The Prime Minister has repeatedly called for the banks to start lending to business again. Robert Spencer FRSA, argues for a new approach and new banks to help this happen.
In January, the Prime Minister said "I have just come from a meeting with small businessmen and when I asked who had difficulties with their bank many put up their hands". The reality is that the clearing banks have left the small business lending field and are not going to come back. But this is not the fault of small business: over the last ten years banks have been deskilled. The kind of bank manager who built relationships with their business clients, and had discretion to make loans based on their judgement, have long gone. Instead decisions on lending rely on computer formulations and faceless credit committees who never meet the potential borrower.
Banks have also become more risk averse and even though this present crisis was not brought about by business, business is paying the price for the mistakes of others. In response to this state of affairs, we can either wring our hands in utter frustration as we see the recovery fail to gain traction because finance - the lifeblood of recovery - is rationed. Or we can do something about it.
The time has come to look at things again. Every big business was once small, but our small firms are being starved of the finance that they desperately need. How many Dysons have withered and died from lack of cash? How many business owners have just given up as bank after bank has turned them down. Britain is one of the most inventive nations: but we seem to be lousy at exploitation, possibly because businesses do not get the financial backing they need, early on.
Many years ago there was an organisation that specialised in providing finance for the smaller business. It was called 3i and it worked. But it too left the field when it decided to float itself on the stock exchange and go seeking bigger and bigger projects to give bigger and better returns to its shareholders.
The time is right for a new approach. One that needs to be taken seriously by government and all those interesting in boosting small business, reducing unemployment and speeding up the UK’s recovery: I would suggest that there should be set up Regional Enterprise Banks (REBs).
In appropriate locations in England, these would be charged with supporting ambitious businesses to grow. They would not only to lend money, but also offer support and strategic advice to assist in their clients success. Regional Enterprise Banks would match businesses with mentors, introducing them to business angels to provide capital and - as they make progress - be prepared to finance them over and over again. They could also liase with government agencies like Trade Partners UK and provide much needed export finance. Meanwhile the REB’s bank managers would be incentivised to help their clients grow successfully and not to avoid risk at all costs. Giving the banks a stake in their clients’ success would increase interest in ensuring this is achieved.
Regional Enterprise Banks would be run on a not for profit basis with no shareholders demanding returns: underpinning them would be the aim of ploughing any surplus back into the Bank. This does not mean staff cannot be rewarded for financial success, within reason, but most importantly they need to be incentivised for sticking to their raison d’être: taking a small business with a good idea and helping it grow.
So how will these new banks be financed? Well one way could be through the issue of Enterprise Bonds. These could be issued by government with the proceeds lent to the Regional Enterprise Bank. Alternatively bonds could be issued by the Regional Enterprise Banks themselves and guaranteed by government. A reasonable return could be paid on the bonds (say 3 or 4 per cent) with interest payments being guaranteed by government. Ideally the interest accrued (or part of it) would be tax free.
The public knows that economic growth is the only thing that will get us out of the hole we are in. The country knows the big banks are not lending. I believe there is enough goodwill, and intelligence for the details of such a proposal to be hammered out. Obviously persuading government will be important but much could be done to test support and refine the model now.
And there is some evidence that such an approach could work. I have been Chairman of SEEDA’s Finance Company- Finance South East for the last seven years and we have consistently gone where them banks fear to tread. Our Accelerator fund that lends largely unsecured loans has had great success with its losses: less than a third of the losses suffered by the Clearing Banks under the Small Firms Loan Guarantee Scheme. We have practiced and proved that the concept of joined up funding and mentoring all help to accelerate and consolidate a company’s growth. If a company is given a research and development grant, then we alert our investment teams and if the inventor of an idea has a good business plan, a strong team and good prospects then Finance South East will fund that company through its growth either alone or with partners until the company is strong enough to stand on its own feet. If the management team is not strong enough we might even find a suitable mentor to plug the gap. We have had three main floatations and numerous trade sales of Companies we have backed.
This is not rocket science. It is common sense. The Clearing Banks are not equipped to deliver what the small growing business needs so let us accept that and go a different way. Taking this forward requires serious, flexible and creative thinking: it may be that the clearing banks could be encouraged to invest in enterprise bonds or lend directly to the regional enterprise banks, possibly using the Enterprise Guarantee Scheme. Whatever the details, if we want a recovery that is properly financed, we need to recognise that money is not all that is needed that that the clearing banks are not set up to do what is needed.
The RSA has a long and proud history not just in enterprise but in bringing people together to forge new solutions to contemporary challenges. I would be delighted to hear from Fellows and others about whether they think this kind of approach would work and how we might develop it.
Robert Spencer is Chairman of Finance South East and was head of the Investment scrutiny committee of Biotechnology Investments PLC. He invented the concept of Regional Venture capital funds in 1986, backed by the RSA and CBI.