Conclusions and recommendations
Our inquiry
1.We acknowledge that the decision taken on the 23 June 2016 to leave the EU is likely to have repercussions for access to finance. We intend to monitor the data on access to finance, and the Government’s response to any repercussions in light of the decision to leave the EU. If there are indications that the situation on access to finance has changed, then we will return to this subject. (Paragraph 4)
The British Business Bank
2.Calculating the gap between demand and supply for SME finance is complicated and there is a clear need for the British Business Bank to continue to gather intelligence on how the market operates. There is evidence of unmet demand for finance from SMEs, particularly at the scale-up and grow stages, where business are looking for finance of £10 to £25 million. We recommend that the Government targets its intervention at addressing this funding gap, working closely and flexibly with investors to respond to evolving demands. (Paragraph 15)
3.In the few years since it was created, the British Business Bank has filled an important space in the SME finance landscape. We agree with many of our witnesses who said it has had a positive impact and should be allowed time to establish itself. Its credibility with the business community is enhanced by its independence from Government and we do not recommend changes to existing arrangements. (Paragraph 16)
Start-ups
4.We agree that the Start-Up Loans Company is a good and effective way to support entrepreneurs who want to create their own business. The Government should maintain its level of funding and assess if there is potential for Start Up Loans Company to be extended. (Paragraph 21)
Scale-up and growth
5.Access to finance is one of the main barriers to scale-up for fast growth SMEs. There is a gap in securing finance at particular growth stages, and a lack of investors able to provide a pipeline of finance at all stages of development. It may be that the market for growth finance requires time to mature, but the Government must introduce targeted intervention to address the difficulties around businesses wishing to scale-up. The Government should set out what it is doing to incentivise further institutional investors into the private equity market. (Paragraph 26)
6.Awareness of options for finance is growing. However, awareness in areas such as equity has not necessarily led to an increase in uptake of those options. Part of the reason for this is because SMEs are not taking the steps to become ‘investment ready’ and attract potential equity investors. The British Business Bank, alongside business groups and networks, needs to focus on identifying businesses with high potential for growth, and ensuring they have access to advice about what they need to do to secure the most appropriate form of funding for their next stage of development. (Paragraph 27)
The Alternative Investment Market (AIM) and encouraging investment
7.The Alternative Investment Market is an important part of the finance ecosystem in the UK. Whatever happens with the proposed merger of the London Stock Exchange and the Deutsche Borse, we urge the Government to support the retention of AIM as a forum for companies to raise capital and grow. (Paragraph 28)
Tax incentives
8.The SEIS, EIS and VCT schemes received praise from many of our witnesses for their role in cultivating a UK venture capital community. It is important that the Government does not tinker with how the schemes operate. The main barrier to greater take-up of the schemes appears to be low awareness among both businesses and investors. Promotion and take-up of the schemes would be helped by HMRC carrying out an assessment of the EIS, SEIS and VCT schemes, and demonstrated their value to both SMEs and the tax-payer. We recommend that the Government directs resources towards promoting the SEIS, EIS and VCT schemes. This includes the British Business bank working with HMRC to consider how to improve promotion of the schemes. (Paragraph 32)
European Investment Fund
9.The European Investment Bank has provided millions of euro into funds that underpin finance for businesses in the UK. Following the result of the referendum on the UK’s membership of the European Union, there are concerns that this source of finance might not be available in the future. There is a risk that structures in place to assist SME finance will have considerable shortfalls in their resources without the value of these funds. We recommend that the Government identifies the size of current European Investment Bank contribution in the UK economy, the timetable for current commitments, and make a clear statement on Government plans to ensure that the current level of funding will not be reduced. (Paragraph 34)
Angel CoFund
10.The Angel CoFund is a strong and positive part of the finance landscape for new businesses. It helps secure funding for new businesses through sharing risk, but also brings new businesses with potential and business angels, with their experience and networks. We recommend that the Government and the British Business Bank build upon the success of the Angel CoFund, ensure it is funded adequately to meet demand, and consider how it could be expanded. (Paragraph 36)
Regional imbalances
11.The new Prime Minister has already spoken of her desire for opportunity and economic success to be more fairly distributed across the UK, and we look forward to learning how the Government intends to use the various levers at its disposal to make this happen. Enabling entrepreneurs to start their own business, and ensure they can access finance as they grow, can have an important role in rebalancing economic growth across the UK. The willingness of the Government to intervene where there are identifiable market failures in the business finance landscape across the whole UK, represents a test and an opportunity in the context of its new industrial strategy. (Paragraph 39)
12.The British Business Bank, as the Government’s centre of excellence on these matters, needs to be at the heart of proposals to address the regional discrepancies in SME finance. We welcome the intention of the British Business Bank to use the Angel CoFund to stimulate equity investment beyond London and the South East. The development of the Northern Powerhouse Investment Fund and a Midlands Engine Investment Fund will be important routes to focus investment away from the South East of England. We recommend that the Government introduce a fifth performance indicator for the British Business Bank to assess its effectiveness in incentivising lending and investment activity in all parts of the UK. (Paragraph 40)
13.A recurring theme in our evidence is that access to information and advice on finance options is a more significant barrier to SMEs than the availability of funding. Furthermore, businesses that seek and receive advice greatly enhance their chance of securing finance. (Paragraph 45)
