Small businesses and productivity Contents

3SME Access to Support and Advice

Government support for SMEs

15.There is a wide range of Government support aimed at helping SMEs to innovate, export and scale-up.

The British Business Bank

16.The British Business Bank (BBB) started operating in 2014 and is 100 per cent Government owned but independently managed. It mainly targets its assistance to SMEs with a turnover up to £25 million. It works with other financial institutions, such as challenger banks, leasing companies and venture capital funds, to increase access to funding, for instance by providing part-guarantees for loans.46 The BBB hopes to unlock up to £10 billion of new finance and bring greater choice and information to SMEs on finance options.47 The Bank offers Start-Up and Help to Grow loans for start-up and scale-up SMEs.48

Patient Capital Review

17.The Government has also looked at the issue of patient capital,49 to consider the availability of long-term finance for growing innovative firms looking to scale up and the barriers that investors may face in providing long-term finance.50 This is crucial for many SMEs, particularly younger firms that invest heavily in research and development (R&D). Responding to the Review in the 2017 Autumn Budget, the Government announced a 10-year action plan to unlock over £20 billion to finance growth in innovative firms. This included: a £2.5 billion incubator fund for the British Business Bank; expansion of support for innovative firms through the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs); funds through the British Business Bank to encourage private sector long-term investment and though the Department for International Trade to drive overseas investment in UK venture capital and the launch of a National Security Strategic Investment Fund of up to £85 million to invest in advanced technologies.51 The Government also said that it would work with the pensions industry and its regulators to unlock further investment into innovative high growth firms.52 In June 2018, the British Business Bank introduced a new £2.5 billion investment programme, British Patient Capital53 and has so far made commitments of £123.6 million.54

18.The Government also convened an industry panel to look at patient capital, chaired by Sir Damon Buffini, which reported in October 2017 with several proposals to further increase levels of patient capital.55 The Treasury Select Committee’s Report on SME Finance, published in October 2018, called on the Government to produce its assessment of how to encourage such long-term capital.56 The Minister confirmed that the Government was still considering the response of the industry panel chaired by Sir Damon.57 It is now over a year since the Patient Capital Review Industry Panel published its proposals and we are disappointed that the Government is still considering them. We recommend that the Government publishes its response to the Panel’s proposals without delay.

Innovate UK, Catapult Centres and investment schemes

19.There are several specific initiatives aimed at helping SMEs innovate. This includes access to various funding streams and promoting collaboration between small businesses, investors and universities. Innovate UK offers loans for the development of innovative products, ranging from £25k to £10mn with a pilot programme of innovation loans specifically aimed at SMEs of between £100k and £1mn.58 Innovate UK also runs a Global Business Innovation Programme to help UK SMEs develop international partnerships on research and development as a first step towards international business activity.59 A series of Catapult Centres across the UK, funded by Innovate UK, provide support for SMEs through funding and collaborations with industry and universities.60 The Government supports a number of venture capital schemes including: the Enterprise Investment Scheme;61 the Seed Enterprise Investment Scheme (SEIS);62 Social Investment Tax Relief (SITR)63 and HMRC authorised venture capital trusts.64 The Department for Business, Energy & Industrial Strategy also hosts a business finance support finder to help SMEs and other business access funding.65

