SMEs: Access to Finance

Margaret Ferrier Excerpts

Tuesday 9th November 2021 Westminster Hall

[Peter Gibson (Darlington) (Con)]

I beg to move,

That this House has considered access to finance for small and medium sized enterprises.

It is a pleasure to serve under your chairmanship, Mr Pritchard. I am grateful that this timely debate was granted. Following the UK’s departure from the European Union and our ongoing economic recovery following covid-19, the UK has a unique opportunity to shape a diverse financial services sector that serves a fair, robust and competitive economy with small and medium-sized enterprises at its heart. Research by the Industrial Strategy Council, economists at Sheffield University and the International Monetary Fund concluded that the UK is the most regionally imbalanced country in Europe when it comes to the productivity of its economies.

It is worrying that the job opportunities and livelihoods of most UK citizens depend on where they live. We know that skills and talents are spread throughout the country but opportunity is not, and so it is with SME finance. The Prime Minister has rightly made levelling up his key mission, examples of which I am already beginning to see in my constituency, with the establishment of the Darlington Economic Campus providing life-changing new opportunities for the Tees valley. I and my Conservative colleagues look forward to the levelling up White Paper and the opportunity that it will provide to right some of the imbalance in our country that has perpetuated under Governments of all colours for decades.

How does regional inequality relate to small businesses up and down the country? As Mark Carney said when Governor of the Bank of England in his speech at the Lord Mayor’s banquet for bankers and merchants in 2019, SMEs across the country face a £22 billion funding gap. A recent inquiry by the all-party parliamentary group on fair business banking, chaired by my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake), my good friend, found that SMEs report significant problems in accessing finance.

[Margaret Ferrier (Rutherglen and Hamilton West) (Ind)]

I congratulate the hon. Gentleman on securing the debate. I recently met representatives of the British Business Bank, who ran through their full range of offerings, including optional learning modules for entrepreneurs, which are an excellent way to mitigate lending risk and provide entrepreneurs with the knowledge they need to be successful. Does he agree that that is an excellent initiative and should continue to be funded and expanded?

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[Kevin Hollinrake (Thirsk and Malton) (Con)]

It is a pleasure to speak under your chairmanship, Mr Pritchard. I again congratulate my hon. Friend the Member for Darlington (Peter Gibson) on bringing forward this important debate. It is very important, particularly in these times, to refer the House to my entry in the Register of Members’ Financial Interests. Although I am no longer directly involved in my business, I led and built a business for the best part of 30 years. Access to finance is the critical factor in wanting to grow and scale a business.

As my hon. Friend set out, SMEs are so important in the UK in terms of the dynamism of our economy. Some 60% of the private sector workforce and 50% of our private sector turnover comes from SMEs. We are facing some huge challenges that are relevant to our economy, not least the demographics of costs in the future. We recently had a debate in Parliament about how we pay for the covid crisis and pay for social care, but we have some even bigger challenges in terms of balancing the books. The Office for Budget Responsibility has said that because of healthcare costs, social care costs and pension costs, our debt to GDP ratio, which is currently about 100% or £2.2 trillion, will be 400% by 2060 if we do not change our tax system or change the dynamics of our economy to pay for such costs over the next few decades.

The only way of paying for that is to make the economy more productive and more dynamic. I know, from my experience in running a business, that one thing that made our business more productive and more dynamic was competition. New competitors appearing on the horizon made us more efficient and more productive. We need a much more dynamic business environment. That is why my hon. Friend’s comments are so relevant, particularly on the statistic he cited from the APPG’s report, “Scale up to level up”, which I know the Minister has seen. Some of its conclusions are so important, but so are some of the facts behind it.

As my hon. Friend said, 73% of SMEs would rather grow more slowly than borrow. That means that we have a real problem, because we need those businesses to scale up. Not every business wants to do that, of course. Some businesses are happy to stay at a lifestyle kind of level. But part of the problem we have, as was very well articulated by the Chancellor when he was a Back Bencher, is that we are No. 1 in the OECD report in terms of start-ups, but No. 13 or No. 14 in terms of scale-ups—the number of small businesses that employ 10 people or more after three years. That is a real problem.

It is our belief, which is certainly borne out by anecdotal conversations with businesses, that because of the fall-out of some banking scandals—which came as result, principally, of banks trying to restore their balance sheets after the difficult recessionary problems of the global financial crisis—withdrawal of finance to business in the five-year period post 2008 has, as my hon. Friend the Member for Darlington set out, damaged confidence between business and banks. We need businesspeople to feel that they can scale up and grow, which means taking finance, taking risks, and, in most cases, putting their house on the line. I think my hon. Friend and I have both put our houses on the line in the form of personal guarantees and others. These are big risks that businesses have to take. If we expect them to do that without the confidence that banks will see them through a crisis, then many fewer businesses are going to take that risk.

