Memorandum submitted by the Federation
of Small Businesses
For small businesses, access to finance and
cash-flow remain the greatest challenges in this recession. Measures
to boost bank lending have so far failed to meet expectations
of small businesses and too many viable firms are going out of
business as a consequence.
The FSB believes that the Enterprise Finance Guarantee
(EFG) scheme has good potential, but its implementation has been
hampered by poor communication and failure of the banks to pass
on the benefits of the scheme. This does appear to be positively
changing with more small businesses applying to and drawing down
EFG finance.
FSB case studies suggest there have been behavioural
inconsistencies between strategic level and branch manager level.
Only 8% of small businesses polled by the FSB in early March 2009
said that the EFG scheme was being made available to them.
Many of the other schemes the Government has
set up to help small businesses have not been as successful as
was envisaged. One in particular is the Prompt Payment Code which
is failing to attract signatories. This is especially concerning
as late payment is a real threat to small firms.
The FSB continues to work closely with the banks
in an effort to improve understanding of the small business community
and to boost lending.
The threshold of an annual turnover of £25
million for applicants
When the FSB first proposed a Government guarantee
scheme in October 2008 (Appendix One) to help small businesses
access funding during difficult credit conditions, we proposed
a turnover cap at £5.6 million. This was taken from the criteria
that the European Investment Bank (EIB) placed on a new tranche
of finance for SME's in the UK.
The FSB envisaged that a cap at this level would
help the smallest firm's access funding. We were concerned that
the current turnover cap at £25 million would lead to large
businesses taking the majority of the available £1.3 billion
available through this scheme.
The FSB would still like to see the EFG aimed
at the smallest firms within the SME community and has been encouraged
that the finance flowing out of the EFG scheme has been awarded
to firms with small turnover levels.
This was demonstrated by feedback from BERR
on 29 April 2009 which stated that nearly £325 million of
eligible applications from over 2,900 small businesses have been
assessed, are being processed or have been granted. This brings
the average term loan to slightly above £110,000.
Whether the amount of money available is reasonable
to enable businesses to continue operating
The FSB welcomed the announcement that the scheme
would guarantee £1.3 billion over one year. The FSB proposed
£1 billion of Government guaranteed funding in its initial
proposal which was derived from the Small Firms Loans Guarantee
scheme (which on average made term loan commitments of nearly
£250 million per year). We felt that due to the serious problems
in the national and global credit markets, which had a major impact
on the SME sector, a figure of five times that of the Small Firms
Loan Guarantee scheme per year would be sufficient to assist the
SME sector.
The FSB feels that as the EFG becomes increasingly
used and known amongst the SME sector, the overall amount will
be used quickly. This has recently been demonstrated by BERR ear-marking
£20 million for social enterprises in disadvantaged areas
through the EFG. While the FSB welcomes BERR ear-marking money
for these causes, it must also recognise that the fund may need
supplementing and may need to go on for longer.
This is a concern as the EFG replaced the Small
Firms Loan Guarantee scheme, which remains suspended. The FSB
urges BERR to scrap the Small Firms Loan Guarantee scheme and
make the EFG permanent.
Whether loan guarantees are the best method of
addressing the difficulties in businesses accessing finance and,
if not, what is the best method
The FSB considers that a Government guarantee
loan funding scheme (such as the EFG or the Small Firms Loan Guarantee
scheme) is needed for those small firms that are viable and have
high-quality business plans, but have difficulties accessing finance
due to a lack of security.
The Small Firms Loan Guarantee had a perceived image
amongst many small businesses that it was heavily biased towards
start-up firms and that banks used it to package risky loans,
therefore able to reduce potential losses on these actions.
The EFG has been able to break away from this
image by lending to businesses that are past the start-up stage
and looking to consolidate or expand.
It is vital that businesses in perceived risk
sectors such as green technology, specialised manufacturing and
engineering are given the opportunity to trade and explore growth,
and will need the appropriate finance to do this. Certain firms
may decide to explore equity release of other finance raising
initiatives, but many will still need to obtain terms loans.
Finance to these firms through the banking sector
is difficult due to the perceived risk involved, but can bring
technological advances and growth potential in terms of sectoral
and job opportunities.
Some of these concerns were addressed in the
2009 Budget. For example, the Chancellor stated that the Governments
Technology Strategy Board will receive £50 million to drive
future growth in low-carbon technologies, advanced manufacturing
and the life sciences.
As well as loan schemes, the Government needs
to look at root causes of why small businesses need finance.