Helping UK SMEs to export

20.The Government has introduced a raft of policies and initiatives to support and encourage SMEs to export, including trade finance, overseas trade events and access to advice on export issues. These are aimed at supporting the estimated 20 per cent of UK small businesses that already export,66 and encouraging those have potential to. A key plank of this support is UK Export Finance (UKEF) which seeks to ensure that no viable UK export fails for lack of finance or insurances.67 UKEF runs a network of 250 Export Finance Managers across the UK as local points of contact for exporters and businesses with export potential, who offer advice on: payment methods and risks; the types of finance available; trade finance (pre and post-export); credit insurance; foreign exchange risks.68 UKEF also runs trade fairs to promote UKEF support to suppliers, including SMEs. In October 2017, the Government announced that UK SMEs would be able to access UKEF-backed finance from high street banks.69 In 2017/18, UKEF provided £2.5 billion worth of support to help nearly 200 companies sell to 75 markets around the world.70 In addition, International Trade and E-commerce Advisers located across England provide help to SMEs to develop their export plans and online strategies to access overseas markets, in partnership with Local Enterprise Partnerships (LEPs) Growth Hubs, trade associations, and Chambers of Commerce. SMEs can also take part in the Tradeshow Access Programme and access a grant to attend overseas trade shows. However, there has been some criticism that support for UK exporters does not match that given by other countries to their exporters,71 and many SMEs are not aware of schemes such as UKEF or the assistance they offer.72

21.In August 2018, the Government launched a new export strategy, which included a commitment to better target SMEs with available support.73 More specifically, the strategy will: provide financial incentives to SMEs (e.g. vouchers, grants and loans) to access emerging markets;74 offer access to UK Export Champions who are themselves successful exporters;75 review LEP and Growth Hub export support for SMEs and the role of International Trade Advisors;76 improve digital access to export support, particularly for SMEs and offer support for SMEs in emerging markets (e.g. intellectual property rights and bribery and corruption legislation).77

EU support for SMEs

22.UK SMEs can also access EU funding through the European Investment Fund (EIF),78 and the European Investment Bank (EIB).79 In 2017, the EIB lent €659mn to UK SMEs.80 Local Enterprise Partnerships, which support SMEs at a local level, are also able to apply for money from the European Regional Development Fund (ERDF) and European Social Fund (ESF).81 However, many witnesses told us that they were worried as to what will happen if access to this funding dries up as a result of the UK leaving the EU.82

Government initiatives to address the productivity gap

23.The Government has also introduced a number of specific initiatives to address the UK’s productivity gap, especially amongst UK SMEs.

Be the Business

24.In 2015, the Productivity Leadership Group was formed to bring together senior business leaders, such as John Lewis Chairman Sir Charlie Mayfield, to consider how the UK’s productivity problems could be tackled. It looked at specific issues, such as access to finance, digitisation, innovation, skills, business management, employee engagement and how to benchmark productivity. The Group concluded that business management and capability were more important than research and development and technology in driving through productivity.83 In July 2017, the Government announced that it was providing up to £13mn to a new industry-led initiative–Be the Business, chaired by Sir Charlie Mayfield, to understand what simple management changes can be made to help SMEs and managers boost their productivity.84 It runs campaigns to raise standards and uses surveys to gauge practices in SMEs, hosts online tools for SMEs to benchmark and measure their productivity and resources for small companies in areas such as business planning, digitisation and leadership.85

The Government’s Industrial Strategy

25.The Government’s Industrial Strategy, published in November 2017, targeted productivity and growth. This included: increasing UK R&D investment to 2.4% of GDP by 2027 and 3% in the longer term, to place it in the top quartile of OECD countries;86 investing in strategic innovation through a new Industrial Strategy Challenge Fund;87 introducing Sector Deals to create significant opportunities to boost productivity, employment, innovation and skills;88 and, establishing a new Future Sectors programme to focus on new and innovative businesses to develop new technologies & business models.89 The Industrial Strategy included a specific focus on SME productivity, which included a new Business Basics Programme, launched in June 2018, to support SMEs in adopting tried and tested technologies and business practices such as accountancy software and performance management systems.90 It will also be delivered by Local Industrial Strategies, primarily through LEPs.91 Finally, the Industrial Strategy announced that there would be a Long Tail Productivity Review to look at the barriers facing SMEs, which was launched in May 2018.92

Issues with Government funding and schemes to help small businesses

26.We heard from several witnesses that there was frustration with the complexity associated with accessing and applying for Government support and funding.93 One SME told us:

