that 20 or 30 years ago they could pop in to see the bank manager if they had a problem, and discuss their concerns and try to get over issues. Now it seems that a customer adviser or someone who is purportedly a bank manager taps a few figures into the computer and comes up with the right result—if the computer thinks that is right. That is a dangerous situation. It is difficult for our small businesses to survive.

[Mr Jones]

I tend to agree; that is particularly the case for manufacturing, about which banks are taking a very short-term view.

It is positive that progress is happening, and a taskforce is being created by the six largest banks in the country. Until now that has been headed by Stephen Green. I understand that from today he has other responsibilities and I wish him well with those. The move is a positive one and I hope that the work of Mr Green and his colleagues will continue. I would like the Minister to explain how he will work with the taskforce and feed into it. There seem to be some positive noises about banks wanting to engage with Government and business to get over the problems.

[Lorely Burt]

Does my hon. Friend agree that a taskforce set up by banks to see why they are not lending is a tiny bit self-serving?

[Mr Jones]

That is obviously a risk if the banks are marking their own exam papers, but I have asked the Minister how the Government will interact with the taskforce, and I think that if we do that in the right, positive way and involve business organisations, we can end up with some positive outcomes. I am mindful that there have been many interventions in my speech and that other hon. Members will want to speak, so I shall try to cut my remarks a little short.

We and the Government are here to facilitate and improve the environment in which small businesses can flourish and employ people. That is what we all want, and I hope that the Government’s new local enterprise partnerships will be more focused on doing that. My hon. Friend the Member for Stafford has alluded to schemes that the Government have been or could be involved with, and that is positive. I hope that the local enterprise partnerships will get involved with such schemes and that they will be a positive way to bring about solutions locally. Often such solutions work, in time, but businesses get frustrated by the fact that it takes so long to bring about schemes and to provide the relevant types of finance and help with financing; that has been a problem with the regional development agencies. Businesses often do not have that sort of time, for the reasons I have mentioned.

The Government are moving in the right direction, but hon. Members need to keep putting pressure on them to continue. I am sure that if the Government can motivate the banks and bring them together to work for the common good—although they obviously have their own commercial reasons to be in business—we shall have gone some way towards creating the enterprise culture that this country has so badly missed for so long, and which will reinvigorate our economy.

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[Lorely Burt (Solihull) (LD)]

I shall be brief because I know that colleagues want to contribute.

I was going to talk about Government schemes, but that area has been well covered by other hon. Members, so I shall confine my comments to privately run, independent schemes, to which I should like the Government to give some form of backing. I also want to talk about the banks.

The Funding Circle was launched on 13 August and it will be an interesting way for private investors to borrow, and to undercut the banks by several percentage points—by up to a quarter. That is a similar enterprise to Zopa, which has lent more than £90 million in the past five years. There is an element of risk, but it can be spread by investing in a number of different organisations, so I should like the Government to give that some blessing.

I also want to mention 3i. The point has already been made about investigating how we could support a similar type of organisation—a private equity group—to provide equity and debt finance to business, particularly small businesses.

My third suggestion was in the Liberal Democrat manifesto but does not seem to have made it into the coalition agreement: regional stock exchanges. Local investors want to invest in businesses that are local to them and to put money back into the prosperity of their region.

[Gavin Williamson]

The hon. Lady made a valuable point about private equity and perhaps regional stock exchanges, but the fundamental issue is that although private equity is one of the longest-term investors in the country, in that it has a five or six-year plan—that is going through the stock exchange—we want to consider modes of investment with a turnaround of not five or six years but 20 to 30 years, so that people invest for a sustained, long period and the small business can become a medium-sized business and grow. I encourage the Minister to look at ways to do it. I do not quite have the answer, but obviously that is why I am not a Minister. I am sure that he has all the answers.

[Lorely Burt]

The hon. Gentleman makes a valid point. I, too, look forward to the Minister’s response to that plea.

In August, the Bank of England reported that loans to small and medium-sized businesses had contracted by 2% year on year. Credit conditions are tighter for small business. Larger businesses can get out of that by refinancing on the bond market, but there are few places for small businesses to go. I referred earlier to the exorbitant rates that small businesses are being charged. I have come to the conclusion that there is a sort of cartel. I do not know whether that statement is libellous, but at least I said it in the House.

There are four main banks, and 90% of small businesses bank with the big four. The Federation of Small Businesses says that it wants to see more competition among the banks. Various attempts were made by Labour to get the banks to lend; they threatened them and said, “We are going to do some bank bashing if you don’t comply,” but none of that resulted in anything worth while. However, I do not believe it was through a lack of trying.

I have a solution for the Minister to consider. I call it the Lil-lets solution after a recent visit to the Lil-lets head office in my constituency. I have been visiting businesses to see how they are faring with the recession and to ask what the Government can do to release that stranglehold and create a better business environment for them. They said that banks are not lending more, and that even those with only half a brain would not borrow from banks if they could possibly avoid it because of the exorbitant rates, arrangement fees and other charges made by the banks.

The two directors of Lil-lets have a solution. We own 84% of the Royal Bank of Scotland. We also own a substantial proportion of Lloyds. Why not make RBS bring its rates down? The cartel agreement would thus not be valid. If one bank went to a lower rate, all the others would have to follow or they would become uncompetitive. General competition would improve, which would break the stranglehold agreement that seems to have evolved between the big four banks. It would create the sort of competitive environment needed particularly by small businesses, which need not only to borrow money but to borrow at a sustainable rate. That is the most important thing.