Small and Micro-Business Borrowing — Question for Short Debate

Part of the debate – in the House of Lords at 5:18 pm on 24th May 2012.

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Photo of Lord de Mauley Lord de Mauley Lord in Waiting (HM Household) (Whip) 5:18 pm, 24th May 2012

My Lords, I thank my noble friend Lady Kramer for initiating this debate, and all noble Lords who have participated. This is a vital issue and has been for a long time; it is not a recent phenomenon, although it is even more acute in the current environment.

The Government are committed to rebalancing the economy, encouraging private sector investment and creating the conditions for confidence to return, small companies to thrive and growth to revive. Ensuring that small businesses and micro-businesses can access the finance most appropriate for them is a core priority. While we want to ensure that there are alternatives to high-street banks for businesses, the majority will remain reliant on banks. It is vital that SMEs are able to access bank finance. I will explain what we are doing in that area before dealing with alternatives.

First, the Government provide guarantees to viable SMEs lacking sufficient collateral to secure commercial finance. The enterprise finance guarantee scheme plays an important role in facilitating credit to viable small businesses and micro-businesses. Over 12,800 businesses with a turnover of under £1 million have been offered EFG loans. That equates to 70% of all the loan offers under the scheme. The enterprise finance guarantee is delivered by lenders directly. They include banks, and alternative finance providers such as community development finance institutions.

Secondly, in the Budget the Government launched the national loan guarantee scheme, which reduces the cost of bank lending to smaller businesses by up to 1%. This is achieved by the Government providing guarantees on unsecured borrowing by participating banks to enable them to borrow at a cheaper rate, and therefore to pass on the entire benefit they receive to small businesses through cheaper loans. The Government will provide up to £20 billion of such guarantees. Thousands of businesses have already benefited from LGS loans and the scheme is proving popular. Ulster Bank formally launched the scheme in Northern Ireland last Monday.

Thirdly, to improve relationships between banks and small businesses, we are working with the BBA on the delivery of a range of bank commitments. As a result-and this is very significant-the banks have put in place: first, an independent appeals process to deal with situations where businesses have been declined loans; secondly, an online mentoring portal for SMEs to find sources of advice; and, thirdly, a lending code that makes it clear what standards businesses should expect from their banks.

It is also important that we do what we can to encourage the development of diverse sources of finance for SMEs beyond just the banks, which is the gist of my noble friend's Question. Increased competition not only between banks but between forms of finance will improve outcomes for businesses. The Business Secretary recently commissioned a report, which has been referred to in this debate, from Tim Breedon that explored alternative finance options such as supply chain finance, mezzanine finance, peer-to-peer lending, retail bonds and so on. All these should be fostered and encouraged, to create a more resilient business finance environment. The Government have a role to play but so do financial institutions and, crucially, businesses themselves.

To diversify the sources of finance available to smaller businesses further, BIS has received £100 million from the business finance partnership. This funding will focus on alternative lending channels which aim to lend specifically to smaller businesses. The key aims of this scheme are to stimulate the development of non-bank lending channels and to increase the supply of capital to smaller businesses. In support of these objectives, we are considering investing business finance partnership money through peer-to-peer lending platforms, mezzanine loans and supply chain finance products.

For businesses seeking other forms of debt finance, community development finance institutions offer an alternative to the banks. They provide microfinance and small loans to enterprises that banks consider too costly or too risky to serve. Such businesses can nevertheless be viable and tend to have a positive impact on their local community. The Government support the CDFI sector in a number of ways. A key aspect of this community investment is tax relief. This encourages investment in CDFIs by providing a tax relief worth up to 25% of the value of the investment over five years. The funds so invested are then on-lent by the CDFIs to small businesses and social enterprises. We are currently looking at ways to simplify the rules to encourage more usage and make it more effective. This is because public investment of this type has been shown to be an effective method of generating and protecting economic output. Our evaluation has demonstrated that every £1 of tax incentives generates an additional £1.89 of net gross value added. We also support CDFIs through the regional growth fund by contributing £30 million to the sector to facilitate £77 million of lending through small loans-around 4,500 loans-to small and micro-businesses.

In addition, we are about to launch a pilot scheme at the end of this month to help young entrepreneurs set up their business and access finance when doing so. Aimed at 18 to 24 year-olds, the start-up loans scheme will provide microfinance and mentoring support to enable young people to start and grow a business.

I have focused so far on debt finance. The Government are also committed to supporting equity funding. We have committed £200 million over four years to the enterprise capital funds programme, bringing our investment to more than £300 million for SMEs with the highest growth potential. We are also working to stimulate business angel investment through the establishment of a £50 million business angel co-investment fund. This partly addresses my noble friend Lord Popat's point. Through this, we co-invest with business angels in high-growth-potential early-stage SMEs, particularly in areas most affected by public spending cuts. My colleague Mark Prisk announced the first deals under this scheme earlier this month.