A multitude of different options become available and then are not available. Sometimes there is a very lengthy process to go through in order to obtain the help that is advertised, so very often—I have definitely had this myself—it is easy to give up and just plough ahead without taking advantage of that help.94

27.The Federation of Small Businesses said: “Too many times we have seen support initiatives that have either been time-sensitive or pot-sensitive and have gone by the time a business is ready to access them.95 The Minister told us that it was right that the Government should continually review support and withdraw those schemes and programmes that were not effective or good value for money.96

28.There is a myriad of support for SMEs and the Government has made this central to its Industrial Strategy. The wide range of programmes, initiatives and support matches the complex mix of UK SMEs with their different needs, sectoral markets and ambitions. However, many SMEs, LEPs and Growth Hubs understandably find this difficult to navigate. The longevity of schemes can reduce confidence that support will be there when it is needed. Whilst we agree with the Minister that such schemes, especially those using public money, need to be constantly assessed for their effectiveness they also need to be accessible and be able to maintain the confidence of the small business community. We are also concerned that after the UK leaves the EU there will be a shortfall in EU funding currently available to small businesses. We recommend that the Government should urgently review its online hosting of support for SMEs and create a more visible and accessible portal for SMEs, LEPs and Growth Hubs to navigate. The Government should ensure that programmes and support for SMEs have been adequately stress tested before they are introduced so that they are more likely to endure, which will improve SME confidence in them. If the Government does decide to remove or replace schemes it should move as quickly as possible to effectively communicate this to the small business community and relevant support networks. It is crucial that the Government immediately explains how it will match any shortfall in EU funding for local business support after Brexit.

Local advice and support for SMEs

Local Enterprise Partnerships and Growth Hubs

29.Since 2015, LEPs have received funds through the Local Growth Fund to deliver local Strategic Economic Plans to support local businesses and communities that have been approved by the Government.97 There are 38 LEPS across England. By October 2018, £9.1 billion worth of Local Growth funding had been allocated to them.98 The Government maintains that every £1 of Local Growth Fund invested could generate £4.81 in benefits.99 BEIS also currently provides £12mn per annum to maintain a network of 38 local Growth Hubs, led and governed by LEPs,100 across England. The Growth Hubs bring together public and private sector partners to promote, co-ordinate and deliver business support based on local needs, working in partnership with BEIS. They provide a mechanism for integrating national and local business support, so it is easier for businesses to access the help and advice they need to thrive and grow.101 The Institute for Public Policy Research note that how Growth Hubs operate and what they focus on varies across the country–some are branded separately from LEPs and while some highlight ‘green growth’ and ‘digital growth” others emphasise ‘business support’.102

30.Growth Hubs are also able to access and match funding from the European Regional Development and European Social Funds. In 2014, the Government announced that for the period 2014 to 2020 €6,512.7million of this funding (at then current prices) would be allocated to LEPs in England.103 There has been some concern has to how this funding will be replaced when the UK leaves the EU.104

The Importance of local advice and support

31.Several witnesses stressed the importance of local support for SMEs. For example, we were told that local delivery was imperative, because it could adapt support to different regions and their specific needs,105 and help co-ordinate access to both national and local resources and foster client relationships.106 LEPs and Growth Hubs also link SMEs to local business schools and universities, which can help in areas such as business skills and innovation.107 The Scale-up Institute also argued that LEPs are crucial in providing local support to companies that want to scale up and innovate.108 In addition, the Government have stated that LEPs will be critical to delivering its Industrial Strategy by underpinning national and local collaboration and developing evidence-based Local Industrial Strategies.109

Issues with LEPs and Growth Hubs: fragmentation, visibility and funding

32.Though many witnesses stressed the importance of local provision and the role that LEPs and Growth Hubs play, we heard that provision was variable.110 We were told that provision could be fragmented and inconsistent,111 and that too often there was a confusing array of training, networking and webinars available which small businesses often struggled to navigate, which required better signposting.112 Our previous inquiry into the Industrial Strategy, published in 2017, found that less than a half of businesses were aware of LEPs and fewer than one in five had heard about Growth Hubs.113 This was confirmed by several of the witnesses we heard from.114 We were told that it was important that LEP and Growth Hubs used digital platforms to improve visibility and access.115

