Conclusions and recommendations |
1. BIS manages six
main schemes that are intended to provide around £2.85 billion
of financial support for SMEs between 2011-12 and 2014-15. In
2012-13, these schemes helped just over 5,900 firms. In addition,
HM Treasury and the Bank of England jointly oversee the Funding
for Lending scheme, under which banks and other lenders have been
provided with £17.6 billion at cheaper than market rates,
with the intention that they will lend this on to businesses and
households. The new British Business Bank, which will start operating
in 2014, has £1 billion of capital at its disposal in addition
to the resources of the existing BIS-led schemes, and is designed
to better identify and fill gaps in the market for financing SMEs.
2. The departments' schemes are managed as
a series of ad hoc initiatives that are launched to address particular
weaknesses in the market, rather than to act as a coherent programme.
The departments have developed the schemes over time, to address
particular areas of the finance market where there are problems.
These schemes include finance guarantees, loans, equity support
and efforts to diversify financing options beyond the traditional
channels of the high street banks. But neither department has
a clear view of what success will look like for the programme
as a whole. They have also found it difficult to meet the needs
of many different types of SME operating across a variety of sectors,
whose outlooks range from those seeking funding for high growth
to others seeking finance to start up or to continue operating.
Recommendation: The departments should use
the establishment of the British Business Bank to start managing
the various schemes as a coherent programme, clearly setting out
what it wants to achieve, and how each scheme and the programme
as a whole will contribute towards the departments' overall objectives
for making it easier for SMEs to access finance.
3. The Government spends a considerable amount
of taxpayer funded money promoting better access to finance for
SMEs but the departments could not demonstrate that their schemes
have successfully addressed the market failures they were designed
to correct. Indeed far from encouraging more lending to SMEs,
investment has declined. The departments
are trying to positively influence the markets for business finance
and get them to work more effectively, as well as benefiting individual
SMEs through targeted schemes. However, the departments could
not provide compelling evidence of where schemes had made a significant
impact on the financial markets' willingness to support SMEs.
Among the debt-based schemes, for example, the performance of
both the Enterprise Finance Guarantee and the Funding for Lending
schemes do not suggest that the banks are more prepared to lend
to SMEs. Indeed overall lending is down. The number and value
of loans backed by the Enterprise Finance Guarantee has fallen
each year between 2010 and 2013 and net lending by the Funding
for Lending scheme participants has reduced by £2.3 billion
since the scheme was launched. Similarly, the poor performance
of the early equity support schemeswhere government commitments
of over £140 million have generated returns of just £38
millionleads us to question their contribution to the development
of the wider market for venture capital for smaller businesses.
Recommendation: When the departments establish
a scheme to address a particular market failure, they should set
out clearly both what a successful impact on the market will look
like and how they intend to evaluate its success.
4. There is scope for the departments to better
match the nature of their interventions with the specific needs
of SMEs. The markets are changing rapidly,
and there is a range of different financing options available.
However, most of the funding associated with the current schemes
involves delivery via the banking system, reflecting the importance
of the main banks to the UK market. BIS has begun to support
the development of alternative financing options such as peer-to-peer
lending, crowdfunding and supply chain finance, and is exploring
how further government support can encourage new entrants into
the market. It is important that the departments work to maintain
business confidence in crowdfunding, which is becoming a vital
funding route for many businesses. In researching how the British
Business Bank might be set up, BIS has examined markets in other
countries, and concluded that there was a particular need to address
long-term growth finance in the SME sector.
Recommendation: The departments must ensure
that the British Business Bank draws upon emerging evidence of
SMEs' changing financing needs, and tailors its interventions
accordingly, implementing, refining or withdrawing schemes as
5. BIS has not done enough to ensure that
SMEs have access to information on the potential range of financing
options available to them. Credit cards
and overdrafts, though mostly more costly, remain the most frequently
used financing option for many SMEs who need working capital quickly.
BIS has developed a number of web-based tools intended to improve
awareness among SMEs of the funding options available. But the
owners of small businesses very often lack the time to seek out
such advice, and do not necessarily think of government as a source
of such information. BIS acknowledges that it needs to improve
its communications, both with SMEs to raise awareness of the support
available to them, and also with intermediaries who can raise
the profile of the products and advice on offer. The lack of awareness
may have been exacerbated by recent changes in retail banking
practice which have scaled back the skills and capability of local
banking staff, who are often unable to make bespoke decisions
or signpost companies to other sources of finance.
Recommendation: The departments must establish
a clear strategy to ensure that SMEs are made aware of appropriate
funding options for their needs, both through government information
and through advice from lenders and others. The departments should
use their influence with the mainstream banking sector and across
Whitehall to ensure high street banks understand the needs of
their local businesses in order to encourage lending.
6. For some of the schemes, the amount of
funding reaching UK SMEs is either unknown by the departments
or appears lower than we would have expected.
At the launch of the Funding for Lending scheme, the Bank of England
stated that its main objective was to encourage net lending to
be higher than it would have been without the scheme. An extension
to the scheme in April 2013 provided incentives for the banks
to increase lending to SMEs, but HM Treasury does not currently
have any information on the number or value of loans to SMEs under
the scheme. The UK Innovation Investment Fund has received £150
million of taxpayers' money but UK companies account for only
40% of the total number of the Fund's investments. BIS could not
tell us the total cost of management fees paid to administer this
Fund. We heard from BIS that it was often easier for lenders to
make larger investments than smaller ones. Moreover, we did not
hear what BIS is doing to encourage smaller investments by lenders
7. Recommendation: The departments must
gather and publish data about how much financial support is reaching
SMEs, and how much is diverted to other recipients or used to
run the schemes.