The Government believes that banks are choking small businesses by not lending or setting criteria which are too tough. Banks say they're finding it hard to hit lending targets as customers are paying back more.
What do SMEs really want?
What do SMEs really want?
It seems that everyone knows the answer and continues to beat the drum. But because no one in the Government or in banks have run small businesses, they have no real idea what they need. They don't have any shortage of senior corporate figures piping up and telling them how much they want to earn or how bad education is (Terry Leahy of Tesco has done just that today). They have even employed Lord Sugar as some kind of Enterprise Tsar, whatever that rubbish may be. But no one in the Government would want to listen to someone like you or I. We don't get knighted or put into the Lords. We don't get to speak at the CBI and tell people how it is.
Small businesses account for 97% of all businesses in Britain and are the largest body of employers and we contribute disproportionately the largest amount of tax into the system through corporation and PAYE but we have the least heard voice. So it comes as no surprise that there is an argument between the Government and banks about lending.
So let's just think about this for a moment. Why is it that SMEs don't want to borrow as much cash as everyone thinks they should? RBS and Lloyds have set aside more cash, they have even put their most experienced bankers on hotlines. Why are SMEs behaving like spoilt brats and asking for credit and then not using it?
So let's just think about this for a moment. Why is it that SMEs don't want to borrow as much cash as everyone thinks they should? RBS and Lloyds have set aside more cash, they have even put their most experienced bankers on hotlines. Why are SMEs behaving like spoilt brats and asking for credit and then not using it?
The main reason is that lending is seen as the way to prosperity by the Government. There is no other pathway. There is a good reason at a personal level because cheap and available mortgages allow us all to trade up or release equity to supplement our household income. No one could have survived the last 12 years if they had relied purely on their average household incomes and produced the growth we had - it came from freely available, ultra cheap and few strings attached credit. Banks fought over themselves giving it to us and we took it and used it prodigiously.
There was a ripple effect into SME business. Of course, in that environment of growth, businesses see opportunities and invest to grow by taking on people, marketing, gearing up new production, maybe expanding overseas. While the market is buoyant, the lower available credit was essential for companies to move forward.
Even now, at the heart of the recession, mortgages are critical as more people need to keep moving their earnings as wage increases are minimal and jobs are becoming scarcer. People are borrowing to maintain their lifestyle and maybe to survive. They are leveraging their own bank, again. It's a dangerous strategy long term as prosperity has to be geared to income ultimately but in the short term it is the only method the Government has to stand any chance of stimulating growth to cut borrowing. You can almost see the accident waiting to happen - borrow more to fuel growth to decrease borrowing. It's a cycle doomed to fail.
But small businessmen are a canny lot. They do not operate under the same mentality. Experience has taught them that in times of recession, borrowing to invest is not a priority. You may need to borrow to survive but that's different. Survival borrowing is not favoured by banks - after all, why would they want to give money to a company to save jobs or pay wages? That's the sort of thing that taxpayers do for banks but banks don't do it for businesses - oh, no. It's a simple credo, banks lend against some kind of collateral - so if you have assets in the business or you have a strong revenue book to show, you get money under nice criteria and although the cheapest business overdraft is around 13 times the bank base rate, let's face it 6.5% interest is the lowest for business borrowing for a long, long time.
The thing about small businesspeople is that we are naturally sensible. We do not operate like Government lackies would like us to. If sales are low due to a recession, we adopt a different approach. We cut costs, conserve cash and we attempt to decrease dependence on borrowing. Why? Because CASH IS KING. If sales are not coming through and growth opportunities are not there, we do not borrow more money, we cut our cloth. There is a simple reason - SMEs want to take advantage of the growth as and when it comes through to do that you must then have access to readily available credit at good terms. Borrowing in a recession for SMEs is either done out of desperation or because the business has spotted an opportunity created by the recession.
The truth is that the Government does not know how to run their own economics, that has been spectacularly manifested. So there is virtually no chance it understands the economics of running a small business. It has no adequate advice for SMEs and so they will continue to beat up banks and banks will do stupid things like put managers in call centres. It will not stimulate the credit.
