1 Introduction
1. Small and medium sized enterprises (SMEs) form
a large part of the UK economy. According to official statistics,
there were 5.243 million private sector businesses at the start
of 2014. 5.236 million had 0-250 employees and are classed as
SMEs, of which 5.204 million had fewer than 50 employees and are
classed as small businesses. SMEs account for 60 per cent of all
private sector employment, and registered an annual turnover of
£1.6 trillion at the start of 2014—47 per cent of the
private sector total. A large majority of SMEs are sole traders—76%
of all businesses are non-employers.[1]
2. The definition of the term SME can vary. Some
define SMEs as firms with a turnover of up to £25 million
a year, some as firms with fewer than 250 employees, and some
use a combination of both employee count and turnover.[2]
SMEs themselves are highly heterogeneous. The Association of Chartered
Certified Accountants (ACCA) wrote:
[…] ACCA has repeatedly cautioned against
aggregation when discussing SMEs. The 'SME' label, applicable
as it is to 99.9% of businesses in the UK, is so broad as to render
most statistics and anecdotal evidence meaningless. This is even
more true because demand for finance is significantly skewed,
and a minority of SMEs will always account for the bulk of demand.[3]
THE IMPORTANCE OF SME LENDING
3. The Government believes that access to finance
for SMEs is "key to the recovery and long term growth of
the economy".[4] Research
by National Endowment for Science, Technology and the Arts (NESTA)
in 2009 found that the "6 per cent of UK businesses generated
half of the new jobs created by existing businesses between 2002
and 2008". Citing this research, the Department for Business,
Innovation and Skills said:
High growth firms are particularly important
to the economy, driving competition and productivity growth. Research
found that from 2005 to 2008, seven per cent of SMEs met the OECD
definition of 'high growth'. A similar proportion also achieved
this over 2002-05 and 2007-10. Over a three year period, these
high growth SMEs are credited with creating around a quarter of
all new jobs among existing businesses.[5]
4. A large proportion of SMEs rely on external finance
in some form. The SME Finance Monitor, an industry led survey
of SME lending, found in Q2 2014 that approximately 40 per cent
of SMEs used external finance, with 30 per cent of SMEs using
"core products"—loans, overdrafts and/or credit
cards. Stephen Nickell, member of the Budget Responsibility Committee,
told the Committee in December 2014 that SMEs are particularly
vulnerable to changes to bank lending:
Large companies, generally speaking, have access
to alternatives to bank lending, the bond market and so on. Of
course SMEs and small companies generally rely on or have in the
past relied on the banking system.[6]
Indeed, one interpretation of the persistently low
post-economic crisis productivity growth is a loss of bank lending
to rapidly growing firms such as SMEs. Mr Nickell said:
If push came to shove, I think we would argue
that it is the consequences of the credit crunch that have led
to this productivity puzzle. That is to say quite a high proportion
of productivity growth is generated because high productivity
firms start up and expand and low productivity firms contract
and go out of business. There is some evidence to suggest that,
because of the credit crunch, there has been a barrier to the
expansion of high productivity firms and the starting up of high
productivity firms. I am not too convinced about this, but some
people argue that the credit crunch as part of the whole business
has also led to low productivity activities surviving, so-called
zombie firms and so on and so forth.[7]
EVIDENCE RECEIVED BY THE COMMITTEE
5. Over the course of the inquiry, the Committee
received a considerable amount of written evidence, as well as
oral evidence from 32 witnesses over seven evidence sessions.
Key topics and problems explored in the evidence included:
· The state of the SME lending market, including
current market conditions and potential problems that exist in
the availability of finance;
· The importance of SME perceptions in improving
the flow of credit to businesses;
· Competition in the SME lending and banking
markets, including the current state of banking competition, potential
methods of improving competition, and the role of alternative
lenders in improving the competitive environment;
· Allegations of mistreatment of SME customers
in financial distress by RBS in its Global Restructuring Group
(GRG) division; and
· Allegations of mis-selling of loans with
features of interest rate hedging products by Clydesdale Bank,
and the perimeter of regulation regarding such loans.
6. The Committee is grateful for the written submissions
and oral evidence received from banks, alternative lenders, think
tanks, professional services firms and government bodies. The
Committee is also particularly grateful for the large number of
submissions from individual businesses who have been personally
affected by alleged mis-selling. The evidence received from all
of them has been invaluable for the preparation of this report.
We are also grateful for the assistance of our specialist advisers
for this inquiry, Mike Cherry, the National Policy Chairman of
the Federation of Small Businesses, and Professor Richard Roberts,
member of the ACCA SME Advisory Panel. A letter from the FCA of
9 March, which gave some further information about the FCA's IRHP
review scheme, arrived too late for the Committee to consider
carefully and it may wish to return to the issues raised at a
later date.
1 Department for Business, Innovation and Skills and
Office for National Statistics, Business population estimates
for the UK and regions 2014, 26 November 2014 Back
2
Bank of England, Lending to businesses - a new data source, March
2012; House of Commons Library, Small businesses and the UK economy,
9 December 2014; European Commission, The new SME definition,
2005 Back
3
SME0011 Back
4
Department for Business, Innovation and Skills, Evaluating changes
in bank lending to UK SMEs over 2001-12 - ongoing tight credit,
April 2013 Back
5
Department for Business, Innovation and Skills, SMEs: The Key
Enablers of Business Success and the Economic Rationale for Government
Intervention December 2013 Back
6
Oral evidence by Stephen Nickell to the Treasury Committee, q
149 Back
7
Oral evidence by Stephen Nickell to the Treasury Committee, q
140 Back
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