Federation of Small Businesses Annual Conference
Good morning. I was due to attend last year’s conference, but on the day I received a 5am call in my hotel room in Liverpool summoning me back…
Good morning. I was due to attend last year’s conference, but on the day I received a 5am call in my hotel room in Liverpool summoning me back to London to attend an emergency Cabinet meeting over the unfolding crisis in Libya. As a result, my extremely able Ministerial colleague Mark Prisk was left to deliver a speech that began with words about how the speaker is frequently accused of being a Marxist.
I never got to find out how that went down.
But I can offer my belated apologies for my no-show. I am pleased to be invited to attend this year instead.
I would like to begin by paying tribute to the FSB - under John Walker’s leadership it is a necessary and effective advocate for the concerns of small businesses.
Lending trends
We are laying the foundations for a recovery built on the efforts of small businesses like yours, but appreciate that we have a job to do to clear away the obstacles you face after such a recession.
In particular, the FSB has never allowed us to lose sight of the fact that many small companies are still struggling to access the finance they need to invest, export and grow.
Its latest research, published earlier this month, underlines the extent of the problem - more than one in five firms cited access to finance as a barrier to growth, with 41 per cent of FSB members’ loan applications being refused.
These findings are reflected in a range of other data. The stock of lending has been contracting since the global financial crisis and still shows few signs of recovery: the Bank of England’s latest Trends in Lending survey found that, up to November 2011, lending had declined 6.1% over the previous year.
Increased risk aversion among banks has made it significantly harder for smaller companies to obtain finance, as compared with before the crash. Another factor in play is the tougher regulatory regime which requires banks to increase their capital holdings. The latest SME Finance monitor shows that 33% of loan applicants in 2011 ended up with no loan facility: that’s 1% of all SMEs. It is striking and worrying that in the last quarter 24% of all SMEs cited access to external finance as an obstacle, of one kind or another, to running their business in the next three months.
Underlying demand is an issue, too, with low numbers of small firms applying for finance over the past 12 months. Small businesses are deleveraging; repaying existing debt, and delaying investment plans. Around 12% of SMEs had wanted to apply for finance, but felt unable to - often citing discouragement; most often small businesses assuming they would be turned down and therefore not asking for funds.
Government support
There a number of reasons for the paucity of credit available to SMEs but, whatever the origins, it is clear there continues to be a problem, and we have deployed a number of carrots and sticks to ease the constraints.
We negotiated the Merlin agreement last year. It was criticised as naive and ineffectual, but I think it did have some beneficial effects in prompting more SME lending than would otherwise have occurred, and has genuinely prompted a change back to relationship banking in some banks.
We also agreed with the banks the launch of the £2.5bn Business Growth Fund, wholly funded by them. It is investing in companies with high growth ambitions- where equity is more appropriate than debt, but unlikely to deliver the scale and speed of growth and returns venture capital and private equity funds seek. Its regional network is now up and running and the fund is starting to make its first investments.
Through the Regional Growth Fund, the Government is also supporting a number of initiatives aimed specifically at SMEs.
A £50m Business Angel co-investment fund is providing early stage equity financing. While two further funds - a £70m scheme overseen by the Royal Bank of Scotland; and a £20m fund being administered by HSBC - are also boosting the flow of finance to small firms.
[This is in addition to successful mainstream bids for RGF money - just this week a further 20 bids worth more than £225m have had their contracts signed.]
We have also made the Enterprise Finance Guarantee more generous to incentivise banks to lend more. We have increased the level of payouts against defaults from 13% to 20% for 2012/13. Over 17,000 businesses have benefited from an EFG loan to date - those lacking sufficient security and track record to secure a regular bank loan. By improving the EFG we intend to support many more.
National Loan Guarantee Scheme
Alongside these targeted interventions, we are introducing a wide-ranging scheme to make it easier for SMEs to borrow from banks the working and investment capital they need.
This week the Chancellor launched the National Loan Guarantee Scheme, which is providing up to £20 billion worth of government guarantees for bank’s wholesale funding. This will enable the participating banks - currently Barclays, Royal Bank of Scotland, Lloyds, Santander and Aldermore - to borrow at lower rates and consequently offer a one per cent discount on loans to business with a turnover of up to £50m. And the banks will be monitored to ensure they pass on to full benefits of the guarantees to borrowers.
But the FSB, and John Walker in particular, have always urged us to look at the long term problem - what he has called a major restructure of the sector.
Breedon review
John is right. It is clear we need long-term action to reshape the finance landscape so it is more effective in meeting the needs of British businesses. The FSB encouraged us to be ambitious with the Vickers commission, which I hope you agree we have been. It is ridiculous that in many parts of the country there are only one or two banks to serve the business needs of an area.
But we also need alternative, non-banking sources of finance. For this reason I asked Tim Breedon, CEO of Legal and General, to lead a taskforce bringing together businesses, investors and advisers to examine the issues. He published his conclusions last week and the government response was released on Wednesday. His arguments are persuasive: more diverse financing gives companies more choice, promotes competition among finance providers, potentially reducing costs, and should produce a more resilient financial system.
We have seen the risks of over-reliance on bank lending. The UK needs a properly functioning non-bank funding safety valve, similar to that which exists in the US. The taskforce recommendations included:
- Creating a mechanism which enables a wide range of international investors, such as insurance companies and pension funds, to lend to smaller firms in the UK.
