Wednesday, June 13, 2012

Entrepreneurs and SMEs Need a Level of Funding Support

Copyright (c) 2012 Alison Withers

Annual research is carried out into the top 59 economic countries by IMD, the Swiss Business School, as part of their IMD World Competitiveness Yearbook. They have just released their results for 2012 that show UK at 18th for competitiveness and 57th for entrepreneurship.

Corporate renewal specialists argue that despite government rhetoric and its promotion of initiatives to encourage bank lending to entrepreneurs and SMEs the banks aren't lending.

Merlin and the various government finance initiatives for entrepreneurs and SMEs are a joke and contribute almost nothing to stimulating growth or an entrepreneurial culture in UK.

Unsurprisingly, trust among SMEs in banks is low as shown by the Federation of Small Businesses' (FSB) survey of 11,000 SMEs, where only one in ten small businesses had obtained a bank loan in 2011. The FSB believes this is because the UK banking system does not see any money to be made from lower-end lending of less than £25,000.

Banks' inability to lend to businesses with few assets is at the root of the problem.

The Enterprise Finance Guarantee (EFG) scheme has not worked and nor will the new National Loan Guarantee Scheme (NLGS) initiative. The reason is that the lending by banks under these schemes is unsecured and therefore exposed to the full credit risk of these loans.

The EFG and NLGS are very different from the Small Firms Loan Guarantee Scheme (SFLGS) that was launched in 1981 to stimulate lending to SMEs. The SFLGS provided for a government guarantee to the lending bank of 85% of unsecured loans to qualifying SMEs who could borrow up to £250,000 (70% for companies under 2 years old). Throughout the 1980s and 90s the SFLGS contributed to the stunning growth of those decades. It helped encourage entrepreneurs to set up and grow their business but was scrapped by Gordon Brown in 2006; a nail in UK's entrepreneurial coffin, and what prescient timing.

Other government initiatives that have been announced have fine titles such as: Export Enterprise Finance Guarantee (ExEFG), Enterprise Capital Funds (ECFs), Business Angel Co-Investment Fund, Business Finance Partnership (BFP) and Seed Enterprise Investment Scheme (SEIS). But where are they?

While a reduction in corporation tax and in income tax may well encourage larger businesses and their executives to stay in UK and possibly unlock some of the substantial reserves that have been built up, it is not clear if much investment will trickle down to SMEs.

It has to be said that HM Revenue & Customs (HMRC) has probably contributed most to supporting SMEs through their light touch approach to PAYE and VAT arrears. This however is changing and HMRC is becoming far more proactive in dealing with late payment.

A major source of potential entrepreneurs is university and school leavers as they confront the limited prospects of finding a job. The March budget contained a promise to consider offering enterprise loans for young people to start their own businesses. Since then the Department for Business, Innovation and Skills recently provided a grant of £500,000 to the National Association of College and University Entrepreneurs (Nascue) to set up more enterprise societies.

There is another scheme called Entrepreneur First, a two year programme for graduates to provide them with links to mentors and sources of funding. But no money and the cynics believe that these mentors are looking for a job themselves.

A significant drawback for debt-ridden graduates is that the last thing they want or need is to add to their debt burden. Nascue chief executive Hushpreet Dhaliwal said: "what is needed is grant finance to allow students to take a risk".

Finally there is the myth of equity investment for SMEs. While we are aware of business angels, venture capital firms and the Dragons Den, fund raising is not as easy as it seems. A private equity investment risk-taking culture doesn't really exist in UK where most with money invest in property. There are however funds for those with real growth potential and before exploring this route, entrepreneurs need a very sound business plan that is supported by evidence that it will work. It is worth remembering that Sir James Dyson spent nine years raising funds to manufacture his first bag-less vacuum cleaner.

While all these alternative sources of funds may be welcome and laudable, they are a small drop in a large ocean of need. In the absence of a culture of investing in each other's business, we need the banks to be incentivised to lend to SMEs. While they may have the funds and the distribution, they should not be exposing themselves to risky or unrecoverable debt and therefore they must be wary of unsecured loans.

If they are to lend to SMEs, their loans need to be underwritten and the government is the only such source. With the right level of government guarantee, entrepreneurial and SME investment can be stimulated.

Corporate renewal experts argue that funding and support for SMEs and Entrepreneurs has to be much better and more accessible if the UK economy is to be stimulated into recovery and growth. By Ali Withers.

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