Small Businesses

Ian C. Lucas Excerpts

Tuesday 7th September 2010 Westminster Hall

[Ian Lucas (Wrexham) (Lab)]

It is a great pleasure to appear before you, Mrs Main. It has been a very interesting debate, so let me congratulate the hon. Member for Stafford (Jeremy Lefroy) on securing it and on provoking such reflective comments.

The Minister and I discussed this difficult matter when I was in government, but the whole subject has now moved on. In the context of the international banking crisis, it was clear that one of the most traumatic problems for businesses of all types was securing lending or investment on a consistent basis. Over the past two to three years, we have heard massive exhortations about the banks from all parties. The former Chancellor, the present Chancellor and the Secretary of State for Business, Innovation and Skills have all made it clear that they are dissatisfied with the investment decisions that the banks have made. In our own constituencies, we are seeing businesses that are having great difficulties. If anything, the problem of securing investment from banks may be getting even worse. In the past, the Government have taken steps to address the issues. The enterprise finance guarantee scheme has been relatively successful, and I am pleased that the Government took the decision to extend it in the Budget. I do not know what has happened to the major loan guarantee scheme that was referred to in the coalition agreement. Perhaps it morphed into the enterprise finance guarantee extension. I am pleased to see the extension of a scheme that has helped many businesses in my own constituency.

An important concession that was made by the previous Government concerned VAT and payments to Her Majesty’s Revenue and Customs. It was a massive extension of support by Government, and it cost money. Part of the reason behind the size of the deficit is that the Government decided to support business to ensure that unemployment was lower than it was in the 1980s and 1990s. That was the correct decision at that time. It is interesting to note that some of the suggestions today from the Government Benches involve Government investment to support small businesses. We still have massive problems with the banks.

[Dr William McCrea (South Antrim) (DUP)]

Does the hon. Gentleman not agree that many of these small and medium-sized businesses are viable? They are facing challenges that are not of their own making. Many were encouraged to take loans by the very banks that pulled the rug from under them when they got the first sign of the recession. Surely it is criminal to destroy viable businesses at a time of such crisis?

[Ian Lucas]

The hon. Gentleman is absolutely right. What is vexing is when businesses that have had a long-term relationship with a bank suddenly discover that the terms and conditions that are being applied by that bank are completely changed to their detriment. There is not the local relationship that there should be. When I ran my own small business—yes, it does happen on the Labour Benches sometimes—I had a long-term relationship with the bank that helped finance my business, and that was very important.

What has been interesting about this debate is that rather than just banging the banks—we have done that to a certain extent—we have begun to move on and to talk about alternative methods of finance. I do not think that we have done that sufficiently in the past. I hope that in a different governmental environment, in which the present Government are seeing just how difficult it is to find a solution to this problem, we look at alternative ways of financing businesses. I think that we have heard some interesting observations today on that issue in what, as I have said already, has been a genuinely positive and reflective debate.

One of the important lessons that we need to learn from the economic crisis of the past few years is that certain businesses actually prospered during it. We need to look at why they did so. When I was in government, I met, for example, representatives of the John Lewis Partnership and of the Co-operative. They are organisations that did very well in the past few years, because they had business models that were apart from the norm and that functioned on a different basis. It seemed to me that they functioned on a more stable basis and, to use a phrase that I have heard a number of times in this debate, on a longer-term basis. I think that we could learn from those organisations.

I also think that we need to reflect on the experience of those organisations and be much more aware of the possibility of businesses being run in a different way from how they have perhaps been run in the past. They could have a different model, a different form of ownership and a longer-term approach. I think that those businesses would be much less susceptible to the bad decisions that we are so often seeing from banks, decisions that are detrimentally affecting the finances of small businesses.

My perception is that banks do not have any idea about alternative business models. Earlier in my life, I was a solicitor and when I was taught about business, the two models were, first, partnerships or sole traders and, secondly, companies. There was very little discussion of alternative business models, which I think is a great failing for perhaps the legal profession, the accountancy profession and, I strongly suspect, the banking profession. We need to explore alternative business models as part of a process of looking at financing business in a different way.

Another interesting point that has been made today is that, within that long-term context, we should look at how pension funds, for example, can support business on a very long-term basis. All of us have pensions and have funds that are built up during many years within those pension funds. However, it seems to me that most of us have very little knowledge of how that money is invested and that most of us do not take as much interest in that investment as we perhaps ought to. As individuals or working with others within our communities, we ourselves could take steps to invest in the types of business that will really provide the bedrock support for our community.

[Stephen McPartland (Stevenage) (Con)]

Does the hon. Gentleman agree that, as my hon. Friend the Member for Bedford (Richard Fuller) stated earlier, part of the problem with the banks at the moment is the complexity of their organisation? What has happened during the last decade is that the banks have become so large and so complex that their focus has moved away from lending to small businesses, and their profits are focused in a different manner. The real crux of the problem now is that they are not lending to small businesses. All small businesses want is access to credit, reasonable terms and conditions for access to that credit and prompt payment of invoices. So I do not think that we should encourage small businesses to change how they operate. It is more about encouraging the banks to focus more on small businesses, in terms of their core lending to those organisations.

[Ian Lucas]

I am not sure that I agree with that observation, because the thrust of what I am saying is that perhaps we ought to move away from the banks when it comes to financing businesses. Of course, it is true that there will always be a role for banks, but we should be aware of the possibility of alternative models, because it seems to me that the banking sector is not that interested in small business. It certainly does not seem to be providing the support locally to small business and if the big banks are not interested in small business, small business should perhaps look for investment from someone who is interested. We need to provide structures that will support the development of business over a long term and I hope that those structures could be provided by some alternative sources of finance, which have been referred to in this debate.

Of course, one of the major problems in the banking sector is the lack of effective competition between the big banks, which seems to be one of these problems that is very difficult to solve. I would be interested to know about the time scale that is going to be applied to the commission that is looking into these subjects, including when the commission is likely to report.

We have a finance system that needs to change. I think that there is a willingness among people to make longer-term investments, provided of course that the security is there for the investments that are made. In the longer term, it may be that the Government will have a more important role, in ensuring that, if we are using alternative models for investment, there is a guarantee mechanism provided by the Government, so that they support—with their hand in their pocket—those who make the publicly-spirited investments in the businesses that will provide jobs and prosperity for the UK in the future.

Clearly, we have had a seismic shock to the financial system in the past three years. It has been a shock in historic terms and not only in the UK, of course, but right across the world. The banking system and the regulatory system were found gravely wanting during that period. Now that we have gone through a period in which we have held the banks very much responsible for what has happened and we are seeing that they are not able to respond to the necessary moves towards growth that are being made, we need to think in a different way—I think that many Members have done so in this debate already—about how we take forward investment in businesses that will grow the economy in the UK in the years to come, providing the jobs that we all want for our constituents. I think that many of the ideas that we have heard today are an interesting initial step and I hope that we will continue to take more steps in the months and years to come.