This is where Germany has won and got it right: regional mutual banks. In fact, it is not just Germany. Every G7 country has a significant regional mutual banks sector as part of their lending mix, and the UK is an outlier in that sense, having just commercial banks. That is important because, particularly post the financial crisis, we saw banks prioritising their own finances, shareholders and balance sheets over the SMEs, which led to tens of thousands of businesses going to the wall.

That withdrawal of finance between 2008 and 2013 saw a 25% reduction of lending to SMEs from our commercial banks in the UK. At the same time, the Sparkassen and Landesbanken in Germany, the community and co-operative banks, increased lending by 20%. That is an incredibly important statistic, because that is when the SMEs needed the finance. There is an old adage we quote in our report—I heard it from my father when I was a young boy—which is that the banks will give you an umbrella when the sun is shining and take it away when it is raining. That proved to be the case in the worst financial crisis—the five-year crisis—we have had in this country and that, again, damages confidence.

That is not to say that our commercial banks are not part of the solution. Clearly, they are, and I must say that they did a fantastic job in 2020 in terms of getting finance out of the door to our SMEs—about £80 billion in coronavirus business interruption loans and bounce back loans. However, I wonder—although I probably do not have to—how much of that money would have been lent had the Government not stepped in to give them guarantees. How much of that money would have been lent if the Government had not taken away the responsibility for a forward-looking viability test? A fraction, I suspect.

Shareholder-driven banks will tend to look after the shareholders in these crises, whereas mutual banks and community development finance institutions, which are effectively not-for-profit co-operatives, really look after businesses. Clearly, some businesses will go to the wall if they are not fit for purpose in the current or future climate; we do not want to see zombie businesses. Nevertheless, we want businesses that hit problems because of a short-term recession to be helped through that period and into the better times ahead.

From my experience in the property sector, we had a good business going into 2008, when we had 210 staff members. However, we were not treated as a good business with longevity by our bank when we went into that crisis, and we had to make huge cuts. We cut our staff from 210 to 65 in a very short period. That was short term—we eventually picked those jobs back up—but we could have been helped through that crisis much more effectively. If the banks had not had shareholders as their priority, and if they had had customers as a priority, then I think we would have seen something different.

[Margaret Ferrier]

Does the hon. Member agree that high street banks could benefit from investing more time in understanding the SMEs they lend to, really taking the time to understand the business model and the entrepreneur throughout the whole lending process?

[Kevin Hollinrake]

That is such an important point, and I appreciate the hon. Lady’s intervention. Again, going back to my days as a child going with my father to see the bank manager, Mr Ron Taylor of Barclays bank, my father had that one-to-one relationship with him. He knew a good business from a less good business; he knew which ones he would support in difficult times. That type of relationship between big banks and SMEs has largely gone now, and the lending decisions have moved away from those relationship managers.

That is a worry and a concern, and it is what CDFIs and regional mutual banks can bring back. In this report, there is clear evidence from the sector, academics and people in the German banking sector that big banks primarily lend to big businesses—not exclusively, but primarily—and that big banks did not want to lend to SMEs, did not want to lend below £50,000, even though they were effectively Government-backed loans, until the bounce back loan scheme was brought forward and businesses could get a loan on demand. That is because that relationship with SMEs has principally gone now.

That relationship is something we need to restore. The CDFIs and regional mutual banks are those smaller banks, and it was great to hear that my hon. Friend the Member for Darlington would consider a Tees Valley version of that. I am very keen to work with the Mayors and the council leaders across Yorkshire. They are in talks now, trying to set up a Yorkshire regional mutual bank. That would be a fantastic step forward. It would not require any money from the Treasury or the Department for Business, Energy and Industrial Strategy, from Government, other than a guarantee or loan, because the money comes back. The money is lent to businesses sensibly. It will then be returned to the Treasury, and with interest, on the basis that that will create tax receipts, which are good for the Exchequer. It would be a very sensible move to pump-prime a number of regional mutual banks, which would have that patient capital approach in the down cycles.

