The government's own Small Business Service estimates that around 83,000 businesses were unable to raise finance in 2005. And despite a number of initiatives the Government still has not got to grips with providing the right kind of help for Small and Micro Enterprises.
The vehicles that are put in place for raising finance are largely unsuitable and are usually offered through the same old suspects, (the big five banks or venture capital organisations) who are only interested in business owners who have a squeaky clean credit history or are working in areas where there is minimal risk to the lender/investor.
Few owner managers want to get involved with Venture Capital providers! The main reason being that they could possibly loose their business; whilst bank finance may be available to some it is by no means accessible to all or even the majority without putting the family home at risk. Over the years vehicles like the Small Firms Loan Guarantee Scheme have been created to help micro and small firms, but again the banks do not like them as they restrict the profits they can reap from lending, even using these instruments the banks will only lend to the squeaky clean and the Loan Schemes are not always available for all sectors.
The lending criteria applied to these instruments also selects out the not so desirable applicant. We know of occasions where loans have been refused because the owners of the business failed to hit the required "credit score" by 0.5 of a point. How on earth can we say we are fostering an enterprise culture when decisions on lending are finalised like this.
Can you believe it, the only reason for turning down the funding to help the business grow was that they failed by half a point to meet the minimum criteria which had been set by some mandarin who did not know them as people from Adam.
Banks are not a good solution for small business lending and its time the government realised this. Sooner or later someone in government has to grasp that the system isn't working and do something about it, instead of tinkering and passing the buck! Time to value the life style business!The vast majority of small businesses in the UK are classed as "Life Style" businesses and as such are scorned upon by many Development Agencies, Business Link and Central Government.
A lifestyle business is usually defined as a business that does not want to grow further than the comfort levels of the owners or one which provides a living for the owners and because of its nature replaces income from previous employment where the owner's status would have been that of an employee or manager with perhaps a large firm.
An example would be someone who has taken redundancy from the steel industry and then set up their own small business using their skills to give themselves a living and more importantly, perhaps employing others at the same time. Critically though, they may not want to get much bigger due to skills, age or logistics, such as having to move premises to grow, or entertain Venture Capital funding or Bank Finance. More to the point, one of the prime reasons for not growing a lifestyle business further is often down to not being able to finance the project. Remember, not all businesses with the potential to grow are considered suitable by Venture Capital Funds, Business Angels or the Banks. This does not mean that they could not grow the business – simply that they are not considered suitable by those who could help, so consequently they do not get the help. Without the necessary help they remain what they are where they are doing what they are doing and making a living at it. With a little help, how much more could they do and how many more could they employ. If every lifestyle business took on one employee – we would not have anyone on unemployment benefits.
Whether a business is a Lifestyle business or not is immaterial. What really matters is that they contribute to the nation's economy! They probably employ someone other than the business owner, or sub contract work to another self employed individual. None of this is taken into consideration by government when coming up with ideas and processes which by and large really don't meet what the "market wants and needs".
Indeed, recently the government does not consider a business to be a business unless it is registered for VAT and preferably incorporated. It wants the tax paid by these lifestyle firms but does not recognise them for any other purpose. They are ignored in numerous government statistics and help is often denied them.
What does that say to any budding entrepreneur? "We consider you to be cannon fodder until you can reach the VAT threshold".
And yet, if these lifestyle businesses were to close up shop the UK's economy would soon be in serious peril. The vast majority of Farming is made up of lifestyle businesses, But they have in place vehicles to help them through Agricultural subsidies and diversification grants. The trouble is that the diversification grants have been wasted because they have funded diversification into other farming practices or related areas rather than diversifying them into more profitable non related sectors. Not so many other sectors of the UK economy! The fact is that any business that makes a profit and pays tax should be eligible for financial help! Poor credit ratings:It is now the easiest thing in the world to fall foul of consumer credit ratings. Many who could be starting new businesses or growing existing businesses can't get the help they need because of their credit rating. Three million people in the UK do not have a bank account and are not considered suitable as customers by the banks. Yes there are "Basic Bank Accounts" available, but these are very restrictive in the services on offer and do not provide for the user the ability to buy from the Internet.
How many people could be off benefits and working for themselves and employing others if this was addressed? It is not owner managers that we need to change – it's the system and we can only do this if we address the root and branch causes of the weakness in Small Business Funding. Granted, many owner managers do need training in business skills and new technologies, but if this expenditure was able to be offset as a 100% capital allowance as investment in the business and where the individual or firm is not paying tax due to lack of profit during the growing period, the expenditure could be refunded through the tax system in the form of a carry forward relief against future tax payable, this could stimulate an end to the much hailed skills shortage.
To address these issues we do not want to throw the baby out with the bathwater. Keep what we have but then build on it. Yes it will create a tiered system, but we have that anyway with bank lending, VC finance, the alternative investment market and the stock exchange. What we need to do is widen the scope of help to small firms and make it more flexible, more tolerant of hard times and the occasional failure! Many of today's business millionaires will at some point have been close to bankruptcy or even through it.
We need to value and invest in "Tryers" for they are the long term future of a successful economy.
We must understand that not everyone wants to be the next Alan Sugar or Richard Branson, but that their contribution when added to the others who do not become the next Sugar or Branson is probably greater in relation to UK PLC than either or both Sugar and Branson put together and added to the other business millionaires. So what could be an alternative to what we have now?- Unsecured lending at low rates of interest and flexible repayments which can mirror the trading position of the business.
- Help for those with adverse credit ratings who could well become self employed if only they could get some help to start a business. Similarly for the self employed who could be maintaining and growing an existing business, if only they could get the help they need for reinvestment in technology or learning. Whilst cash flow is always king, we usually find that it helps the small firm to have the latest technology and the skills to use it properly so allow funding to finance skills and technology acquisitions rather than cash flow. Do not forget that often small business owners can have their credit ratings adversely affected by poor trading conditions and help needs to get to these people who could well become one of the next major players in their field if only they could get the financial help at the critical time.
- Bring back 100% capital allowances for small firms who are investing in growth within their businesses. Even better - If they can't offset the capital allowance against tax in that year then let them draw it down against future earnings. This will stimulate investment in technology and learning new skills to meet the challenges of the 21st century. So many small firms in the burgeoning sectors of ICT and Creative Media could be doing much better if they could only finance the equipment and training they need without breaking the bank.
- Bring in Social Banking: Set up Small Business Banks – who must not be run be the big five banks or affiliated to them in any way, these banks would fill the lending gap which exists due to the strict banking and VC criteria imposed on all other forms of lending or funding. This would foster competition in the banking sector towards small businesses.
- Create Socially Responsible Banking - Bring back County Banks – who cannot be owned by any clearing bank or lager bank, and who can only operate within the boundaries of the county is serves (Cumbria for example) – anyone wanting to form a County Bank must agree to put a minimum of 10% of its profits back into the community. (Good causes, charities, sport for all, credit unions, social regeneration and engineering)
- Stop creating legislation that has an adverse impact on the small firm – too much time is wasted by owner managers in trying to keep up with imposed regulation often because large organisations have abused the system. Small firms can be put out of business by the cost of conforming to red tape and it puts most owner managers off employing someone. The result – reduced employment prospects and smaller growth. Do like they do in the USA and free small firms from much of the red tape.
|