33.Several witnesses told us that they were concerned about the continuing viability of LEPs and Growth Hubs.116 We heard that the funding for Growth Hubs was sporadic, with some hubs losing their funding and advisers.117 Buckinghamshire Business First stated that though the Government had agreed funding for Growth Hubs for the next two years, it should commit funding on a longer-term basis so that Hubs can plan. Witnesses were also concerned as to how LEPs and Growth Hubs would manage when EU funding from European Regional Development and European Social Funds is withdrawn as the UK leaves the EU.118

34.In July 2018, the Government published the results of a review of LEPs which had been promised in the Industrial Strategy, and which brought forward reforms to the leadership, governance and accountability of the 38 LEPs..119 The Government also included up to £20 million of additional funding between 2018 to 2019 and 2019 to 2020 to support the implementation of the reforms and embed evidence in Local Industrial Strategies.120 The Minister told us that LEPs were “absolutely valuable” and that the Government had a responsibility “to promote our growth hubs and what our LEPs are doing”; however, she accepted that their performance was variable and that it was important that LEPS and Growth Hubs were monitored to ensure that provision was effective and consistent.121

35.Local Enterprise Partnerships and Growth Hubs should play a crucial role in supporting and advising SMEs within their communities and directing them to local and national resources. They help enable local networks and partnerships between small businesses, business organisations, communities and education and research institutions. We note that the Government has recently reviewed the effectiveness of LEPs in terms of their governance and accountability and have increased funding. However, as we noted in our inquiry on the Government’s Industrial Strategy, we are concerned about their variable performance, visibility in some cases and their longer-term viability. The Government should urgently ensure that the support offered by LEPS and Growth Hubs is consistent and that they are visible and digitally accessible to local small businesses, including through social media platforms. It should at the earliest opportunity survey local small businesses on a regular basis to ascertain whether local support is accessible, offering the range of support required by different types of small businesses and maximising local networks. It is essential that the Government ensures that LEPs and Growth Hubs have the resources to offer long-term support to SMEs and meet their various complex needs.

48 See: Start Up Loans Company, Start Up Loans, (accessed 2 November 2018) and BBB, Help to Grow - Growth Loans, (accessed 2 November 2018).

49 Patient capital is another name for long term capital whereby an investor is willing to make a financial investment in a business with no expectation of turning a quick profit. Instead, the investor is willing to forgo an immediate return in anticipation of later more substantial returns.

50 HM Treasury, Patient Capital Review, (November 2017).

54 HM Treasury, Financing growth in innovative firms: one-year on, (October 2018), p 3.

55 Patient Capital Review Industry Panel, Industry Panel Response, (October 2017). The Panel recommended: creating an independent Patient Capital Investment Vehicle (PCIV) to enable the aggregation and deployment of both retail and institutional capital for investment in UK scaleup businesses and capital-intensive R&D-based businesses; creating a UK Patient Capital Investment Company (PCIC) programme to raise funds from commercial lenders through a British Business Bank guaranteed debenture, alongside equity capital; Extending the investment limits for existing EIS and VCT schemes.

56 Treasury Select Committee, SME Finance, (HC 805; October 2018), p 8.

57 Q302 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.

59 See: Innovate UK, Global Business Innovation Programme, (November 2018).

60 Catapult, About Catapult, (accessed 2 November 2018). The Catapult Centres focus on: Cell and Gene Therapy; Compound Semiconductor Applications; Digital; Energy Systems; Future Cities High Value Manufacturing (a network of another seven centres); Medicines Discovery; Offshore Renewable Energy; Satellite Applications; Transport Systems. Catapult has so far supported 5,913 SMEs.