Of course, as my hon. Friend the Member for Darlington set out, what the Treasury and BEIS did in pumping out the money last year was tremendous, and my hon. Friend the Minister did a great job of engaging with businesses. One mistake we made, though, was that we made bounce back loans so cheap—which was a great thing to do to get that finance out to SMEs—that it was not possible to borrow from wholesale markets to lend at 2.5%. It meant that only the big banks had access to very cheap capital through the term funding scheme for SMEs. It meant that, whereas we had seen about 59% of SME finance in recent years coming from the challenger banks and non-bank lenders, suddenly that was down to 11% as the big banks took a great big market share. For people such as iwoca, Tide and others, their market share dropped dramatically and they lost, potentially, thousands of customers during that period.

We will have to do this again at some point, so we might as well be ready for it. I have asked Andrew Bailey about this. It was not all in the Treasury’s gift to sort the term funding scheme for SMEs; it is a Bank of England scheme. Nevertheless, we can square that circle in a couple of ways. Either we find a way for the term funding scheme to work for non-bank lenders, or we put requirements on the banks so that if they access that scheme, they also have to lend a proportion of those moneys to non-bank lenders and the like. It is very important that we get this right now. We must not simply forget some of the things that we learnt last year but actually put those things in place today to ensure that we are prepared for the future.

I say that because there is another challenge ahead, and this is the second requirement that I am going to refer to—there are only three, Mr Pritchard. This is another APPG initiative—Bankers for NetZero. It is a world-leading initiative; we are now one of the key chapters in international financial regulation in terms of how we decarbonise our economy and how we bring the UK finance industry together with business and provide the capital to decarbonise—that will be a critical part of the conversation. We are going to have to do something at some point to provide capital to businesses so that they can decarbonise, because significant investment will be required in lots of businesses to be able to do that. We do not want to simply pull the plug in terms of SMEs that could contribute towards decarbonisation. We should not be thinking, “Oh, they’re businesses that operate in old ways, using what is probably less green technology, and therefore we’re not interested in them. We’re going to pull finance from those people and go to new businesses.” That would be a significant mistake: the scale would probably be a multiple of two or three times what it was during the financial crisis when we pulled money from certain businesses. We should be allowing these businesses to invest in decarbonisation.

To give a simple example, there is a very good business in my constituency—I have used this analogy many times for people who listen to my repetitive speeches—called the York Handmade Brick Company. It makes handmade bricks, as can be imagined, and employs about 20 people in my constituency. It is a very good business. I am not saying that it has any kind of liquidity or capital issues; I am sure that it has not, because it is a very successful business. But that business fires all its bricks in its kilns using natural gas. Nobody has yet invented a different solution to that problem, although no doubt there will be solutions on the horizon—biogas and the like. But whatever it has to do to make the business less carbon intensive will cost money—cost investment. Then it will have to find some capital to invest in new technologies. What we do not want to see, of course, is a bank coming along and saying, “Actually, our own business and our customer base have capital requirements that require us to not lend to businesses with a large carbon footprint,” and simply withdrawing finance from those kinds of business. It is a significant problem—a significant danger.

We will have to ensure that capital is made available, probably at a cheaper rate, a discounted rate, to decarbonise such businesses. For example, a term funding scheme for net zero, which the report on mainstreaming net zero proposes, is something that we should consider. We must get that right to ensure that all lenders can access those things. The Conservative Environment Network, of which I am proud to be a member, is also looking at this, and we had a conversation earlier today. It is very clear that we need finance for environmental reasons as well as for economic reasons. I could not put it better myself. The Conservative Environment Network is also very worried about divestment.

The last report to which I will refer is “Resolving insolvency”, because the Minister has responsibility for this area as well. It is a very important report. Today’s debate is not just about businesses that are growing but about businesses that might hit difficulty. The Department for Business, Energy and Industrial Strategy has made some very important changes to insolvency over the last year or so, giving businesses that are under pressure and having difficulties time to restructure. That is absolutely right.

However, what we have not addressed yet, although the Government have legislated to address it, is reform of the insolvency industry. The report highlights some very concerning conflicts of interest between insolvency practitioners and, for example, banks and private equity. There was a very disturbing recent case in which KPMG was fined £13 million in relation to Silentnight. That certainly highlights the kinds of conflicts that occur between secured lenders and insolvency practitioners.

The report recommended that the Government set up a totally independent regulator, as they have set out to do in the past. Currently, insolvency is regulated by recognised professional bodies—membership organisations. It is the only significant part of our economy that is not properly and independently regulated. We urge the Government to introduce changes to put in place an independent regulator, an ombudsman, a statutory code of ethics and a central database of repossessions.