- Exploring how the government can encourage innovations such as mezzanine loan funds and peer-to-peer lending.
- Raising awareness of non-bank financing options and doing a better job of promoting existing government programmes.
- Creating a single agency to deliver these programmes - drawing on the example of Germany’s KfW state institution.
- And encouraging larger companies to live up to their obligations to their SME suppliers by settling their bills promptly, as well as supporting wider use of invoice discounting and supply chain financing.
These recommendations mirror many of those put forward by the FSB in its own study of business finance released last month, and are based on a thorough analysis of the structural barriers preventing the credit markets from functioning effectively. I welcome the consensus we have reached which will allow us to move forward.
And in the Budget, we have given a commitment to take forward a number of its recommendations.
In the months ahead we will give serious consideration to having a single delivery agency for government support programmes intended to tackle market failures.
This could be akin to the German KfW model, which I have been told produces a “Heineken effect’ - reaching the parts of business that other markets don’t reach. Or it could draw on other state agency models used in other countries.
Either way, we will need to consider the options and scrutinise the evidence and rationale carefully, balancing any proposed changes with the need to ensure continuity for schemes that are already working well.
Alongside this, there is real work to be done to increase businesses’ awareness, confidence and expertise in accessing alternatives to bank finance. So we will look at how best to improve awareness of the government’s access to finance programmes and report back later this year. We also strongly support the commitment given by the major accountancy institutes [ICAEW, ACCA and ICAS] to overhaul the accessibility of trustable, expert and independent Business Finance Advice.
Opening up channels between SMEs and institutional investors is another important part of the picture, so we will give practical support to the feasibility study looking at how this might work. And the government recognises it may have a role to play in kick-starting these markets.
We also recognise our role in relation to stimulating the growth of alternative financial products, such as asset-based finance, mezzanine finance and peer-to-peer lending.
The Chancellor announced the expansion of the Business Finance Partnership in the Budget - £100m of this funding has been earmarked to invest through non-traditional channels that can reach smaller businesses, which could include peer-to-peer lending as well as mezzanine loans and asset-based finance. We will invite proposals for this investment in May.
But the Breedon taskforce is right when it identifies the important role large companies could play in opening up potential new sources of finance for smaller firms in their supply chains.
We are going to look at ways to promote its potential as a credible financing option. We will also consider how to use our own purchasing power to stimulate greater use of supply chain finance, and whether government guarantees might have a role to play in export supply chains.
The work we intend to do in this area will complement existing efforts to support existing UK supply chains in key industries, and to develop capabilities in new areas. That cannot happen if the smaller firms that make up those chains cannot get the finance they need.
Regulation
Now, I have been focusing on access to finance issues so far, because I know it is an absolutely central concern for FSB members.
But there is another issue that blights your working lives and stands in your way as you strive to grow your business - and that’s the burden of red tape and regulation. So I would like to say a little about that before I close.
Last year Mark Prisk described to you the steps we taking on regulation: the review of employment law, One In One Out, the micro-exemption. We are delivering on these, and recognise we have a long way to go. But we are making good progress.
However, in addition to cutting the volume of regulation, we also need to improve the way it is enforced. Because we understand that it can be just as burdensome as the rules themselves. And I think the best way to do that is by listening to business - just as we have been doing with the Red Tape Challenge.
We have heard a lot about the frustrations of dealing with poor coordination between different regulatory authorities, so that rather than being left to run your business you are having to juggle inspections and requests from different bodies.
And we heard accounts of being given inconsistent advice; or the feeling that regulators don’t always make enough of a distinction between businesses that try their hardest to comply with the law, but don’t always get it right every time, and those that deliberately flout the rules.
So, starting from today, we are going to look at regulatory enforcement through the lens of those who have direct experience of it. To do that we need your help: this is your opportunity to tell us how the enforcement of regulation affects your business.
We are launching a website - Focus on Enforcement - to enable you to share your experiences of regulators, positive and negative, with us. And to suggest areas of enforcement you think we should investigate, either because they need reform, or because they work well and you wish other regulators would follow their lead.
We are also using this site to publish the remits, budgets and staffing resources of 56 national regulators, so that at a glance anyone can see who they are and what they do. And we will publish data on the compliance and enforcement roles of Local Authorities - which for many small firms will be a key relationship. This is the start of an ongoing process to encourage greater transparency and incentivise improved performance.
We announced the first three reviews on Wednesday, which will look at compliance and enforcement arrangements for small-scale food manufacturers; the chemicals industry; and for voluntary events; starting in April.
But this is just the start: in the months ahead we will investigate a series of areas of enforcement affecting small firms in every part of the economy. This is your opportunity to tell government how to make a real difference to the way regulators visit, inspect, advise business and enforce the law. So I would encourage you all to share your views.
Conclusion
Because this government has an absolute commitment to clearing away the barriers that act as a brake on growth for British SMEs. That lies at the heart of our strategy for achieving economic transformation and recovery.
So I would like to close by reiterating how impressed and inspired I am by the achievements of this country’s small companies. You are a huge British success story - and your innovation, know-how and creativity will be the basis of our long-term economic success.