Helping SMEs is top of Brown’s agenda

Oct 29 2008 by Karen Dent, The Journal

Another week and another raft of promises from the Government as it pledges to help hard-pressed small businesses weather the financial storm. Karen Dent asks whether the region’s SMEs expect the measures to make any difference.

SMALL businesses have suddenly found themselves at the top of the Government’s agenda as it strives to be seen to be tackling the economic slowdown.

Last week’s pledge to pay suppliers within 10 days, help credit-crunched small firms with their cashflow, free up access to finance and plough more money into training has been followed by new forum for small business groups and the banks.

Chaired by Business Secretary Lord Mandelson, the group aims to meet regularly and provide a platform for the two groups to resolve their differences.

Tomorrow, Chancellor Alistair Darling and Lord Mandelson meet Philippe Maystadt, president of the European Investment Bank (EIB), to discuss more plans to support SMEs.

The Federation of Small Businesses (FSB) wants the EIB and the Government to create a £1bn small business survival fund to tide over firms for the next six months.

A lack of day-to-day finance and money to grow are among the most serious issues facing small firms. As a condition of its £37bn bail-out of the sector, the Government told banks to return lending to small businesses to the same level as 2007.

Jonathan Gold co-founded Newcastle venture capital company NStar in 2003 and now runs training and support firm Finance Tree, which acts an intermediary and advisor for people looking for investment finance up to £1m. He says lower-end private equity deals are still available for start-ups but the behaviour of the banks has made it more difficult for expanding firms to source money.

He said: “Where people are looking for £100,000 to £1m, it is still out there. But for companies seeking larger sums – £1m or more – I am beginning to spot evidence despite pressure by the Government that banks are withdrawing loan facilities, and they are not allowing companies overdrafts they would have a year ago.

“The banks can deny it as far as they like but that is what is happening on the ground. They are putting a brake on economic development and it’s going to continue to depress the local economy.”

However, he says the picture for small firms seeking cash to start-up or grow is not utterly bleak, especially for those able to use sales or organic growth to expand. He believes there is still confidence in the sector.

“General confidence is still high among small businesses, particularly those that have been around for a long time that have ridden out recessions before and they know what to do,” said Mr Gold. “And confidence is still high with entrepreneurs just starting out.”

Just as not all small businesses are suffering, neither is every bank.

HSBC was not part of the Government’s banking bailout, and because the majority of its business is conducted overseas, it has avoided many of the problems that have hit its rivals.

As a result, it says it has been picking up new customers and is signing up around 2,500 new small businesses a week, the same level as 12-18 months ago.

Andrew French, HSBC’s head of Newcastle Commercial, said: “We are highly capitalised as a bank and we have always been a cautious lender – we have never thrown away the rule book. We haven’t had to go cap in hand to the Government.”

Newcastle-based creative agency the bgroup has banked with HSBC for four years. “We secured a sum of private investment to launch it as a separate business, with its own board and MD,” said bgroup managing director Si Bales.

“The banks are looking at overdrafts and the small business loan guarantee scheme. They have been pretty good throughout our growth period.

“We invite our bank manager in a lot. It’s about building those relationships so they understand our business.”

However, this experience is not reflected across the board. The FSB says small firms have suffered from interest rate hikes for loans and overdrafts, poor treatment from their banks despite good credit histories, being asked to pay facility fees and losing finance that had already been promised.

Fellow small business lobby group, the Forum of Private Business (FPB), has written to the British Banking Association (BBA), over these issues.

“Real interest rates on overdrafts, in particular, are as high as 15%, lending facilities are being reduced or withdrawn and charges for renegotiated agreements are excessive,” said FPB chief executive Phil Orford.

“We believe this will make survival extremely difficult for many small businesses and consider it to be an unacceptable position given the clear public obligation the banks have, to deliver something tangible to personal and business borrowers.”

Despite the Government’s demands that banks loosen the purse strings, there are concerns businesses will fail before the money filters through.

Carole Beverley, chief executive of the Entrepreneurs’ Forum, said: “The issue is they need finance very quickly and they need access to finance without too many caveats. At the moment, everything is risky to banks.”

That view is echoed by Mr Gold. He said: “The problem with Government announcements is that it takes a long time to implement them. It doesn’t happen overnight, it’s going to take a bit of time.

“We do need Government intervention, either telling banks they have to lighten up their lending or we need Government intervention to fill some of the gap.”

The online business

SARAH Taylor was “devastated” when her bank pulled the plug on the funding she had been relying on literally weeks before she and business partner Chris Gifford were due to launch their company.

Urban Digger, a Newcastle online company providing European city information, had been in development for two years and was a month away from going live when the bank dropped its bombshell.

Ms Taylor had applied for the Small Firms Loans Guarantee scheme in January. She said: “It usually takes four weeks to turn around but it took five months and even when we got it, we only had half of what we’d applied for.

“We were due to get the other half in October to take us up to our launch, then we got a call to say ‘you’re not getting it’. They pulled the plug at the 11th hour, even though as far as we were concerned, it was signed and sealed.

“We were devastated. As far as we were concerned our business should have started, we should be bringing money in. I never envisaged this.”

The business looked at seven different routes to find start-up finance and has reached the pre-launch stage through self-funding, Arts Council and Business Link money.

Ms Taylor, who is now looking at private equity funding, says the real problems with the bank have surfaced in the last few weeks.

“When I saw Gordon Brown talking about the bank bail-out, on the condition the banks helped small businesses, I was between laughing and crying,” she said.

“I knew we were never going to see any of that. It’s very different what you see on the TV and what the reality is.”

The manufacturer

THE credit crunch is having huge repercussions on flagmaker AA Flags, which is concerned it may not be around long enough for the Government’s measures to have any effect.

Mandy Scott, managing director of the Consett company, said: “My staff have just agreed to cut their hours in half until February – either that or I would have to lay off half of them – by which time we will review the situation. The credit crunch is having a knock-on effect. Flags are the last thing a company needs. If you’ve got a flag and it’s looking a bit scruffy, you’re not going to replace it.”

Around 10% of AA Flags’ work is with the public sector and despite the company’s 30-day terms, Ms Scott says organisations can take more that double that time to pay their bills.

Coupled with cheap Chinese imports and digitally-printed flags, she says her business is suffering as a result of the slowdown.

“Not everyone wants MoD quality flags,” she said. “Our phones just haven’t been ringing for the last four or five months. I think everyone you speak to, the phone is not ringing. I can’t see us lasting another six months.

“We are not in a situation where we have to borrow money and I wouldn’t let it get that far. The company has been going for 16 years. I can afford to pay the staff for six months, after six months, I’ll shut the door – I’m not losing everything I’ve worked for.”

The subcontractor

SUBCONTRACTORS in the construction industry saw little to celebrate when the Government announced its 10-day payment pledge.

Although the contractors themselves may receive their money more quickly from public sector organisations, there is no guarantee of faster payment for subcontractors forming the links of the chain between the contractor and the job.

John Holmes, who employs 13 people at specialist flooring firm Reprotec in Langley Moor, relies on main contractors for around half of his turnover.

“The Government tried to introduce the 30-day payment scheme in January but as far as we’ve seen, there has been no great benefit,” he said.

He says only time will tell if the Government’s 10-day payment pledge will make a difference to smaller firms. “The next few months will be very interesting to see if anything is going to filter through more quickly,” he said.

Reprotec is busy with projects that have been on the table for some time but Mr Holmes remains concerned.

“We can say we are OK for six months,” he said.

“But we are seeing a decrease in the number of tendering inquiries. Certainly, that’s an indication for the long-term future of the construction industry.”