House of Commons - Public Accounts

Select Committee on Public Accounts Eleventh Report

2 The burden of regulation on small business and access to finance

8. Small business representative groups identified better regulation and better access to finance as their priorities for government action.[14] Surveys by the Federation of Small Businesses, amongst other organisations, have consistently found that small businesses are particularly dissatisfied with the volume and complexity of regulation and the frequent changes in legislation that affect business.[15]

9. The Government currently has no official statistics on the national cost to business of regulation or on the overall burden of compliance.[16] The absence of such figures makes it impossible to set targets for managing and ultimately reducing the burden. The SBS said that it had helped to persuade the Government to embark on an exercise to measure the burdens of regulation, which is now almost complete.[17] The Confederation of British Industry (CBI), however, thinks the SBS has not delivered on the issue of better regulation and stresses the negative impact that regulation has on the growth of the small business sector.[18]

10. The SBS's contribution towards the development of regulation and policy has been mixed. There are cases where the SBS has been fully involved in ensuring regulations take small business priorities into account. The SBS also has some anecdotal evidence of individual examples of its influence on regulations.[19] But SBS cannot provide systematic analysis or evidence that the standing of the SBS has improved since the NAO undertook its initial work in 2004.[20] In many cases SBS involvement in the development of regulation and policy has been limited, often because the departments did not consult the SBS in a timely manner.[21] It is telling, however, that neither the SBS nor six out of eleven departments surveyed by the NAO have been able to quantify any reduction in the burden of regulation as a result of SBS interventions.[22]

11. A significant proportion of small firms still find it difficult to obtain the finance they need either to help to start up or to grow. The United Kingdom has one of the most developed financial markets in the world but the Government has identified a number of gaps in the market which means that the 'right' amount or the 'right' type of finance is not always available, for reasons unconnected with the viability of any particular proposal. SBS surveys have shown that around 20% of small businesses which were starting up or in their infancy and had sought an unsecured bank loan had found it difficult to raise the finance they needed. The figure is slightly higher for new businesses, defined as those less than three years old. In total, around 150,000 small businesses face problems in seeking finance each year.

12. Most of these businesses eventually find some form of market finance, while some proposals do not merit support. At the hearing, the SBS estimated that each year only about 23,000 firms with viable business proposals could not find appropriate market finance.[23] The SBS extrapolated this figure by stating that of the 150,000 firms initially experiencing difficulties in obtaining finance, 80,000 found finance from a second source. Of the remaining 70,000 still unable to obtain funds, the SBS estimated that 42,000 (60%) did eventually obtain some from another source. SBS further estimated that 23% of the remaining 28,000 firms did not have viable business plans, leaving between 22,000 and 23,000 firms with viable plans that could not obtain market finance. The SBS argued that supporting "10,000 out of 23,000 is not bad going". However, the reliability of the SBS's estimates has not been confirmed. The SBS has not, for example, clarified its understanding of a "viable business proposal". There is a lack of clarity as to the difference between the 80,000 the SBS says eventually found finance despite difficulties and the 42,000 that went on the obtain finance from other sources. And there is no confirmation that the 10,000 firms assisted by the SBS came from the 23,000 firms with viable plans unable to find market finance, and not from the wider pool of 150,000 small businesses that found it difficult to obtain finance.

13. Government support to improve access to finance takes two main forms. First, the long running Small Firms Loan Guarantee Scheme provides support for businesses which find it difficult to access debt finance. Secondly, a variety of venture capital funds and similar support schemes, which are part-funded by the Government and part-funded by the private sector, provide additional equity and capital funding.

14. The SBS has accepted that the high default rate of businesses assisted through the Small Firms Loan Guarantee Scheme is an issue. With a default rate so much higher than the commercial rate, it is questionable whether the Scheme is best calculated to promote the generation of viable businesses. However, the SBS considers that the objective of the Scheme is to encourage the banks to lend in areas of risk they would not normally accept. Following recent changes to the Scheme, it should be easier to understand where the banks are lending and the reasons for the default rates. The SBS hopes that lenders' experiences with the proportion of borrowers that do not default would encourage them to lend on commercial terms without a guarantee,[24] but lenders are hardly likely to do so while default rates remain many times higher than the commercial norm.

15. On equity finance, the Government estimated that in 2003, of some £4 billon of equity finance invested in the United Kingdom, only 2% was invested in start-up companies and 5% in other early stage companies. The Government's conservative estimate was that 6,000 to 12,000 small businesses a year were not obtaining the equity finance they required. In response, the Government has set up a number of schemes designed to stimulate an increased flow of private capital to mitigate this equity gap for new and growing businesses, drawing on a mix of public and private funding. Figure 2 details the funds concerned and the number of companies helped by each of the schemes in 2004-05. SBS said that the number of companies helped by the schemes was less than 1,000[25]. The figures show that in 2004-05 they assisted just 175 businesses. The Government has recently begun to establish a series of further funds, known as Enterprise Capital Funds, to help more businesses.

Figure 2: The number of small businesses supported by Government backed equity funds in 2004-05

Name of Fund Firms supported in 2004-05 Government investment in 2004-05 (£m)

Regional Venture Capital Funds 61 20.0

UK High Technology Fund 38 19.3

Early Growth Funds 65 5.3

Community Development Venture Fund 11 5.0

Totals 175 49.6



© Parliamentary copyright 2007	Prepared 6 February 2007