For many small firms, the need for loans and
overdrafts is due to a need to finance an existing invoice or
pay staff salaries or wages. Many small businesses are being hurt
by the late payment of invoices which is impacting on short term
cash flow. This will not be ended by the Prompt Payment Code,
which is welcomed by the FSB, but by a shift in culture to pay
invoices swiftly. The EU states that one in four business closures
is due to late payments, costing 450,000 jobs.[45]
Business rates, which are the third highest
expenditure for most small businesses, are also having a detrimental
impact. The FSB has been calling for Small Business Rate Relief
to be made automatic and empty rate relief to be reintroduced.
These root causes should be looked at by the
Government as well as loan guarantee schemes; and
To what extent the loan guarantee will encourage
new lending by banks
The extent of lending is examined in reports
such as the Bank of England's first Trends in Lending report and
the British Bankers Association's (BBA) statistical SME data released
each quarter. These reports show optimism in the demand for credit,
but a lack of optimism in the short term availability from credit
suppliers.
The FSB considers that as part of the drastic contraction
of the credit markets in the mid to late part of 2008, credit
suppliers from foreign countries left the UK. This impacted on
direct credit availability and the macro-level availability to
UK financial institutions.
Recent BBA figures have shown an increase in
term lending, in March 2009 to small businesses which represents
almost the monthly averages for 2008. This is welcomed and the
FSB agrees with the Bank of England that credit conditions are
not in the same dire conditions of those in late 2008 and early
2009.
We hope that the EFG has not just brought the
benefit of extending the EFG slate of term loan funding, but also
provided banks and small business clients with the communications
channels that may have broken down. This in turn should lead to
more normal "in-house" lending.
The extent to which banks are making this scheme
available
The FSB was extremely concerned that during
the initial weeks of the EFG many small businesses and bank branch
staff did not have the full details of this scheme. This was brought
home by anecdotal evidence from FSB members who frequently commented
that bank branch staff did not know the details of the EFG. Some
of these comments have been attached in Appendix Two.
The FSB also carried out polling work in February
2009 which demonstrated that fewer than 8% of respondents had
been made aware of the EFG scheme by their bank (see Appendix
Three).
As the scheme has matured, the negative comments
from FSB members have reduced dramatically.
Whether businesses in some areas of the UK have
more difficulty in accessing the scheme than businesses in other
areas
The FSB carried out polling in February 2009
which showed a mix of numbers on whether banks were making the
EFG available to small businesses. In particular, only 3.3 and
2.6% were being made aware of the EFG scheme in the North East
of England and Northern Ireland respectively.
In both London and the West Midland the numbers were
slightly higher, but both only just above 10%. For the full FSB
February 2009 survey see Appendix Three.
Whether applying to the scheme creates an administrative
burden on those applying
The FSB does not believe the scheme is over-burdensome.
Taking out a term loan from a bank is a serious undertaking for
a small business and a certain amount of due diligence from their
part and the part of the bank is necessary.
As the EFG brings tax payer money into the equation
it is vital that money flowing out of the scheme is to viable
small businesses with robust business plans. The FSB has had some
concerns over the length of time it has taken from initial offer
to receipt of money, but this has been in a small number of cases.
Whether the scheme has been effectively promoted
to the private sector
The FSB believes that while the scheme was announced
at the start of 2009 it was not fully promoted to the private
sector, especially to small businesses. This promotion should
have taken place under the lead of BERR and the banks. Unfortunately
this was not the case and the FSB decided to internally promote
this scheme to its 216,000 members with clear advice and factors
to be taken into consideration. We also highlighted other Government
initiatives such as the HMRC deferment of payment scheme and the
Prompt Payment Code.
Any other views stakeholders think the Committee
should be aware of
The EFG scheme is the temporary replacement scheme
for the Small Firms Loan Guarantee which lent to businesses that
found ordinary banking products difficult to attain. The EFG is
lending to businesses within this criteria, but also to firms
that should be able to acquire regular banking products without
Government interference.
We hope that in time the demand for the EFG will
decrease as a result of normal banking practises to the small
business sector.
A major concern for small businesses is the
lack of knowledge of Government schemes and initiatives, and the
serious problem of broken relationships between SME's and banks.
The FSB proposes using a Corporate Mediator, as used in France
and Belgium, to overcome such problems. This is outlined in Appendix
Three.
45 http://ec.europa.eu/enterprise/regulation/late_payments/index.htm Back
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