66 See: HM Government, Export Strategy: Supporting and connecting businesses to grow on the world stage, (August 2018), Table 1, p 35. It also estimates that 7.3% of micro businesses export. See also: Institute of Export and International Trade, UK SMEs sceptical over export opportunities, according to latest study, (May 2018); FSB, New figures show rise in SME exports and award will recognise the best business exporters, (September 2017).

67 UK Export Finance, About Us, (accessed 5 November 2017). See also: : HM Government, Export Strategy: Supporting and connecting businesses to grow on the world stage, (August 2018), pp 54–55.

68 UK Export Finance, The role of our export finance managers, (November 2016).

69 UK Export Finance and Department for International Trade, UK government ramps up support for SME trade, (October 2017).

71 See: Civitas, Boosting UK Exports: Improving Export Finance for Small Businesses, (March 2017), p 4. Civitas estimate that in terms of business support for UK exporters, in 2015 UKEF offered £1.8 billion, while comparative schemes gave considerably more: Italy (£7 billion); Netherlands (£6 billion); Germany (£12.6 billion).

72 As above, p 6.

74 As above, p 44.

75 As above, p 40.

76 As above, p 44. The Government said it would seek feedback from SMEs on the quality and availability of export support offered by LEPs and Growth Hubs.

77 As above p 40.

78 European Investment Fund, EIF for SMEs, (accessed 2 November 2018).

79 European Investment Bank, The EU Bank, (accessed 2 November 2018). See also: Institute for Government, The European Investment Bank, (accessed 2 November 2018) and House of Commons Library, The European Investment Bank, (November 2017).

80 European Investment Bank, The European Investment Bank in the United Kingdom: what we do, (accessed November 2017).

81 See House of Commons Library, UK Funding from the EU, (January 2018), pp 10–20.

82 Q172 Linda Edworthy (Tees Valley Combined Authority); Q194 Chris Manson (Newable); SBP0023 Buckinghamshire Business First. See also: Growth, Is EU funding for British SMEs drying up?, (September 2017). See also: Institute for Government, The European Investment Bank, (accessed 2 November 2018) and House of Commons Library, The European Investment Bank, (November 2017), pp 7–8.

84 Behavioural Insights Team and Cabinet Office, Be the Business: boosting productivity in the UK, (July 2017).

85 For benchmarking tool see: For resources, on issues such as business planning, digitisation and leadership see:

86 BEIS, Industrial Strategy: Building a Britain fit for the future, (November 2017). See also: House of Commons Library, Industrial Strategy, (April 2018).

87 BEIS, Industrial Strategy Challenge Fund: for research and innovation, (May 2018). The includes innovation in a series of grand challenges: AI and the data revolution; clean growth (e.g. low carbon technologies); mobility (low carbon transport, automation and infrastructure); an ageing society

88 Sector Deals include: life sciences; construction; artificial intelligence; automotive; creative industries. See: BEIS, Policy paper: Introduction to Sector Deals, (November 2017).

89 Evidence from BEIS (SBP0016). This includes a series of Future Sectors reviews, working closely with cohorts of innovative businesses to understand and address their barriers to further growth; and barriers to the wider adoption by businesses of all sizes across sectors of the innovations they are spearheading

92 BEIS, Long Tail Productivity Review, (May 2018). A consultation was launched in May 2018 and closes in July 2018. The review will report its findings to the Secretary of State for Business, Energy and Industrial Strategy and to the Chancellor of the Exchequer in Autumn 2018. The output of the review will be used to help inform the next steps on the delivery of the Industrial Strategy.

93 Q157 Byron Dixon OBE (Microfresh); Q160 Angela Middleton (Middleton Murray); Q200 Chris Mason (Newable); Q117 Ruby Peacock (FSB).

94 Q156 Angela Middleton (Middleton Murray). See also: Q160 Linda Edworthy (Tees Valley Authority); Q190 Mike Cherry (FSB).

