Small Businesses

Andrew Griffiths Excerpts

Tuesday 7th September 2010 Westminster Hall

[Jeremy Lefroy]

I am grateful to my hon. Friend for her contribution. I had the pleasure of working with her on a training course in Rwanda one month ago, so I know how expert she is on the subject of training, and how much she knows about it. Her words must be taken extremely seriously.

The Government must step in on the issue of small business finance—indeed, they have already intervened. Since 1981, there has been a small loans guarantee scheme. The previous Government set up the enterprise finance guarantee in January 2009, and the current Government committed an additional £200 million in the June Budget. The public often demand evidence of cross-party consensus in the national interest, and this issue provides a fine example of that.

In his response, I would be grateful if the Minister answered questions on the enterprise finance guarantee, and told us how he assesses its performance to date. He is no doubt aware that the Institute of Chartered Accountants in England and Wales—of which I am a member—has called for the scheme to become more like the former small loans guarantee scheme in its design and operation. I would be interested to hear his views on that.

If a loan guarantee scheme proves successful and pays its way, it needs to be expanded further and rapidly at this critical time, so that as many SMEs as possible can be assisted. I would be grateful for the Minister’s views on that. Finally, on bank lending, what progress are the Government making to bring together banks and small business representatives to ensure that instead of the stand-off that we appear to have at the moment, we have genuine co-operation in our country’s most vital interests?

[Andrew Griffiths (Burton) (Con)]

I thank my hon. Friend for organising the debate. It is testament to his hard work and diligence that we are all here, and I think that we are getting to the crux of the matter. May I raise the flag for engineering, as someone who comes from a small engineering family business? There are a lot of concerns in my constituency in relation to manufacturing. I am lucky enough to have in my constituency a couple of large manufacturing businesses. They tell me that they see the green shoots—they see business slowly improving—and they want to place orders with local businesses. They want to buy British and they want to use local suppliers, but they are finding that there is a major problem with the supply chain. Companies that they have used in the past or new companies just are not able or are unwilling to take the risk in order to meet the potential orders. They are saying that those businesses have either downscaled—they have cut shifts and lost staff—or they just are not prepared to take the risk, or the banks, more importantly, are not prepared to take the risk, that the order that might be there tomorrow or next month will be there in six months’ time. That problem is having a major impact. It is slowing things down; there is a drag effect on manufacturing in particular. If we could get that supply of finance to small manufacturing businesses, that would make a massive impact.

[Jeremy Lefroy]

My hon. Friend makes extremely important points; he has great experience in this field. I feel disappointed at the situation. We are a trading nation; our history is as a trading nation. That is how Britain became wealthy over the centuries. Only by taking risks, particularly through the merchant banking of the 19th and 20th centuries, were we able to finance it, but I do not see that spirit alive in our banking sector as much I would like to. I long to see the formation of some new British merchant banks. All our old ones were largely taken over and are now part of massive conglomerates. I would like to see young entrepreneurs come into the City—indeed, I would like to see this not just in the City of London but all over—set up merchant banks and really take some risks and make a difference to the country, because I believe that they can do that and it might help firms such as the ones to which my hon. Friend referred.

The other major potential source of funding—apart from grants, where organisations such as the Prince’s Trust in particular have done fine work over many years—is of equal importance. I am referring to equity. That is where SMEs miss out. Only 2% have access to equity finance. The Green Paper gives several reasons why that is the case: a reluctance to cede ownership, unsuitable business models, poor corporate governance and businesses that are in themselves not ready for investment. I would add further reasons. First, there is the work involved in making an investment compared with the actual amount invested. Looking at a proposal for £20,000 can require as much work as looking at one for £200,000 or even £2 million. I ask the Minister to consider how to make it easier and less costly for small businesses to raise equity capital.

Secondly, there is a lack of suitable investment vehicles. I hope that the Government will give serious attention to that. Thirdly, the overall tax treatment of investment in new and young businesses puts them at somewhat of a disadvantage in attracting funds compared with larger companies. It is ironic that the companies that least need funds from investors are those that receive the most favourable tax treatment through being eligible for inclusion in pension portfolios. There are tax incentives for funds investing in smaller non-quoted companies—in particular, venture capital trusts—but they are usually available only to the wealthy investor, and the funds themselves will tend to invest in reasonably well established companies.

