SMEs: Access to Finance

Paul Scully Excerpts

Tuesday 9th November 2021 Westminster Hall

[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.

[Kevin Hollinrake]

I would like to put on record my thanks to the British Business Bank, which has done a fantastic job in engaging with the APPG over the last 18 months or so and a tremendous job in helping to get that money out of the door. In terms of releasing equity capital—the Minister talked about pensions, which is a very good move by the Treasury—I think Octopus also suggest we allow ISA investments into unquoted companies which, again, could provide a source of equity finance for some of the good, high-growth companies he was talking about. Would the Minister consider having a discussion with the Treasury about this?

[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?

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[Paul Scully]

The Government have gone a significant way to try to simplify procurement options for SMEs. There is undoubtedly an unlevel playing field, as big businesses have the resource and capability of procurement specialists, which SMEs clearly do not. SMEs inevitably have to join the framework as subcontractors, which is not as easy for them or as good for the taxpayer, because it adds extra cost and extra levels. The Cabinet Office is always looking at the procurement framework to see what more we can do to have greater access for SMEs.

The greater the choice of finance options for small firms, the better. We know that challenger banks, including those in the FinTech sector, have the potential to make a real difference so, following the recent Kalifa review, we are rolling out initiatives that will help these organisations try out new ideas and grow.

To boost competition, we have also raised the banking surcharge allowance to £100 million from £25 million, which means that 35 banking groups will fall out of its scope completely. The British Business Bank has a specific objective to support diverse finance markets, and 94.5% of the finance supported by the bank’s core finance programme in 2020-21 was delivered through smaller, newer or alternative finance providers, exceeding its 94% target. I am sure that, over time, these measures will help to further widen small businesses’ finance options.

On the British Business Bank and its objectives, my hon. Friend the Member for Thirsk and Malton talked about delivering net zero. Indeed, we have implemented a net-zero objective within the British Business Bank, and therefore everything it does has to adhere to that objective.

The right hon. Member for Wolverhampton South East (Mr McFadden) talked about MREL, and the Bank of England is currently leading a review of that and its approach to setting a minimum requirement for own funds and eligible liabilities. The Treasury is working closely with the Bank, which is considering the responses to its consultation—the Bank will respond in due course. The Government and I thank the banks for their continued engagement. He also talked about bail-in debt, which is primarily a matter for the regulators, and it fits into that review, too.

The hon. Member for Motherwell and Wishaw (Marion Fellows) asked what will happen to the Government’s pandemic loan schemes, and we clearly have to get the balance right in ensuring taxpayers’ money is used well. As we heard from my hon. Friend the Member for Thirsk and Malton, a number of businesses that borrowed money did not necessarily need it, but they wanted the extra protection and are still sitting on the money. He is right that converting the money into a grant is probably not appropriate in ensuring that we get best value for money.

We clearly want to make sure that we address fraud, and we will have further updates on our estimate for fraud in the Department’s annual accounts, which will be published shortly and will be available to be inspected. We also have the pay-as-you-grow schemes. We have listened to businesses and have made sure to extend the exceptional support, allowing them to repay their bounce back loans on terms that work best for them. Businesses will be responsible for repaying any facility they have taken out, as is right and proper, but they will not necessarily be able to make repayments for the first 12 months or pay the standardised low interest rate of 2.5% afterwards, but the pay-as-you-grow options provide additional support to businesses throughout the life of their loans. We are trying to make sure we can flex as best we can to ensure that businesses have the best chance of recovering and succeeding.

This Government champion small businesses, and we have heard about the wisdom of people who run small businesses. This is not a macro consideration, and it is not just about a unit of economic activity. Entrepreneurs are taking a risk to set up their business, and they often take a personal hit to ensure that those who work for them can pay their bills. From my experience of running small businesses, I know that it adds a totally different perspective on life when someone is responsible for other people’s livelihoods. It is important that we have the human cost of getting it wrong at the forefront of our minds and that we see that small businesses can get the just rewards that they deserve for the risks that they are taking. However, it is also important that the people who work within small businesses get the opportunities that small businesses and SMEs inevitably can and will create as we recover and build back better. We want to ensure that the UK is a great place to be an entrepreneur. As I hope I have shown, we are focused on giving firms throughout the country the right tools to succeed, including access to finance to both launch and grow.

I thank right hon. and hon. Members once again for their excellent contributions to the debate. I look forward to working with everybody on this most important of issues over the months ahead.