95 Q198 Mike Cherry (FSB).

96 Q284 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.

97 See House of Commons Library, Local Growth Deals, (November 2018).

98 As above, p 1.

100 LEPs are voluntary partnerships between local authorities and local private sector businesses. They play a central role in determining local economic priorities and undertaking activities to drive economic growth and job creation, improve infrastructure and raise workforce skills within the local area. LEP boards are led by a business Chair and board members are local leaders of industry (including SMEs), educational institutions and the public sector. Click on the map or the name of the LEP to be taken to its website home page. See: For more detailed analysis see: House of Commons Library, Local Enterprise Partnership, (May 2017).

103 BIS, European Regional Development Fund and European Social Fund: UK allocations 2014 to 2020, (April 2014). This includes a breakdown of funding for each LEP.

104 Q172 Linda Edworthy (Tees Valley Combined Authority); Q194 Chris Manson (Newable); SBP0023 Buckinghamshire Business First. See also: Local Government Association, Beyond Brexit: Future of funding currently sourced from the EU, (July 2017); House of Commons Library, UK Funding from the EU, (January 2018), pp 10–20.

105 Q163 Heather Dean (Bucks Business First)

106 See Q184 Irene Graham (Scale-up Institute); Q186 Chris Manson (Newable); Q181 Tim Vorley (Sheffield University). See also: Chartered Management Institute, Growing your small business. The role of business schools and professional bodies, (September 2015), p 36.

108 Q199 Irene Graham (Scale-up Institute). Q57 and Q69 Professor Paula Whitehouse (Aston Business School) who noted the importance of integrating local universities and business schools as part of local support for SMEs. Also: Q78 (Professor Sarah Underwood, Leeds University). Scale-Up Institute, Look to the LEPs, (April 2017).

109 DCLG, Strengthened Local Enterprise Partnerships, (July 2018), p 4. Q20 Andrew Griffiths MP, Minister for Small Business, Consumers and Corporate Responsibilities, Lords EU Internal Market Sub-Committee, Brexit: SMEs, including start-ups and scale-ups, 5 July 2018.

110 Q73 Ben Wilmott (CIPD). See also: BEIS Select Committee, Industrial Strategy: First Review, (HC 616; March 2017), p 42. We recommended that the Government needed to set out how it would evaluate the performance of Growth Hubs and determine how their performance and effectiveness could be improved.

111 SBP0029 Leeds City Region Enterprise Partnership and West Yorkshire Combined Authority.

112 (SPB0027) Sage.

113 BEIS Select Committee, Industrial Strategy: First Review, (HC 616; March 2017), p 42. See also: BEIS, Longitudinal Small Business Survey Year 2 (2016), (July 2017); it found that only 26% of UK SMEs had sought external advice or information in the previous 12 months. The IoD found that only 6% of its members had used LEPs or Growth Hub - IoD, Lifting the Long Tail: The Productivity Challenge through the eyes of small business leaders, (October 2018), p 23.

114 Q95 Andrew Wright, (Leeds City Region LEP); Q162 Linda Edworthy (Tees Valley Authority); Q163 Heather Dean (Bucks Business First); Q117 Ruby Peacock (FSB).

115 Q161 Linda Edworthy (Tees Valley Authority); Q194 Mike Cherry (FSB); Q194 Irene Graham (Scale-up Institute); Q169 Angela Middleton (Middleton Murray).

116 Q171 Linda Edworthy (Tees Valley Authority); Q194 and Q199 Irene Graham (Scale-up Institute); Q61 Professor Paula Whitehouse (Aston Business School).

117 Q153 Heather Dean (Bucks Business First)

118 Evidence from Buckinghamshire Business First (SPB0023). See also Q194 (Chris Manson, Newable); Q61 (Professor Paula Whitehouse, Aston Business School).

121 Qq 296–297 Kelly Tolhurst MP, Parliamentary Under-Secretary of State, Minister for Small Business, Consumers and Corporate Responsibility.

Published: 5 December 2018