However, we are not limiting our support to finance itself. To help businesses navigate the various support programmes, we have launched the "Business in You" website to help businesses access support and mentoring and determine which financial support package suits them best. The growth accelerator programme will also provide intensive management and training support to high-growth-potential SMEs.

Noble Lords asked a number of questions. I will address as many of them as I can. My noble friend Lady Kramer compared the German, US and Swiss local banks and their emphasis on localness favourably against our branch networks; my noble friend Lord Smith made a similar point. We recognise the value of the bank branch network and relationship banking for SMEs, where the manager knows the area and understands the business. Indeed, these values are still present in the UK banking sector. In particular, some of our smaller banks have chosen to adopt more traditional banking models, with an emphasis on good customer service, personal relationships with customers and local focus to operations. The larger banks, too, recognise the importance of having managers with a clear understanding of businesses and the local area.

However, my noble friend makes an important point, and the Government remain committed to ensuring that viable businesses can access the finance that they need at an affordable rate. My noble friend suggested that RBS's network should be used as the basis of a regional banking network. The Government's shareholding in the Royal Bank of Scotland is managed on a commercial and arm's-length basis by UKFI, whose overarching objective is to protect and create value for the taxpayer as shareholder, with due regard to financial stability and acting in a way that promotes competition. Splitting it up into a regional banking network might be a considerable undertaking and would take a fair while. It is uncertain whether it would improve lending conditions for small and micro-businesses. However, UKFI continues to work closely with the bank's management to assure itself of the bank's approach to strategy and to hold it rigorously to account for performance.

My noble friend suggested that credit unions and CDFIs are too fragmented and small. That chimes with something that the noble Lord, Lord Myners, said; he was basically sceptical of alternative forms of finance in general. The Government recognise the important role that CDFIs play, but are aware that the sector needs to operate on a greater scale to widen their coverage across the United Kingdom. The Government's regional growth fund award of £30 million will help to address this issue, as it will facilitate £77 million of lending. It will also allow the Community Development Finance Association, which developed the fund, to build its capacity and capability to act as a wholesaler to the sector. This will allow it to look to private sector funders and European institutions. This, combined with the community investment tax relief and enterprise finance guarantee scheme, will enhance the sector's capacity to grow.

My noble friend was critical of the barriers to entry to the banking industry; a number of noble Lords referred to that. All prospective new banks must apply for and receive a banking licence from the FSA. This is an essential step to ensure that all banks in the UK operate to the required standard and that consumers are protected. It is right that standards are robust. The FSA has, however, recently implemented a number of improvements to the banking licence process which will make it easier for potential new entrants to navigate. These include holding pre-application meetings with the applicants and the introduction of a modular approach to assessing deposit-taking applications.

My noble friend suggests a less onerous licence for small, local banks with a community obligation. We are clear that prudential standards for capital and liquidity should not act to dampen the effective competition and that new banks should not be treated disproportionately subject to the level of risk. That is why we have supported the Independent Commission on Banking's recommendation that the OFT should work closely with the Prudential Regulation Authority to review the application of prudential standards, to ensure that they do not pose excessive barriers to entry and expansion from new entrants.

My noble friend was concerned that the new online lenders should be regulated under the Consumer Credit Act and by the OFT, and about the feeling that the responsible players are bracketed with the cowboys. The Government have noted the online peer-to-peer lenders' concerns and are keeping the case for further regulation under review. Any decision to regulate would need to balance the needs of borrowers and lenders and the possible impact on new market entrants.

I am afraid that I am running out of time, so I will write to noble Lords whose questions I am unable to address. My noble friend Lord Popat had several. He was concerned about low participation in government lending schemes and the poor publicising of schemes available. We recognise the lack of awareness of government schemes and, following the Breedon review earlier this year, we have already committed to consider how best to improve awareness of such schemes. We are working to raise understanding of the support available to SMEs, including through a new online finance finder tool at www.businesslink.gov.uk.

The noble Lord, Lord Myners, referred to the Vickers report. I enjoyed his thought-provoking speech. Let me just answer his point. The Government welcome the work of Vickers and further analysis is ongoing to confirm the detail. As the noble Lord said, a White Paper and formal consultation will be launched next month.

The noble Lord, Lord Berkeley, raised a very important point. May I say, rather rudely, that most of it was slightly outside the scope of this debate? However, I can see exactly where he is coming from. He addresses the finance that is available to suppliers-for example, to National Grid. The Government acknowledge that this is an important issue. Many SMEs report that working capital and late payment are obstacles as great as access to external finance. Mark Prisk has convened a working group with business representative bodies to explore how to tackle this issue, which also relies on SMEs agreeing payment terms in advance.

Several noble Lords referred to Project Merlin, through which the banks have lent £215 billion to businesses in the United Kingdom, including £75 billion to SMEs against a target of £76 billion. I acknowledge that they have not hit the target by £1 billion in £76 billion, but this none the less represents a 13% increase in gross lending on 2010 and Project Merlin has clearly focused the minds of senior bank officials on SME lending.

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