My final comments relate to another change that the APPG on fair business banking has worked very hard to bring about. Following the global financial crisis, the APPG advocated an increase in the coverage of alternative dispute resolution. The Financial Ombudsman Service now has jurisdiction over businesses with a turnover of up to £6.5 million, up from £1.8 million previously, which is good. However, there is a scheme that looks at historic complaints and covers businesses with turnovers of up to £10 million. The Business Banking Resolution Service is a voluntary scheme involving seven banks, but at the moment it is an embarrassment to the banks that established it. It hears very few cases. Of the 626 cases that have currently applied to the scheme, only 90 are likely to be deemed eligible. Some of the cases fall into what is called the concessionary cases area, and of the 10 cases that the BBRS is recommending that the banks accept into the scheme, only one has been accepted, which is absolutely wrong.

The BBRS needs more independence and greater jurisdiction. I saw comments in The Times today about this particular issue to the effect that the APPG on fair business banking and the SME Alliance unanimously approved the eligibility rules for that scheme. That is absolutely not what we said. We said that we will have a watching brief over the scheme. It is not working. It needs urgent reform. I have talked to the Minister about this before, and I am sure that he will take those comments on board.

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[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Paul Scully)]

It is always a pleasure to serve under your chairmanship, Mr Pritchard. I congratulate my hon. Friend the Member for Darlington (Peter Gibson) on securing today’s debate and on how he framed it. I pay tribute to him for his work as chair of the APPG on personal banking and fairer financial services. It is important that we continue to shine a spotlight on that. He has been a staunch advocate for smaller businesses both in his constituency and around the country, and he brings his own experience to bear on that. We also heard from my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake), who is a vice chair of the APPG and has brought so much fresh, new thinking to these areas, which is important for me, for the Economic Secretary to the Treasury and for the Government as a whole. We continue to respect and listen to the views of both my hon. Friends.

The business experience of my hon. Friend the Member for Thirsk and Malton has been instrumental in the framing of his words. Both my hon. Friends illustrated how deeply they care about small businesses and their contribution to the economy, which, as we have heard, provides millions of jobs. SMEs will be the backbone of the drive for growth, innovation and jobs, and we are absolutely determined to support them. That is why during the pandemic we protected small firms with our income support schemes, grants, and nearly £80 billion-worth of Government-backed finance to more than 1.6 million businesses. However, as we start our economic recovery, we need to shift our focus from emergency support to policies that will help businesses create jobs and invest. As the Chancellor has said, our plan is to make the UK the best place to start, grow and scale a business. The logic is simple. More start-ups and scale-ups will in turn help us in our mission to level up the country.

[Margaret Ferrier]

We need to ensure access to affordable finance UK-wide, so can the Minister tell us what steps the Government are taking to make sure that Scottish SMEs have the right level of accessibility?

[Paul Scully]

I thank the hon. Lady for that intervention. I mentioned levelling up the country, and she is absolutely right that we need affordable, diverse finances for SMEs right across the country, and that includes in Scotland. I want to make sure that we go further to make the UK the best place to start growth. It should not matter where we are in the country. It should still be the best place to start to grow and scale a business. That is as equally true of Scotland as it is of Wales, England or Northern Ireland. Brilliant businesses can be found everywhere in the UK. However, access to finance is undoubtedly skewed towards London and the south-east, and we need to rectify that.

At the Budget, we took some major steps towards redressing those regional imbalances. For example, the British Business Bank’s start-up loans have been helping entrepreneurs since 2012 with viable ideas that might otherwise struggle to obtain finance from more traditional sources. In fact, the bank has made 165 loans to businesses in Darlington, totalling more than £1.5 million. At the spending review, we built on that success, pledging another 33,000 loans over the next three years. That is not all for Darlington—it would be a significant number of start-ups there—but across the country. That is money that will get other great ideas off the ground.

Members have spoken of the need for strong local options for business; we absolutely agree. That is why the Budget committed a further £150 million to the bank’s successful Regional Angels programme, which helps entrepreneurs obtain early-stage finance across the UK. We also announced more than £1.6 billion for the British Business Bank’s regional funds, which provide debt and equity finance for SMEs to help them with their next stage of growth. Across those funds and start-up loans, CDFIs will continue to play an essential role to help get finance to underserved SMEs.

To answer the points hon. Members raised on CDFIs and mutual banks, community development financial institutions play a massive role in the landscape of alternative lenders, including those essential lenders providing credit to SMEs. They are such an important delivery partner for the start-up loans programme; 11 of the 21 start-up loans delivery partners are CDFIs. They account for approximately 30% of the loans issued through the scheme in 2021. More widely, the British Business Bank was working with 21 CDFI delivery partners, across a range of programmes, at July 2021. That includes the regional funds and the recovery loan schemes.

