What Do SMEs Want?

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?

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?

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.

Sales are what makes SMEs grow.

Taxing Conundrum

Well the budget speech had no real surprises for us but Mr. Darling has been surprised by the fact that borrowing has been higher than he predicted and the recession deeper. Fair play, though, he's only running the country's finances.

The only minor shock was the last minute hike in the top rate of tax for those earning above £150,000 per annum to 50%. Of course, anyone earning between £150,000 and say £250,000 will be grinding their teeth and spitting, particularly if they take that as salary or bonus. For those earning above that level, we are into the stratosphere where compensation can come in varying forms from capital gains to dividends or some other contrivance.

In fact, of the 50+ billionaires who are supposed to make their living in the UK, they pay less tax proportionately than those on the average wage.

You see the richer you are, the more creative you can become. And for those in the super-rich bracket, well they know every trick in the book. Sir, and yes he was knighted by this Government, Philip Green made sure he did not pay a bean in tax on a single dividend of £1.2bn that his company did not earn. The dividend was paid by a bank loan and went to his wife who is apparently an non-domicile. Like many hedge fund, private equity and top end traders in the City, Green has the facility to evade paying taxes in the UK - and he is mean-spirited enough to make sure he doesn't pay a penny, not just make sure he doesn't pay more than he has to.

The best part of all that is that this Labour Government have not just allowed this to happen, they have openly supported it and enabled these super-rich people to avoid tax by making our top end system more attractive. Instead of promoting funding for new business ventures, innovation, creativity, entrepreneurship and backing bright ideas, they have allowed billions to be created off buying, revamping and reselling existing businesses and shorting stock prices. Britain is way behind its rivals in terms of injecting capital into good ideas and many of the so called 'Venture Capital' companies plough their money into juicy deals for fast-buck turnarounds rather than back creative new businesses.

What this new hike in tax will do is call into question the raft of high earners who actually have to go to work for their living, selling things, building businesses and creating employment for others. They will be the ones who stick around here not able to afford fancy Trusts like the Labour golden boys and so pay their taxes. So when the opportunity arises to work abroad for a few years or even choose their country of domicile as anywhere else in Europe, like Switzerland, then they will do so.

The whole borrowing and tax situation is only going to get worse. As unemployment moves toward a peak, the strain on the welfare state gets higher and tax revenues decrease - so the majority of us will pay for it. Tax on fuel, because we have to drive to work whereas it is nothing to the super-rich means that once again working Britons bear the brunt of all the tax bill now and in the future.

Why didn't we see 'windfall taxes' for hedge funds or private equity? Why didn't we see a higher rates of tax on future profits on banks as they should pay back the money we are stumping up ahead of us? Why don't we see all senior banking executives having capped bonuses for the future with higher rates of tax applied? Why don't we see scaled Capital Gains Tax for businesses that proportionately rewards owners who have nurtured their businesses over many years vs. those who buy, asset strip and sell in short order?

It's because they won't pay. Tax the hedge funds and they will all register their headquarters outside of the UK, same with private equity. We need a wholesale change in legislation on companies and where they pay their tax and any individual working for them before coming to the rest of us for the price of this mess created by a bunch of ministers who cannot even get the numbers right from day to day.

Once again, this is a budget on the mass of people who regularly cough up and cannot afford to leave the country. The super-rich once again get away without paying. There was a time when Labour represented the party of social equality - but, with their former leader's head so far in the trough of riches, it's pretty obvious that's all in the past.

As a final note, I heard Tony McNulty on the radio today 'defending' himself on his expenses row. He stands by the fact it's all in the rule book. It reminded me of the old Peter Sellars film, 'I'm alright, Jack' - he has got his head so far in the feeding trough he cannot see that his job is no different from the average person who has to commute to London. He claimed £60,000 on a second home that wasn't even his and is less than 13 miles from Westminster. The rule book doesn't say you have to be a greedy, money-stealing swine with no conscience.

But that's what it takes to be a Labour Minister these days - that and skin thicker than a rhino's hide.

Twitter Me, Baby

I was at a party last night, some 300 people in a marquee at the 50th birthday of a good friend, Nick 'Shirtie' Gray. I knew around 30 people there and spent my time trying to speak to them and for us all to hear each other over the babble and music. To my mind it was very much like Twitter - lots of noise, irrelevant comment and inconsequential trivia verging on the immaterial and inevitably you gravitate to the people you know and trust as they say the most interesting things.

I suppose I don't seem to get this Twitter phenomenon from many angles. Then again SMS was an unlikely winner for me - initially a service left in by phone and airtime providers as a back channel for administration purposes, someone had the bright idea of introducing the service as a chargeable item and the rest is history. As it was already built into the service, there was no incremental cost of provision and so any charge was pure bottom line. Who would have thought that sending a short, almost illegible text to lots of people would ever take off? Now we send hundreds of millions of them via every airtime provider - and telecom companies could not be happier.


Twitter is described as micro-blogging, social network messaging or the SMS of the web. But here's the odd thing - founded in 2006 and having 34 employees, Twitter has raised around $57 million of venture capital money, the latest $35 million of which was raised early this year. Yet it has still to make a bean of revenue - in fact, it has a business plan, if you can call it that, which has no model by which it can charge money. What it does have is well over 5 million users from me to Barack Obama and in between many celebrities and important people, and then the cuddly girl from Essex who follows everyone, bless her.

