Part of the debate – in the House of Lords at 8:50 pm on 3rd November 2008.

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Photo of The Earl of Courtown The Earl of Courtown Conservative 8:50 pm, 3rd November 2008

My Lords, as many noble Lords will be aware, this is not a subject on which I speak often. However, as a result of the plight of small and medium-sized enterprises in this current financial crisis, I am motivated to do so. I agree entirely with my noble friends Lord Bates and Lord Naseby and the noble Lord, Lord Bilimoria. I should declare an interest as part of the management of a landscape construction team in the south-west. The company is a typical SME, although it is slightly larger than the norm in the sector. The financial crisis has affected us, but our order book is still full and we hope that our success will continue.

Quite rightly over the past few months, the media have reported extensively on the banking crisis in the financial news. However, the downturn in consumer confidence has been apparent over a considerably longer time and its effects have significantly reduced SME margins. From the early summer of this year, suppliers have increased prices. Until now, we have been reluctant to pass on these prices to customers and consumers, but our experience of trying to pass on those increases has resulted in a blunt refusal from the client. Due to the competitive nature of the industry, it is a question of accepting reduced margins or not getting the work at all.

In the past week, we have had a 15 per cent increase in the cost of waste disposal as well as the same increase in the cost of concrete and aggregates. Not only does that hit the landscape industry, but it will also impact on the construction and building sector, on which the state of the housing market, as we know, has already had a devastating effect. It is of paramount importance that the Government should come up with a proposal that will have an immediate effect. I am not looking for a long-term effect. I understand what the Minister said in his speech, but the problem is now, today, this week. To get VAT paid in this month, the money should have gone to Revenue and Customs today. That is where small and medium-sized enterprises are having problems with their cash flow.

A few weeks ago, the importance of SMEs increased with articles in the media and a Statement in the House. That is not strange when, as other noble Lords have mentioned, 13 million people are employed in this sector, which makes it important and influential. The Government announced that they would talk to banks about their lending activity, as well as arrange for an extra £4 billion from the EIB, which, as other noble Lords have said, is small beer compared to what is required. It is no good having that money available if the banks do not lend it on to small and medium-sized enterprises, which seems to be the case. I understand that in some cases banks are refusing to extend overdraft limits when requests come through to pay the Revenue and Customs. In other cases, facilities are being reduced, but at higher rates, and, as other noble Lords have said, we are finding a difference between the two rates in the market. At present, only one bank has taken up the option of funding from the EIB. I should like to know what effect that has brought into the marketplace—if the Minister is listening. The noble Lord, Lord McIntosh, used to do this to me frequently when I sat over there.

The Horticultural Trades Association tells me that the industry employs around 285,000 people in 20,000 businesses. In other words, it is a highly fragmented industry, which underlines the fact that a form of central support or source of help is required. A number of noble Lords have talked about growth and the lack of it. My thoughts are that this sector will fast go downhill. There have been delays in projects, many cancellations of work from the construction industry, a potential drop in work from local authorities, which have been affected by the banking crisis in Iceland, and a general reduction in economic activity. News reaches me that even large firms in my sector are going out of business due to a lack of confidence, as a number of noble Lords have said, which leads on to the lack of liquidity.

We have found that the factor most affecting us is that debtors are taking much longer to settle their invoices and that the payment period is greatly lengthened. The banks are refusing to increase overdraft facilities and in some cases enforcing reductions in overdraft levels. This has led to an increase in short-term cash-flow problems affecting small companies, in some cases putting them out of business. My noble friends Lord Bates and Lady Noakes mentioned a way to help on this: a VAT and income tax holiday. As long as HMRC does not set punitive rates or fines for late settlement, but keeps repayment terms in line with overdraft facilities, that would be perfectly acceptable to small businesses. Giving companies more time and some help would have an immediate effect.

I am sure that I will be proved wrong and this is an arguable statement, but generally speaking companies fail through lack of cash flow as opposed to a lack of profitability. The Government have bailed out the banks; they must now come up with measures to safeguard British SMEs, which have become such an important part of our economy.