SMEs: Access to Finance

Marion Fellows Excerpts

Tuesday 9th November 2021 Westminster Hall

[Marion Fellows (Motherwell and Wishaw) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Pritchard. I congratulate the hon. Member for Darlington (Peter Gibson) on securing this very important debate. He gave us a very full and interesting speech, full of issues that I recognise. In terms of regional inequality, he has it spot on. When looking at regulation in different types of banks and those in Germany and France, and where small and medium-sized enterprises can receive their finance, he gave us a thoroughly good and interesting lesson.

The chair of the APPG on fair business banking, the hon. Member for Thirsk and Malton (Kevin Hollinrake), followed—I apologise to him for my not perfect attendance at that important APPG—and gave us a quick run through a number of reports produced by the APPG, all of which were interesting and relevant to the subject we are talking about. During this time of COP26, I especially take on board his words about decarbonisation and small businesses looking forward environmentally. That could well become really important and another block to gaining finance in the future.

After the financial crisis, many SMEs were left to sink or swim when bank lending dried up, despite MPs from all parties calling for access to finance. That mistake must not be repeated. It was only right that firms were given furlough, coronavirus business interruption loans and bounce back business loans to get them through the coronavirus crisis. Since March, those have been replaced by the recovery loan scheme, administered by the British Business Bank. Loans are available through a network of accredited commercial lenders; I will come back to that point later. Term loans, overdrafts, invoice finance and asset finance are now available.

The Scottish National party welcomed the autumn Budget 2021 announcement that the scheme would be extended until June 2022, because it was originally due to close at the end of 2021. However, from 1 January the scheme will be open to small and medium-sized enterprises only and the maximum amount of finance available will be £2 million per business. The guaranteed coverage that the Government will provide to lenders will be reduced from 80% to 70%, which could have a huge impact on small to medium-sized enterprises.

Moving from the previous loan system could be difficult for small to medium-sized enterprises. The flexibility of the bounce back loans for small firms, as well as automatic approval and repaying only when the firm is growing, is no more. This is huge. It is beyond belief, and will mean that schemes will be axed before firms have been lent the amount promised.

As well as access to new finance, the SNP has concerns about firms being able to cope with debt levels accumulated during the coronavirus pandemic, and the economic future is looking even more uncertain. After the last crisis, many SMEs were left bankrupt when they could not repay their debts, despite MPs from all parties calling for access to finance. That is another thing that must not happen again.

However, the risk is rising. Last month, the Financial Times reported that the Bank of England has warned that a

“third of the UK’s small businesses are classed as highly indebted, more than double since before the Covid-19 pandemic”.

It went on to say that the Bank of England said

“two-thirds of the £79bn increase in UK corporate debt between the end of 2019 and the first quarter of 2021”

was held by firms who would not have been able to borrow pre-pandemic. The report continued:

“The research showed 33 per cent of SMEs held debt levels of more than 10 times their cash balances, versus 14 per cent before Covid-19 hit. The percentage of those with high debt relative to both cash balances and monthly inflows trebled to 10 per cent from 3 per cent over the same period.”

The Bank of England’s Financial Policy Committee warns starkly:

“Although debt appears affordable in the near term, insolvencies are likely to rise from 2021 Q4 as government support is withdrawn as planned.”

There is a clear blueprint that the UK Government can adopt from TheCityUK, which the SNP has supported since its publication. TheCityUK’s report, “Supporting UK Economic Recovery: Recapitalising Businesses Post Covid-19”, warned that, by March 2021, £100 billion of unsustainable debt was owed by UK businesses, with £35 billion from Government loan schemes. Much of that came through coronavirus business interruption loans and bounce back loans, which were taken to support firms and the economy through the pandemic. Under current rules, responsibility for chasing up businesses that are struggling to pay back their coronavirus loans falls on banks and other lenders, which will only force a rerun of the post-financial-crisis saga of SMEs being bankrupted by banks collecting debts. That the Government will be forcing them to do so is beyond belief, as the hon. Member for Thirsk and Malton said.

TheCityUK came up with a business repayment plan that would let very small businesses pay back their coronavirus loans via a long-term, student loan-style system, with small repayments made every month via the tax system; and a business recovery capital option allowing larger small businesses to convert their coronavirus loan into a long-term, unsecured loan, again to be gradually paid back. TheCityUK plans would also enable some larger businesses to convert their loans into shares in their company on which they paid regular dividends, but that is unlikely to apply to many SMEs. All that would be overseen by a proposed UK recovery corporation, which in conjunction with the UK Government would administer these repayment schemes. Repayments will be a huge drain on SMEs and the economy for a long while to come. Mike Cherry, national chairman of the Federation of Small Businesses, recently suggested that small businesses should repay their coronavirus loans only once they are turning a profit:

“A guarantee that they won’t have to start making repayments until they’re turning a profit would give them the confidence to invest and hire today, rather than further down the line when such activity may prove too little too late.”