Information is not enough
14.The British Business Bank has been an important development in providing a single source of information for business finance. However, there remains a gap between demand and the availability of free business advice. Information provided by the British Business Bank, and others, must be user-friendly, consistent and accessible to non-specialists. It must be able to direct the customer onto the next step. The Government and the British Business Bank need to build on the work of the Business Finance Guide, and prioritise cooperation with business networks and business advisers, often local accountants, to encourage SMEs to seek advice at the earliest opportunity. (Paragraph 46)
15.We welcome the fact that the British Business Bank has a performance indicator “to promote better information on, and understanding of, finance options”. The publication of the Business Finance Guide is a positive step, but the British Business Bank has to rely upon other organisations to deliver the information. We recommend that the British Business Bank explain to us, in the response to this Report, their strategy for promoting understanding of the Business Finance Guide, how it will identify and target hard to reach groups, how it will measure any increase in the awareness and take-up of alternative finance products, and its analysis of the feedback from SMEs on the Business Finance Guide. Furthermore, we recommend the Bank explain how they will analyse the volume of traffic to the online Business Finance Guide and how that will inform their strategy for increasing awareness of understanding finance options. (Paragraph 47)
Business networks and trusted sources of advice
16.Our inquiry reinforced the importance of SMEs seeking advice from trusted sources. We were also struck by the initiatives providing mentoring and coaching for new business people, from bodies such as the Start-Up Loan Company to the AIM stock exchange. The Government should add value by working with the major business groups and finance providers to make sure they have mentoring schemes or events specifically aimed at passing on the experience of successful business people on how to secure finance to grow a business. (Paragraph 50)
Challenger banks
17.Bank lending remains the main source of finance for SMEs in the UK. Too many SMEs think that means the only source of lending is one of the established High Street banks. That is not the case. The new challenger banks have gained a reputation for being innovative, attentive to customer service, and proactive in reaching out to potential customers. We welcome the establishment of challenger banks and the fact they have started to increase their market share. The Government should set out how it plans to support the challenger banks that have entered the market for lending to SMEs, and what steps it is taking to further increase competition in the market place for SME finance. This includes consideration of how the regulatory regime, such as the rules on capital requirements held in reserve, can disproportionately affect the ability of new entrants to compete on a level playing field with the larger, more established banks. (Paragraph 56)
Sharing credit information
18.The Government has stated that it wants to increase diversity and competition in the market for finance. The new banks are disadvantaged by asymmetry in access to customer data held by businesses they would like to work with. We recommend the Government sets out in its response to this Report how they intend to monitor the implementation of the Small Business, Enterprise and Employment Act 2015 and, if need be, review the Act to ensure the banks are fulfilling their obligations to provide data when they are required to. (Paragraph 58)
VAT register
19.We recommend that the Government explore allowing the Credit Reference Agencies and authorised finance providers access to financial data in the VAT Register, subject to the appropriate safeguards. (Paragraph 60)
Referral scheme
20.We found broad support for the scheme, introduced in the Small Business, Enterprise and Employment Act 2015, for banks to refer unsuccessful applicants on to an online platform that will link the business with an alternative finance provider. We also heard criticism that the implementation of the scheme was slow and there needed to be more information on how the scheme will work in practice. We recommend that the Government set out, in its response to this Report, the timetable for implementation of the referral scheme and how it intends to assess its success. (Paragraph 62)
Comparison tool
21.We agree with the CMA that access to finance for SMEs would be improved by the banks providing comparable information, easily accessible online, in areas of interest to current and potential SME customers, such as lending criteria. We support the CMA’s backing of the NESTA challenge prize to develop a comparison tool to provide this information for SMEs, and its requirement that the banks provide financial backing and technical support to the NESTA project. We will monitor its progress. (Paragraph 68)
Alternative Finance
22.The main barrier to growth of alternative finance appears to be a lack of awareness of their existence among SMEs, and a lack of understanding of how they might meet the needs of a new or growing business. The barrier of access to information and advice, rather than access to finance, appears to be magnified with alternative finance. We recommend that the British Business Bank’s collection of feedback regarding the Business Finance Guide specifically seeks views on the range of alternative finance providers and the products available. We further recommend that they set out how that will inform their strategy for increasing awareness of understanding finance options, and how the alternative finance sector can be promoted among those in the accountancy, legal and banking sector involved in giving face to face advice to SMEs. (Paragraph 74)
The regulation of alternative finance
23.The current regulatory framework was praised by those in the industry for being clear and relatively easy to understand, and seen as a standard for other countries to follow. We conclude that it has struck the right balance between safeguards and allowing space for the sector to innovate and expand. The sector is expanding and evolving. It is important that the regulatory framework is flexible, and if need be is revisited, to address the changing landscape. As such, we welcome the Financial Conduct Authority’s willingness to engage with the alternative finance sector before making any change in the regulations. We urge that this approach is repeated in the future. (Paragraph 79)
28 October 2016