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What needs to be done to help small businesses

Submitted by on 22 Nov 2010 – 10:48

By Phil McCabe, Media and PR Manager at Forum of Private Business

With the emergence of a committee charged with easing the regulatory burden, consultations over new Local Enterprise Partnerships (LEPs) and even banks collaborating on a new lending taskforce, one thing is for certain: there will be a lot of talking during the coming months.

But struggling small businesses hope that ministers – and bankers – will pay them more than just lip service.

In addressing legislative barriers to growth, continued lending restrictions and the provision of regional business support following the demise of Regional Development Agencies and Business Links, these new bodies must not become mere talking shops.

They must be able to bring about the cultural changes within financial institutions and across the public sector which are necessary to help make small businesses the catalyst for sustained economic recovery.

The likelihood of achieving a genuinely robust private sector-led recovery will depend on freeing up the flow of credit to allow viable businesses to capitalise on renewed opportunities.

However, despite the banks returning to profit and again paying huge bonuses, the number of complaints from small businesses to the Financial Ombudsman Service about the lack of availability of bank loans has risen by nearly 120 per cent over the past year.

According to the British Bankers’ Association’s (BBA) latest figures, small business lending is down by almost £270 million compared to the same period of 2009 when the UK was in the midst of recession.

Following the green paper ‘Financing a Private Sector Recovery’, a lending taskforce has been set up by the BBA in conjunction with the chief executives of the UK’s ‘big six’ banks.

They will sit on a steering group overseeing four different ‘work streams’ including one focusing on Small to Medium Sized Enterprises (SMEs) finance, which will consist of government representatives.

Broadly, the taskforce will assess the demand for business finance and the ‘market challenges’. It will also make reccomendations on the liquidity and funding of the banking system relating to the provision of commercial finance. It is understood that while they will be consulted, small businesses will have little direct influence on the formation of initial reccomendations.

Partly because of their over-centralised (and now extremely risk-averse) tendencies, lenders are not providing vital growth funds for even many perfectly viable businesses. Further, when finance is available it is often far too costly.

There are, of course, alternatives. Increasing numbers are turning towards organisations such as Funding Circle, an online finance marketplace delivering more cost-effective lending and also a better option for investors than depositing money into banks.

However, while it is true that some businesses could do more to establish their own creditworthiness, there is a clear knowledge gap about business viability that banks are unable or unwilling to bridge.

Given the banks’ repeated insistence that lending was being made available despite subsequent evidence to the contrary, it is important that ministers put across the small business case accurately and resolutely.

The Government itself is already committed to consulting. It is asking business owners exactly what sort of public business support they want the new LEPs to deliver. While this dialogue is welcome it is one area where entrepreneurs would appreciate a little more direction and certainty.

It is also important that the Government’s new Regulatory Policy Committee, which is tasked with scrutinising proposed regulations and the implementation of EU legislation and overseeing a ‘one-in, one-out’ approach to introducing new laws, has real teeth.

According to a survey carried out last year by the Forum of Private Business, red tape costs smaller employers £9.3 billion per year. Owner-managers or key senior staff members devote 37 hours every month to complying with legislation.

In enforcing its ‘principles of regulation’ on government departments, the committee must be able to genuinely alter the public sector’s legislative behaviour if it is to meet its aims of creating a culture of ‘regulation of last resort’

On that other perennial small business issue – tax – there appears to be some hope. The new government has been applauded for cutting the small business rate of corporation tax, albeit by just one per cent compared to the four per cent cut over four years handed to large companies.

Coming in the coalition’s inaugural  budget, alongside sweeping public sector efficiency cuts, this tax break had been a mainstay of successive budget ‘wish lists’ submitted by the Forum but had not previously been taken up.

Reducing corporation tax for SMEs is certainly a positive first step, and suggests that, at times, ministers do listen. However, even bolder tax policies will be required if businesses growth is able to fill the jobs gap created by streamlining the public sector.

Consultation is always a good thing but only if it is meaningful and produces direct actions – proper policies that will boost entrepreneurship and economic growth. Otherwise, all that will comes out of these new committees will be more hot air, and there is already enough of that.