Rising overheads are a key factor behind a slump in Scottish business confidence, according to new research from the FSB in Scotland. Some 77% of Scottish businesses say that the cost of running their business has increased since this time last year, compared with only one in 20 —some 5%—that are seeing a decrease. The FSB’s Scottish small business confidence index fell steeply to +1.2 points in the third quarter of this year, from +20.5 points in the second quarter. The UK’s index also fell, although not quite so steeply, meaning that the typical Scottish business is now less optimistic than the UK average, a reversal of the situation in the summer.

The FSB warns that rising overheads are making it difficult for businesses to invest in measures to grow their operations or tackle their environmental impact, which will hold back efforts to recover from the covid crisis in a sustainable way. Andrew McRae, FSB’s Scotland policy chair, says:

“Scottish business optimism bounced back over the summer but has slumped in the autumn. That’s partly because the easing of Covid restrictions delivered a big confidence boost that’s waned over time. However, punishing rises in business overheads are also taking their toll on the trading outlook. And with a rise in payroll taxes on the way, there’s no end in sight. Spiralling overheads are one of the biggest headaches for our members. Smaller businesses neither have the statutory protections of consumers, nor the bargaining power of the biggest firms. That’s why FSB has been campaigning for the UK Government to take action to help these operators, at the very least easing the VAT burden on their gas and electricity bills.”

One business hit by those rising costs is Equi, which has a number of shops. They are concerned that a high increase in their overheads may cause them to cut corners and cut staff, as happened in the past, which will mean that they are not as successful as they have been in recent years.

A separate FSB report calls on our policy makers to launch a new voucher initiative called “Help to Green” to help small businesses to reduce their environmental impact. The scheme would give businesses grants of up to £5,000 to become more energy-efficient. Andrew McRae said:

“In the short term, we need to help firms manage the overnight spike they’ve seen in their bills. Next, we need to support local and independent firms to reduce the amount of energy they use.”

All that has happened during COP.

Smaller businesses know that they have to take action, but only a third have a plan in place to reduce emissions. Governments in Edinburgh and London need to put together a package of help and support to help firms move in the right direction. SNP Members would prefer indebted firms that are held back from growth by interest payments to have their debt converted to equity or grants.

The UK Government should not force banks to take coronavirus business interruption loan scheme and bounce back loan debtors to the cleaners, as that will prevent them from rebuilding their businesses and, therefore, the economy. The Tory Government’s plan for business-as-usual debt collection is totally inappropriate following what we hope was a once-in-a-century economic shock.

The Chancellor said that total departmental spending will increase by £150 billion over the Parliament, which means a real-terms rise in spending across the board, with Scotland’s Barnett funding up on average £4.6 billion annually. All funding is welcome, but we need to be cautious. The Scottish Government are getting less funding for day-to-day spending in every year of the spending review period than this year. Most of the increases are likely to be in capital.

[Kevin Hollinrake]

The hon. Lady is making some good points, but I am nervous about turning a loan into a grant or making it non-repayable, as I think she outlined that TheCityUK suggested. Lots of businesses did not take loans and used their own funds to keep going, and lots took loans and paid them back. Would there not be a moral hazard in effectively saying that some businesses could have free Government money when others did not take it?

[Marion Fellows]

I take the hon. Member’s point, but I think my point was worth making. We have to be so careful, because businesses took those loans on and are now likely to be hounded by banks that are mainly interested in providing money to their shareholders. The hon. Members for Darlington and for Thirsk and Malton spoke about the mutualisation of banks and local regional banks, which are also on the SNP wish list. I take the point, but my main point is that businesses should not be forced out of business because they borrowed money at a time when they were able, and perhaps would not have been able in the past.

The Chancellor invoked Margaret Thatcher and said:

“The budgets are set; the plans are in place; the task is clear. Now we must deliver because this is not the Government’s money— it is taxpayer’s money.”—[Official Report, 27 October 2021; Vol. 702, c. 279.]

That makes it clear that we must be wary of warm words. The Scottish Government will have to consider the detail of the Budget when it has been confirmed. The £150 million small business fund for Scotland should be disbursed by the Scottish Government and Scottish Enterprise, not the UK Government or the British Business Bank exclusively.

Although the coronavirus business interruption loan scheme and bounce back loans were offered, not all our constituents could access them due to their business banking accounts not being with one of the big banks on the list. They tried to access them through feeder accounts from other banks such as HSBC, but continue to be denied access to any financial support. They were mostly SMEs, many of which were forced to close.

Will there be any guarantee that those who were unable to access those loans but managed to survive with grants from, for example, the Scottish Government will be able to access the recovery loan scheme? Will the scheme allow those forced to close to rebuild their business? I hope the Minister can give assurances on those matters and take on board TheCityUK’s plan and the warnings from the Bank of England, FSB Scotland and nationally.