Is the Government’s Small Firm’s Loan Guarantee scheme the answer?
In this country we have the most prolific and successful SME business community anywhere in the world. The vast majority of the UK’s wealth is generated by SME businesses. We pay the highest taxes whilst struggling with the ever growing burden of red tape, regulation and lack of help and information.
Large corporations have the luxury of expensive and highly skilled advisors that help them minimise their tax positions, move profits offshore and around complex webs of corporate structures. The government seem to be happy to help the large corporates whilst leaving the SME community to fend for itself. Whilst the small businesses continue to fight for survival the largest of corporations, both here and outside the UK seem to be on a head on collision with disaster. It is not the SME’s that have caused us to be in the current climate but they are the ones, along with the general public who are feeling the pain the most.
It has become clear to me in recent months that the government do realise that it is down to the SME community to trade the UK out of its present precarious position and would dearly like to see that happen.
Aside from the regulatory woes we all suffer, the largest hindrance is the lack of financial support. I have for many years been assisting SME’s with obtaining funding, often from banks and regularly utilising the government led Small Firm’s Loan Guarantee Scheme (SFLG). Much has been written about the SFLG scheme in the past but for sake of clarity I should explain. It is a scheme whereby if a bank subscribing to the scheme, which most do, decides to make a business loan of up to £250,000 based on the merits of the application, but there is no security available from the company directors, the SFLG scheme, managed by BERR (formally the DTI) can be used to guarantee 75% of the loan for the bank, with the bank taking the remaining 25% as unsecured.
Over recent years I have witnessed an increasing reluctance by the banks to work with the scheme. I have seen lending move from 90-100% of requirements to matched funding whereby the business owners are expected to personally inject at least half the requirement into the company as share capital and to not expect to withdraw that money during the life of the loan. In more recent times it has become more and more difficult to obtain approval on such loan applications.
Of course, it is not the bank’s legal responsibility to support economic growth but to deliver a return to shareholders. Something they are quite spectacularly failing to do at the moment, mainly due to their own mistakes.
In these interesting times I have great hope that the government will do all that they can to encourage the banking sector to support SMEs far more pro actively than they have for many years. For we are the future of this country and I firmly believe its only hope. With the horrific pension shortfalls that are still only just starting to come to light, increased public borrowing and reducing taxation income despite still being taxed at a higher level than in modern history, the SME community is the only long term hope. I think the government know that very well.
I for one, sincerely hope that much more pressure is placed upon the banks to allow the funds to flow out. I would never encourage irresponsible lending, for that is largely what has led us in to the present mess we find ourselves, but sensible support and nurturing for businesses. It will be most interesting to see how things progress in the coming months. With many billions of taxpayer’s money, much of which has been produced by small businesses, having been pumped into banks, effectively making them state owned in some cases, will the government be able to force the banks to do the right thing? I most desperately hope so!
In any situation there is a positive for every negative. I have considerable involvement in raising business angel investments for businesses and have seen a dramatic increase in the number of businesses now looking at such options. Growing awareness of this source has led to a large increase in activity in this sector. Even in these hard times there is a large base of both private and corporate investors out there that are prepared to inject capital in return for shares in businesses. In many cases this can be much more beneficial for businesses that could benefit from additional skills and experience rather than just cash.
Whilst there will always be a demand and necessity for bank funding it is encouraging to see the SME community increasingly supporting itself with private investors taking interests in other SME businesses and helping them grow.
I have no looking glass into the future but hope and believe that this will continue to grow and prosper and that, with encouragement, the government and banking sector will eventually catch up and get back in the game. They most certainly should. After all, we know the money is there because it is you and I that have given it to them!
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December 18th, 2008 at 5:29 pm
A very interesting article – I agree with alot of it – but as a former banker (30 years before going independent) I still find it frustrating that Bank’s get such bad publicity. They don’t always get it right and they get it in the neck if a business goes bust – it is inevitably someone else’s fault. Banks – even after the bailout – are not charities and have to make decisions – far too often on poor or non-existent information. The owners of SMEs have to smarten up – the best entrepreneurs have good quality managers/NEDs supporting them – to support the best ideas and kill the daft ones. SFLG and an improved quality of management teams might help but please do not simply blame the banks – they too need some nurturing – don’t forget the main problems have been created by the greedy idiots in Investment Banking and Financial Services – most bank managers want to help their clients so try and work with them – most have not been through a downturn before. And finally, there is no such thing as ‘the bank’ individuals make decisions so help them make the right ones and build courage to follow the right path.
December 19th, 2008 at 10:16 pm
I appreciate most of what you say but my experience is that only a minority of banking staff have the experience to take a reasoned view. Local business managers often do not have the right experience to take a view. I have seen many occasions where they have clearly been worried about supporting applications to protect themselves. the more experienced staff at at a higher level and not accessible to most businesses. That is where the services of 3rd parties such as Strategy Consulting come into play.
I think the real problem with SFLG is the government’s intentions are not alligned with the interests of the banks. I fully agree that is not the banks fault, more the governments usual poor execution on what was not a bad idea.
Having said all that, the banking community is failing the SME community more than ever at the moment whilst nurtuiring their self inflicted wounds and cash grabbing at every opportunity.
I conducted interviews for a new member of staff a month or so ago.. I had 7 bank managers that I interviewed!.. the job was nothing to do with banking at all. Sign of the times I guess.
December 19th, 2008 at 10:18 pm
perhaps the best solution would be for the SFLG to give a 100% guarantee.. thus allowing the government to shoulder more risk, release the banks from any risk and allow the bank funds to flow rather then the government just blindly pumping yet more of tax payers money into yet another scheme which will more than likely be poorly executed.