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Backing small businesses means stepping up to ‘create the conditions for discovery’

Jim McConalogue, 29 May 2020

There will be a big ‘small business question’ for government when the coronavirus crisis ebbs. Ambiguous criteria and operational problems in accessing loans saw many businesses turned down for the Coronavirus Business Interruption Loan Scheme. Then, it was found that almost 110,000 small businesses applied for the emergency Bounce Back loan scheme in the first hours after it launched in May, illustrating the intense stress felt by many British wealth-creating SMEs. The Government has now moved to amend insolvency law.

The later Bounce Back scheme had itself been specifically designed to help small and medium-sized businesses to borrow up to a maximum amount of £50,000. More than a third of applications at HSBC, had not been approved. That picture has not improved with the alleged cases of government rejecting the offers of British SMEs, for example, to produce personal protective equipment (PPE) while pursuing offers from Chinese suppliers to supply many thousands of surgical gowns.

So, post-pandemic reviews into schemes supporting UK-based small and medium-sized enterprises (SMEs) and the coordinating role of the British Business Bank seem inevitable. One essential part of this reflection will revolve around asking how we ensure sound policy for small business. Government must move to provide smaller businesses with ‘a leg up’ to ensure international competitiveness.

In a publication at Civitas, ‘Britain’s Export Boom: and how to encourage it’, Marcus Gibson, Head of Gibson Index, looks at the strong evidence which sat behind the growing strength of the post-Brexit economy. Certainly, this is currently subject to the immense disruptions in trade during the coronavirus crisis but his focus is on the extraordinary rise in the UK’s export volumes – much of which has been pioneered by the UK’s “unequalled collection of SMEs.”

His business insights lead to a number of key and realistic low-cost programmes the government could implement, including a programme to promote an increase in UK exports by recruiting an ‘Export Elite’ of SMEs that already export to around five markets – and expand them into 50 export markets.

For those looking to answer the twin recovery problems of disproportionate youth impact and SME wealth-creation, it is of interest that Gibson looks to the creation of a new Knowledge Commercial Partnership, to sit alongside the highly successful Knowledge Technology Partnership (KTP) scheme, in which graduates could be parachuted into an SME to undertake an important project that requires technical skills.

His book further recommends to the government a scheme in which students who start spinout companies at universities, FE colleges and University Technical Colleges should be allowed to offset against a student loan with the company shares they own if they gain significant value. After all, it is a significant incentive to provide an early exit from a student loan for any entrepreneurially-minded students in starting up a viable business.

In a separate Civitas report released this week, ‘Economic recovery after the lockdown’, director of Civitas David Green, identifies how the coronavirus crisis has highlighted some structural weaknesses in our broader economic approach. He offers twelve key policy recommendations for reform. For example, Green looks to the significance of local relationship banks – through the model of German local savings banks (Sparkassen) whose market share of business start-up loans is some 56% – and how they could be utilised to put economic power into the hands of people in localities.

We now have the hindsight of how the current Coronavirus Business Interruption Loan Scheme has been managed by the British Business Bank. Green finds the Bank’s role (operating since 2014) has been limited. It would be more effective if it were permitted to invest directly in promising enterprises. That does not mean ‘selective assistance’ or ‘picking winners’. For Green, it means, the requirement for government to create the conditions for discovery. At the centre of David Green’s Civitas report has been to ensure the primary task of government is “to create the fertile soil in which unanticipated discoveries can grow.” That argument remains central because when we debate the Bank of England’s indications of a V-shaped UK economic recovery or a more protracted U-, W- or other shaped recovery, the more positive forecasts will depend on providing the essential conditions for companies to grow.

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