What SMEs need is sales. Pure and simple, if there are not sales opportunities out there then there is zero point in investing in new people or production. The only other area where credit would be good is for those starting new ventures - with more people becoming unemployed more will want to try their hand at starting a new business. In general, starting a business in a recession is not a good idea. You only have to look at any High Street and count the number of shops now empty to know that buying consumers are still very nervous and businesses are unlikely to start taking small risks on new suppliers.
Of course, there exceptions to the rules. Many businesses like Cisco will tell you that they started business during a recession. Let's draw a line between book theory and practicality here. Cisco was started on the back of the waves of growth in the IT networking and infrastructure business. They were riding a future wave - true, they did that superbly but not every business has such a wave to rise. If you want to start a car repair shop, a nice clothes boutique, a barbers or a building firm, there are not those waves visible to invest against. Markets are generally depressed so you have to be able to pick where the future growth will come from and focus your business upon what you know you can do to tap into it. Simple statistics show that most businesses fail within the first year - in a recession that statistic gets worse. Banks will not lend money just to help people out in tough times, they want an investment idea.
Venture Capital is a very funny beast. Up until about a year ago, you could have had an idea about paper hat design for Outer Mongolia and they would have flown expensive people to you, to 'chase the deal'. Now they are all sitting on top of their masters' cash and working part time until someone presses the green button. It's not a question of pitching to them, it's a question of finding one who is in as most are on part time work.
The money is in the wrong place. If Government is hell bent on providing credit, then support new business ideas. VCs aren't putting cash down and banks don't want to support new ideas, Government should step in. I know Mandelson will say 'we are', but reality says Government is not and if it is, it is going into the wrong places. For a small time guy to borrow £10,000 to get a small business up and running, the facilities are simply not there whether they are the next Cisco or not. Like me, most entrepreneurs do it from their own means and we, of course, bet very carefully as we have too much to lose. If I wanted to expand my business today, there is not a scheme widely available and well publicised in Government anywhere that I do not have to fill in a ton of forms about my business to the nth degree and then wait six months for an answer. Borrowing should be a simple process. It is after all, a process of gambling and banks are very good at that when it comes to large complex sums that mean nothing to anyone else or serve no real purpose. As banks gamble in front of our eyes and conjure up £billions of profits, down in the real world it would be hard to get a penny of that profit to fund a new business idea.
So here's a thought. Government step in and say, for every new £1 of profit earned by investment banking of any type, 80% of it must be invested in small business funding with a new package of conditions to stimulate commerce. Call it a tax if you want, who cares. Bankers won't like it as it will dramatically cut bonuses but would it not create an impression that if you are going to make vast profits then make them out of something that does just a bit of good to the economy.
There are lots more things that could be done. But simply screaming into a High Street bank manager's ear 'Lend!' will not do it They do not have the experience or skill to understand business in the same way as an entrepreneur. You have to structure the whole conditions properly and borrowing is a mugs game for most SMEs today - they want sales. Stimulate new business ventures and there will be more sales for SMEs and their expertise and products.
There was a ripple effect into SME business. Of course, in that environment of growth, businesses see opportunities and invest to grow by taking on people, marketing, gearing up new production, maybe expanding overseas. While the market is buoyant, the lower available credit was essential for companies to move forward.
Even now, at the heart of the recession, mortgages are critical as more people need to keep moving their earnings as wage increases are minimal and jobs are becoming scarcer. People are borrowing to maintain their lifestyle and maybe to survive. They are leveraging their own bank, again. It's a dangerous strategy long term as prosperity has to be geared to income ultimately but in the short term it is the only method the Government has to stand any chance of stimulating growth to cut borrowing. You can almost see the accident waiting to happen - borrow more to fuel growth to decrease borrowing. It's a cycle doomed to fail.
But small businessmen are a canny lot. They do not operate under the same mentality. Experience has taught them that in times of recession, borrowing to invest is not a priority. You may need to borrow to survive but that's different. Survival borrowing is not favoured by banks - after all, why would they want to give money to a company to save jobs or pay wages? That's the sort of thing that taxpayers do for banks but banks don't do it for businesses - oh, no. It's a simple credo, banks lend against some kind of collateral - so if you have assets in the business or you have a strong revenue book to show, you get money under nice criteria and although the cheapest business overdraft is around 13 times the bank base rate, let's face it 6.5% interest is the lowest for business borrowing for a long, long time.
