Small and Micro-Business Borrowing

Lord Popat Excerpts

Thursday 24th May 2012 Lords Chamber

[Lord Popat]

I thank the noble Baroness, Lady Kramer, for bringing such an important and timely topic before the House. She made some important suggestions and comments, on which I would like to expand. For many years I worked as a business and corporate finance specialist, financing small and medium-sized businesses and helping them to secure bank finance either to start or to expand their businesses. We used to process their applications within the day, and many of those firms have gone on to be huge employers that contribute to our communities and our country.

The idea of small businesses securing finance in 24 hours is one that will probably amaze younger entrepreneurs. It is unfortunate that securing finance for micro-businesses in today’s market is at best time-consuming and uncertain, and at worst impossible. The business-friendly climate that I encountered in Britain in the 1970s, 1980s and 1990s has unfortunately given way to uncertainty, bureaucracy and great difficulty. Nowadays, many small businesses find that it takes at least a month just to set up a bank account in the first place, let alone to get finance.

While I entirely believe and support the Government’s commitment to rebalancing the economy and boosting the private sector, the climate for small and micro-businesses, particularly in regard to funding, will have to change considerably before we can make the Government’s vision a reality.

I wish to muse briefly on bank borrowing. The coalition agreement makes it clear that ensuring that credit is available to SMEs is essential for supporting growth, and should be a key priority for the Government. They have announced a number of policies to support this aim, including, of course, Project Merlin, as well as the enterprise finance guarantee scheme. The intentions behind these policies are undoubtedly good, but with Project Merlin the often optimistic statistics regarding bank lending do not seem to match the experiences being felt by small businesses.

I hear every day from friends and associates in the business world that lending from banks is very difficult. With the uncertainty generated by what is happening across the eurozone, I do not anticipate that this situation will change for a considerable time. In addition, many of the schemes offered by the Government—in particular, the business department—often experience very low levels of participation. Perhaps worse, many of these schemes are unknown to many of the small businesses that could most benefit from them. As a brief aside, I wonder whether the communications strategy at BIS could be better targeted so that these schemes are heard about beyond Westminster.

We must look beyond these measures and, as this Question urges, at the alternatives. The financial avenues available to small businesses are still plentiful but require some creative thinking and a culture change. One of the difficulties we are experiencing is that FTSE 100 companies are currently holding approximately £130 billion in their bank accounts. At the same time, many small businesses and entrepreneurs are sitting at home with a fantastic idea or product, but cannot make them commercially available without significant investment. There must be a way further to encourage our largest businesses to invest in and support these micro-businesses to make their products financially viable.

We could also encourage the establishment of alternative providers of capital. In the 1970s, a large number of finance companies were licensed under the Consumer Credit Act and provided business finance to small and micro-businesses. Companies such as Forward Trust, Lombard North Central and First National Securities provided an invaluable service, particularly to leasehold corner-shop owners, as I was at the time. When I first went into business in 1977, I lent from Forward Trust, and while it was expensive it was a specialist company that was willing to take risks. Unfortunately these firms were victims of their own success, and were taken over by the banks. There is, in my opinion, a clear gap in the market for firms of this nature if we can encourage them back. In addition, I meet many high net-worth individuals who are keen to invest in small new ventures but are concerned about doing so. I would like to see the Government explore ways in which wealthy individuals can be encouraged to support start-up businesses in which they are not directly involved.

A related point is that we should encourage smaller businesses to explore new equity financing arrangements. This can help to bring in the capital needed to allow companies to grow and, if coupled with expertise or guidance, may well increase the chances of a small business succeeding, particularly if it is in the early stages.

In the UK, we are fortunate to have significant venture capital funding options for businesses. However, these are often restricted to specific geographical areas, certain specialised industries or businesses of a certain size. I should be interested to know whether the Government have any plans or incentives to help to expand the venture capital industry so that many SMEs that currently miss out can benefit from this very useful industry.

It is worth taking a moment to consider two other points. This Question is clear about looking for alternatives to high-street banks. It is my personal view that, if we were to reduce the barriers to entry for the banking industry and encourage competition, our SMEs would benefit most. By encouraging new banks—particularly local, regional and community banks—new sources of capital will become available to SMEs. In addition, by granting full banking licences to other international banks, such as those from India and China which do not currently do large amounts of business in the UK, or by supporting the creation of new banks, small businesses across the country will feel the benefits and have access to new sources of credit.

My final point is that, while I fully support the need to find new sources of capital for micro-businesses and SMEs, we should not decouple this from ways in which we can reduce the costs that these businesses incur. I know that this week’s publication of the Beecroft report has created some debate about the best way forward, but the Government have a duty to do all they can to reduce the considerable regulatory and fiscal burden on small businesses.

We need a radical new approach to small businesses generally, not just to how they find alternative sources of finance. I would appreciate my noble friend’s comments, especially on the areas that I have suggested: the speed at which we can raise finance; the need for BIS’s communication strategy for small businesses to be well targeted; whether we can make effective use of the £130 billion of deposits held by the FTSE 100 companies to help small businesses; whether we can do something about high net-worth individuals; and whether we can do more about our venture capital funding. As the noble Baroness, Lady Kramer, said, there are many barriers to starting a new bank. How about issuing a full banking licence to some of the foreign banks that have cash liquidity?