COMMONS

Improving access to finance for small and medium-sized enterprises

21 January 2014

The Public Accounts Committee publishes its 38th Report of this Session which, on the basis of evidence from the Department of Business, Innovation and Skills, HM Treasury, the British Chambers of Commerce, the Federation of Small Businesses and Barclays Bank, examined the financing problems faced by small and medium-sized enterprises (SMEs).

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

“Small and medium-sized enterprises have a vital role to play in driving the UK’s economic recovery, but despite Government attempts to encourage lending to SMEs many still struggle to access the finance they need.

At the time of our hearing overall lending to SMEs was down.

Net lending by banks participating in the Funding for Lending scheme has declined by £2.3 billion since the scheme was launched, and the number and value of loans backed by the Enterprise Finance Guarantee fell each year between 2010 and 2013. Departments manage their various schemes not as a coherent programme but simply as a series of ad hoc initiatives.

There is no common understanding about which parts of the SME sector are generating the most growth and where government support would do most good. Departments were therefore unable to demonstrate that they are achieving best value for taxpayers’ money.

BIS intends to give nearly £3 billion of financial support to SMEs between 2011-12 and 2014-15 through its six main schemes. It helped nearly 6,000 firms during the last financial year, but more could have been helped if the department had done more to ensure that SMEs are aware of the potential financing options available to them.

Credit cards and overdrafts, though mostly more costly, remain the most frequently used financing options for SMEs who need working capital quickly.

A new British Business Bank will open later this year with £1 billion of capital at its disposal. Government must use the establishment of the Bank to start managing departmental schemes as a coherent programme, clearly setting out what it wants to achieve, and how each scheme and the programme as a whole will contribute towards the overall objective of making it easier for SMEs to access the finance they need."

BIS manages six main schemes that are intended to provide around £2.85 billion of financial support for SMEs between 2011-12 and 2014-15. In 2012-13, these schemes helped just over 5,900 firms.  In addition, HM Treasury and the Bank of England jointly oversee the Funding for Lending scheme, under which banks and other lenders have been provided with £17.6 billion at cheaper than market rates, with the intention that they will lend this on to businesses and households. The new British Business Bank, which will start operating in 2014, has £1 billion of capital at its disposal in addition to the resources of the existing BIS-led schemes, and is designed to better identify and fill gaps in the market for financing SMEs.

The departments’ schemes are managed as a series of ad hoc initiatives that are launched to address particular weaknesses in the market, rather than to act as a coherent programme. The departments have developed the schemes over time, to address particular areas of the finance market where there are problems. These schemes include finance guarantees, loans, equity support and efforts to diversify financing options beyond the traditional channels of the high street banks. But neither department has a clear view of what success will look like for the programme as a whole. They have also found it difficult to meet the needs of many different types of SME operating across a variety of sectors, whose outlooks range from those seeking funding for high growth to others seeking finance to start up or to continue operating.

Recommendations

Recommendation: The departments should use the establishment of the British Business Bank to start managing the various schemes as a coherent programme, clearly setting out what it wants to achieve, and how each scheme and the programme as a whole will contribute towards the departments’ overall objectives for making it easier for SMEs to access finance.

The Government spends a considerable amount of taxpayer funded money promoting better access to finance for SMEs but the departments could not demonstrate that their schemes have successfully addressed the market failures they were designed to correct. Indeed far from encouraging more lending to SMEs, investment has declined.

The departments are trying to positively influence the markets for business finance and get them to work more effectively, as well as benefiting individual SMEs through targeted schemes. However, the departments could not provide compelling evidence of where schemes had made a significant impact on the financial markets’ willingness to support SMEs. 

Among the debt-based schemes, for example, the performance of both the Enterprise Finance Guarantee and the Funding for Lending schemes do not suggest that the banks are more prepared to lend to SMEs. Indeed overall lending is down. The number and value of loans backed by the Enterprise Finance Guarantee has fallen each year between 2010 and 2013 and net lending by the Finance for Lending scheme participants has reduced by £2.3 billion since the scheme was launched.

Similarly, the poor performance of the early equity support schemes—where government commitments of over £140 million have generated returns of just £38 million—leads us to question their contribution to the development of the wider market for venture capital for smaller businesses.

Recommendation: When the departments establish a scheme to address a particular market failure, they should set out clearly both what a successful impact on the market will look like and how they intend to evaluate its success.  

There is scope for the departments to better match the nature of their interventions with the specific needs of SMEs.  The markets are changing rapidly, and there is a range of different financing options available. However, most of the funding associated with the current schemes involves delivery via the banking system, reflecting the importance of the main banks to the UK market. 

BIS has begun to support the development of alternative financing options such as peer-to-peer lending, crowdfunding and supply chain finance, and is exploring how further government support can encourage new entrants into the market. It is important that the departments work to maintain business confidence in crowdfunding, which is becoming a vital funding route for many businesses. 

In researching how the British Business Bank might be set up, BIS has examined markets in other countries, and concluded that there was a particular need to address long-term growth finance in the SME sector.

Recommendation: The departments must ensure that the British Business Bank draws upon emerging evidence of SMEs’ changing financing needs, and tailors its interventions accordingly, implementing, refining or withdrawing schemes as circumstances change.

BIS has not done enough to ensure that SMEs have access to information on the potential range of financing options available to them. Credit cards and overdrafts, though mostly more costly, remain the most frequently used financing option for many SMEs who need working capital quickly. BIS has developed a number of web-based tools intended to improve awareness among SMEs of the funding options available. 

But the owners of small businesses very often lack the time to seek out such advice, and do not necessarily think of government as a source of such information. BIS acknowledges that it needs to improve its communications, both with SMEs to raise awareness of the support available to them, and also with intermediaries who can raise the profile of the products and advice on offer.

The lack of awareness may have been exacerbated by recent changes in retail banking practice which have scaled back the skills and capability of local banking staff, who are often unable to make bespoke decisions or signpost companies to other sources of finance.

Recommendation: The departments must establish a clear strategy to ensure that SMEs are made aware of appropriate funding options for their needs, both through government information and through advice from lenders and others. The departments should use their influence with the mainstream banking sector and across Whitehall to ensure high street banks understand the needs of their local businesses in order to encourage lending.

For some of the schemes, the amount of funding reaching UK SMEs is either unknown by the departments or appears lower than we would have expected. At the launch of the Funding for Lending scheme, the Bank of England stated that its main objective was to encourage net lending to be higher than it would have been without the scheme.

An extension to the scheme in April 2013 provided incentives for the banks to increase lending to SMEs, but HM Treasury does not currently have any information on the number or value of loans to SMEs under the scheme. The UK Innovation Investment Fund has received £150 million of taxpayers’ money but UK companies account for only 40% of the total number of the Fund’s investments. BIS could not tell us the total cost of management fees paid to administer this Fund. We heard from BIS that it was often easier for lenders to make larger investments than smaller ones. Moreover, we did not hear what BIS is doing to encourage smaller investments by lenders and funders.

Recommendation: The departments must gather and publish data about how much financial support is reaching SMEs, and how much is diverted to other recipients or used to run the schemes.

Further information

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