The thing about small businesspeople is that we are naturally sensible. We do not operate like Government lackies would like us to. If sales are low due to a recession, we adopt a different approach. We cut costs, conserve cash and we attempt to decrease dependence on borrowing. Why? Because CASH IS KING. If sales are not coming through and growth opportunities are not there, we do not borrow more money, we cut our cloth. There is a simple reason - SMEs want to take advantage of the growth as and when it comes through to do that you must then have access to readily available credit at good terms. Borrowing in a recession for SMEs is either done out of desperation or because the business has spotted an opportunity created by the recession.
The truth is that the Government does not know how to run their own economics, that has been spectacularly manifested. So there is virtually no chance it understands the economics of running a small business. It has no adequate advice for SMEs and so they will continue to beat up banks and banks will do stupid things like put managers in call centres. It will not stimulate the credit.
What SMEs need is sales. Pure and simple, if there are not sales opportunities out there then there is zero point in investing in new people or production. The only other area where credit would be good is for those starting new ventures - with more people becoming unemployed more will want to try their hand at starting a new business. In general, starting a business in a recession is not a good idea. You only have to look at any High Street and count the number of shops now empty to know that buying consumers are still very nervous and businesses are unlikely to start taking small risks on new suppliers.
Of course, there exceptions to the rules. Many businesses like Cisco will tell you that they started business during a recession. Let's draw a line between book theory and practicality here. Cisco was started on the back of the waves of growth in the IT networking and infrastructure business. They were riding a future wave - true, they did that superbly but not every business has such a wave to rise. If you want to start a car repair shop, a nice clothes boutique, a barbers or a building firm, there are not those waves visible to invest against. Markets are generally depressed so you have to be able to pick where the future growth will come from and focus your business upon what you know you can do to tap into it. Simple statistics show that most businesses fail within the first year - in a recession that statistic gets worse. Banks will not lend money just to help people out in tough times, they want an investment idea.
Venture Capital is a very funny beast. Up until about a year ago, you could have had an idea about paper hat design for Outer Mongolia and they would have flown expensive people to you, to 'chase the deal'. Now they are all sitting on top of their masters' cash and working part time until someone presses the green button. It's not a question of pitching to them, it's a question of finding one who is in as most are on part time work.
The money is in the wrong place. If Government is hell bent on providing credit, then support new business ideas. VCs aren't putting cash down and banks don't want to support new ideas, Government should step in. I know Mandelson will say 'we are', but reality says Government is not and if it is, it is going into the wrong places. For a small time guy to borrow £10,000 to get a small business up and running, the facilities are simply not there whether they are the next Cisco or not. Like me, most entrepreneurs do it from their own means and we, of course, bet very carefully as we have too much to lose. If I wanted to expand my business today, there is not a scheme widely available and well publicised in Government anywhere that I do not have to fill in a ton of forms about my business to the nth degree and then wait six months for an answer. Borrowing should be a simple process. It is after all, a process of gambling and banks are very good at that when it comes to large complex sums that mean nothing to anyone else or serve no real purpose. As banks gamble in front of our eyes and conjure up £billions of profits, down in the real world it would be hard to get a penny of that profit to fund a new business idea.
So here's a thought. Government step in and say, for every new £1 of profit earned by investment banking of any type, 80% of it must be invested in small business funding with a new package of conditions to stimulate commerce. Call it a tax if you want, who cares. Bankers won't like it as it will dramatically cut bonuses but would it not create an impression that if you are going to make vast profits then make them out of something that does just a bit of good to the economy.
There are lots more things that could be done. But simply screaming into a High Street bank manager's ear 'Lend!' will not do it They do not have the experience or skill to understand business in the same way as an entrepreneur. You have to structure the whole conditions properly and borrowing is a mugs game for most SMEs today - they want sales. Stimulate new business ventures and there will be more sales for SMEs and their expertise and products.
Sales are what makes SMEs grow.
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