I am not saying that there is an enormous amount of money out there just waiting for a home in new businesses or SMEs, but we do not need an enormous amount. Let me take an example from my own county of Staffordshire. The Michelin Development fund estimates that it has helped to create 1,400 jobs over the years through a revolving fund of just £3 million—a revolving fund, not grants. That is just over £2,000 a job. The North Staffordshire Risk Capital Fund and the Black Country Reinvestment Society, both of which operate in my constituency, also help to preserve or generate jobs cheaply. Those funds are not equity funds. They mainly use loans, but they do have some characteristics of equity. They are unsecured and, in some cases, they may ask for a premium return based on performance. Those funds overcome the obstacle of the ratio of time taken to assess proposals to the investment amount by using local experts, who provide their time voluntarily or whose cost is covered by grants or the return on the investment. I would like many more such funds to be set up around the country. Indeed, I believe that the new local enterprise partnerships could make supporting them a priority. Local companies and individuals can use them to invest directly in the future of their area, just as the funds in Staffordshire and elsewhere have done.

It may be argued that such a model is not sustainable because it depends on goodwill or some financial support from the private sector or Government, but those who are quick to challenge explicit assistance are sometimes reluctant to acknowledge implicit assistance—in particular, the substantial amount of pension tax relief that continues to be granted annually to higher rate taxpayers, despite recent restrictions, and which is invested very largely in companies comprising just 30% of the private sector, in property or in gilts.

I respectfully ask the Minister to examine ways to unlock equity funding from pension funds for small businesses, which most need the capital. That could result in dozens of locally based funds springing up around the country, allowing people to contribute their time and expertise to the future of their communities. That would be yet another example of the big society at work in a very practical way.

[Andrew Griffiths]

My hon. Friend touches on the big society, and one of the things that people in my constituency are quite excited about is the prospect of the green bank. We have not heard much about that today, but perhaps my hon. Friend the Minister will touch on it a bit more. There is a business in Burton called Regenerco, which is working with businesses across the country to install solar panels free of charge on those businesses in return for a share of the profit from the energy produced. That is a brilliant business. It is low carbon. It is doing its bit for the environment and for the economy. However, like many other businesses, it is keen to get access to further finance. Many people are waiting with bated breath to see how the green bank will operate and how it can unlock some of the potential in those new green businesses. Perhaps we shall hear more from the Minister about how the green bank will work, but I am sure that my hon. Friend the Member for Stafford (Jeremy Lefroy) will agree with me that it has the potential to help some of those fledgling businesses.

[Jeremy Lefroy]

I am most grateful to my hon. Friend for that intervention. I look forward to hearing from the Minister as well, because I, too, am excited by the concept of the green bank and would like to see it in operation as soon as possible.

Will the Minister also consider whether there is a need to increase the sums invested in Capital for Enterprise? The last figures that I have seen indicate that the total invested by the various funds in UK equity is £566 million, while total SME financing was £1.1 billion, including loans. Those figures may be a little out of date, but in contrast, the total invested in equity in developing countries by the Government-owned Commonwealth Development Corporation is £2.7 billion—well over twice as much. What is right for developing countries is surely right for the UK.

There is also a very important role for the banks to play. Just as the major clearing banks established in 1945 the Industrial and Commercial Finance Corporation —later known as Investors in Industry and finally 3i—is it perhaps not time for them to come together again and form an ICFC mark 2 to invest equity in the smallest businesses, if not directly, for reasons of cost, then through local funds? The major banks have the ability, working together through an ICFC mark 2, to transform the availability of equity funding for small businesses. As the taxpayer is a major shareholder in two of them, I ask the Minister to discuss that with them.

I have been able to give only the briefest of surveys of the current situation regarding the finance of small businesses. I am sure that hon. Members following me will help to fill out the picture with the benefit of their experience. I am no expert in this matter, but what I do have is a conviction that unless we get this right, we will not be able to tackle the twin evils of unemployment and the excessive budget deficit.

The quality of the Green Paper is clear evidence of the thought being given to this subject, but as with many of my colleagues who entered Parliament this year, my background in business makes me rather impatient about words that are not followed up with appropriate action. The Government have already shown themselves willing and able to take difficult but necessary decisions, and I have no doubt that they will do the same to ensure that small business will indeed have access to finance so that our economic recovery is strong and sustained.

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[Andrew Griffiths]

I draw my hon. Friend’s attention to a recent case in my constituency, where a large brewing firm unilaterally decided—with no negotiation or discussion—to extend its terms of credit from 30 to 90 days, which had a massive impact on some very small businesses. We talk a lot about corporate responsibility, and although larger businesses need to operate in a tough economic climate, they also have a responsibility to smaller supply businesses, which often rely on tight terms of credit to survive.

[Mr Jones]

I thank my hon. Friend for his comments. He is absolutely right. The same comments are coming from small businesses in my constituency.