Monetisation

This is the new word which Silicon Valley uses which is the process by which a company whose sole business model is to accumulate users, subscribers or followers can extract cash from its 'success'. The VCs behind Twitter must have something in mind - one of them is Jeff Bezos, the founder of Amazon and he knows a thing or two about making money. But Twitter may be different. Users of the service cringe at the idea of commercialisation of what they see as a 'pure' world of 'tweets'. So offering premium services or adverts alongside or embedded in tweets are frowned upon even though some their parties offer such a service. And that's the odd thing - lots of other companies are making good money off the back of Twitter, like offering advice on how to tailor tweets to get your company messages or news over to users or to promote blogs. Many companies have come out with tweet aggregators or filtering services, some offering mobile tweets - it seems the only people who cannot make money are the people who actually made the service in the first place.

The No Business Model Company

Rather like Facebook, Twitter has a dilemma ahead. Do they continue to offer a free service and just accumulate users, allowing other companies to make money while they just have fun or do they cheese off users big time and start charging for use of part or all of the service?

The latter would seem to be a non-option and many companies have fallen foul of such a business model - what is given for free is very hard to charge for afterwards unless you tell people up front this is what you plan to do. Twitter has always said that would not be done.

So there is only one other business model that works. Twitter, like Facebook has a notional value as a company. The CEO, Evan Williams, has already allegedly turned down at least one offer of $1 billion + for the company and it is reported that Google are stalking Twitter as its prey. It seems that perhaps the problem of monetising Twitter could be left to someone else, like Google.

We have seen that model at work previously. Skype came out with its revolutionary IP telephony service which allows free phonecalls across the web. Even better, it allowed IP calls to be routed to callers on standard or mobile phones by transporting the call largely for free and then just popping out at a local exchange or cell and the caller just paid the local call or reduced mobile rate. For international calling it is superb and with some new business services like voicemail, SkypeIn, and conferencing it is even better and the quality is now very good. As Skype took off with virtually no revenue, in came eBay and paid $billions for it. Since then, little has changed to either company, leaving the investment community to scratch their heads as to why eBay would have blown so much money for so little added value or profit to its business.

Twitter has that similar feel to it - even if Google were to buy it, how could it really allow Google to become a more profitable company if it were not to tamper with Twitter's model of free service?

I have blogged recently on Google and one angle is that Google wants to create more of its own content, particularly as a source of news. Twitter has proved very valuable in getting short news flashes into circulation about incidents but it can also be the source for rumours. While Google might have plans to be a news service of its own, with millions of freelance twittering journalists in its armoury, the problem will be the authentication of news. It could just become a platform for rumour, smears, innuendo and libel rather than an authentic, approved news service.

In terms of how the VC money has been spent, Evan Williams himself has been vague on why they even raised it and you have to suspect that when notable companies like Benchmark give money for no discernible reason from the founders, that they have other options in mind for themselves. A sale of Twitter is almost the only exit route that will 'monetise' their investment.

Where that leaves Twitter's users for the future is anyone's guess at this stage.

Scalability

One of the problems that has persisted with Twitter has been its ability to cope with scaling. Unlike SMS on mobile devices, the network had the built in redundancy to cope already there. Twitter was very intermittent when I first tried it about a year ago and a few re-writes of the server technology has got it into better shape but that does pose questions on the future, particularly if Twitter does become some kind of advertising or news service.

The inherent technology has an API to it that has allowed many companies to capitalise on Twitter. In can be embedded in other software and so the aggregation and filtering services have been easy to make while having Twitter in Facebook has extended its reach. It is highly likely, amid all the associated publicity, that Twitter will at least double its user community within the next year or so and this will pose a big strain on its underlying technology which has been tested severely at much smaller levels of users already. I suspect that is where a good deal of the VC will get absorbed.

This week in London, some people behind Lastminute.com launched a new service for companies to advertise down Twitter. From what I heard on the radio, Twitter purists will squirm at the thought, and I think this is where a risk to the plan lies. Bright sparks can see this as some kind of ticker tape advertising service which can embed logos and neat messages. If that is the case, I think users will go nuts as a well as the service getting stretched to breaking point to cope with the traffic and potential increase in resource use.


What Are You Doing?


The natty catchphrase that goes with Twitter is the raison d'etre. From announcing you are walking the dogs to watching the soccer, Twitter is the platform of the mundane with the occasional chirp of note. It is not dissimilar to everyday life or my party - eventually we will gather those we appreciate around us. Thomas Power, co-founder of Ecademy, sees this as the third iteration of the web where people will follow us having found us. I think there are some flaws to this logic. We are currently, as a society, obsessed with the trivial and things like Big Brother seem to be a huge success because we are fascinated by watching what other people do even it is incredibly boring. Maybe it's our animal instincts coming to the fore - we want alpha people to follow. But I can't help feeling this obsession with knowing if someone is having a cup of tea or not is short lived - soon we have to get back to what matters.

Or do we? Tweet on, baby. Who are you following?