In addition, 14 CDFIs were accredited lenders for the covid loan schemes. In the wake of the spending review, we will continue to explore opportunities for collaboration between the BBB and CDFIs. The Government are also supportive of efforts to establish the regional mutual banks that we have heard so much about this afternoon across the UK. I understand that some prospective mutual banks have had success in raising capital from various sources, but they have also encountered some challenges. There are no plans directly to capitalise regional mutual banks, but I know the Government have been engaging with prospective mutual banks and are willing to explore solutions that are practical and proportionate.

My hon. Friend the Member for Darlington is not only not far from the Treasury in this place and constituency neighbour to the Chancellor, but the Treasury is moving a number of its operations to Darlington, his home town, which he represents. He will not have too far to go to knock on the door to further his case for regional mutual banks. I am sure he will be delighted to know that businesses will continue to obtain funding through all those schemes, along with those in the north-east and the wider south-west of England for the first time as we get regional funding for the British Business Bank increased.

The new regional funds the British Business Bank is setting up in Scotland and Wales, while building on its existing activity in Northern Ireland, will bring levelling-up opportunities for businesses across the UK. As the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) said in relation to Scotland, it is important that we support businesses wherever they are. The regional funds will support a wide range of businesses, including the innovative, high-growth firms that play such a big part in creating prosperity and opportunity. We are further turbocharging those firms through the £375 million Future Fund: Breakthrough, which sees the Government co-invest with private investors and businesses that are heavily focused on R&D.

Finally, as we have heard, the Chancellor announced the extension of the recovery loan scheme to 30 June 2022. From 1 January, the scheme will be open only to small and medium-sized enterprises and the maximum amount of finance will be £2 million per business. The guarantee coverage that the Government will provide to lenders will be reduced to 70%.

We also heard from Members about patient capital, and we are looking to improve access to longer-term sources of finance. We absolutely agree with my hon. Friend the Member for Darlington that we need to unleash the hundreds of billions of pounds in pension funds and other institutional investors for long-term investment. That is not just good for the wider economy, because it will support growth, but good for the customers who will benefit from the opportunities for returns offered by UK long-term assets. It is an area where we know we can and should make more progress. I am happy to say that this Government are taking significant steps in that direction.

We are implementing a plan to unlock more than £20 billion to finance growth in innovative SMEs. As part of this, British Patient Capital, a subsidiary of the British Business Bank, is supporting UK companies with high-growth potential to access the long-term financing they need to scale up.

We have also taken significant action to remove barriers to pension scheme investment in a wide variety of asset classes. Members may recall that in the Budget, the Chancellor announced the consultation on further changes to the auto-enrolment charge cap to remove barriers to higher-return investments, while ensuring vital member protections remain in place.

[Paul Scully]

That is certainly something the Economic Secretary to the Treasury will have heard and will consider as we look to diversify finance, especially in longer-term projects. We have established the productive finance working group, which is an industry-led body, which has now published recommendations setting out how we can unlock new investment in those long-term assets. I am pleased to say the Financial Conduct Authority has just published its rules for a new long-term asset fund structure, which will make accessing illiquid assets easier and encourage investors to look increasingly further ahead.

Finally, we are encouraging asset management and pension funds to play their part. I am delighted to say that the Chancellor and the Prime Minister are planning an institutionalised investment summit later this autumn, which will be a chance to celebrate the progress and commitment to further industry-led action.

Although we undoubtedly need to do more to widen access to finance for business, we should not overlook the great support that existing lenders provide to our SMEs. Last year, in fact, members of the Finance & Leasing Association provided SMEs with more than £16 billion to fund new equipment, plant and machinery, or software. According to the British Business Bank’s “Small Business Finance Markets Report”, banks provided £104 billion in SME lending, up 82% compared with in 2019.

I am delighted that some major lenders are helping our Help to Grow scheme, which aims to boost productivity by giving entrepreneurs management training through the Help to Grow Management scheme, and helping them to adopt digital technology through Help to Grow Digital. I encourage all hon. Members in the Chamber and further afield to promote those schemes to their SMEs because they are incredibly important opportunities to boost productivity wherever they are in the country.

[Margaret Ferrier]

Government Department procurement processes usually mean that the cheapest quote wins the contract, which might mean that SMEs struggle to compete or operate at greater cost to their business. What steps are the Government taking to level the playing field for these contracts and encourage SMEs to apply?