Thrive time

Parry Mitchell 4x3Parry Mitchell on creating the right conditions for SMEs to help boost both our economy and communities

Small businesses are facing a cost of doing business crisis, and a big part of that is the difficulty companies find in getting the finance they need to grow from UK banks.

Every time I ask Ministers about this, I get told the money is getting through. Yet every time I talk to small business owners the word comes back that they are struggling to receive the kind of long-term support required to ensure that this sector, so vital to the economy as a whole, can flourish.

The figures back them up. Net lending to businesses generally was down £2.4bn in August, and net lending to SMEs was down £600m in the second quarter of 2013. A recent National Audit Office (NAO) report reveals the scale of the problem. 38% of companies less than five years old who apply for a bank loan are rejected. These are the people who are often putting everything on the line to start a business. They may have had to mortgage their house, and they certainly know what it’s like to wake up in the middle of the night worrying whether their business could make their next payroll.

I hope policymakers in Whitehall wake up at night worrying about how to create the right conditions for these companies to thrive. 

The NAO report also pointed to the size of the gap in funding between what small businesses need and what they find available could grow by 2017 to a massive £22bn. This shows how crucial it is for us to plan in the long term. A market failure in small business finance was first identified in 1931 by the Macmillan report and has recurred at times of economic difficulty ever since. We’ve got to make sure that if the economy ever falls on hard times again, small business lending isn’t the first thing to go and the last to return. 

Our plans to create a proper British Investment Bank and a network of regional banks underneath it are aimed at achieving just that. While Ministers have now woken up to the need for a state-backed investment bank, there are worrying signs that they, so far, effectively see this as a group of BIS civil servants. 

There are no signs yet that they understand the need for regional banks. That’s a shame because we know they work. An IMF paper from 2011 showed that in Germany during the financial crisis “the decline in bank lending was more evident for large banks, whereas Sparkassen and cooperative banks typically lending to SMEs … provided a stable supply of loans”. Small business owners in the UK deserve the same kind of counter-cyclical support from lending institutions. 

I’ve frequently written about my belief that we need to better regulate the payday loan companies that fill our high streets and suck money out of our communities. By supporting small businesses, through a cut in business rates, a freeze in energy prices and a banking system that works to support them, Labour will put money back into those communities.

Lord Parry Mitchell is a backbench Labour Peer and an enterprise adviser to the Shadow BIS team

Published 19th November 2013

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