Chuka Umunna MP & Shadow Business Secretary provided the keynote for the MarketInvoice “Alternatives to Traditional Business Funding” event held at Cass Business School on the 24th of November. Details of the event can be found here.
Thank you for inviting me to come and speak to you this afternoon
This topic could not be of more importance to our economy.
Politicians speaking to innovative small businesses wax lyrical about how SMEs are the lifeblood of our economy – I make absolutely no apologies for following in that vein because they are. Period.
Together, our four and a half million SMEs employ almost 14 million people, accounting for almost half of private sector turnover.
But, for MarketInvoice, it would perhaps be fairer to say that you are the lifeblood of the lifeblood of our economy.
In an environment where many excellent, profitable small and medium sized businesses are struggling to access the working capital they need, you are turning promises of cash into cash – straw into gold – and I salute you for that.
We know that late payment of invoices is a huge problem for many businesses, particularly small and medium sized enterprises – that is why Labour initiated and I led a debate on the issue in the House of Commons in September. It is why Labour’s policy, announced by Ed Miliband earlier this year, would require government suppliers to pass prompt payment terms down the supply chain.
According to the most recent figures from BACS, half of all the UK’s small and medium sized enterprises are awaiting late payments. On average, each firm is owed £39,000 in late payments, with the total amount owed to SMEs having reached a staggering record figure of £33.6bn.
While the government stands by and fails to get a grip on this issue, it is encouraging that in MarketInvoice, we see the market is coming up with a solution to help small business owners deal with this growing problem.
It is a brilliant, simple idea; done simply and brilliantly. The brain child of two up and coming entrepreneurs, Anil and Charles.
You saw a problem that needed to be solved. You had an idea for a new solution.
You took a risk. You made it happen.
Our economy and society needs more people like you.
More people starting businesses, building businesses, and – hopefully – succeeding in business.
I’m sure that there will be many challenges on the road ahead. But you have made a great start in inauspicious times.
Short term challenges
This stands in contrast to the failures of the mainstream banks to help the situation.
This stands in contrast to the failure of the government to help the situation.
Why do I say this?
The Bank of England’s Trends in Lending publication for last month showed the stock of lending to UK businesses overall contracting in the last three months to August.
The Bank’s latest Agents’ summary for this month states that small businesses are still reporting that credit conditions remain tight, and in some cases have become tighter. This is supported by the figures released yesterday by the BBA showing lending by the high street banking groups to non-financial businesses contracting this month.
Now, the banks say that their failure to lend to small businesses is a failure of demand, not of supply. MarketInvoice’s success suggests otherwise.
And, acccording to the SME Finance Monitor – the most comprehensive survey of business’ on these issues – over half of SMEs applying for overdrafts this year for the first time have been refused.
In addition, more than 400,000 SMEs who wanted to apply for an overdraft in the third quarter of this year didn’t do so – a third of them said this was because they were discouraged by their bank.
So it is, in part, a failure of supply.
Project Merlin – the agreement between the banks and the government to resolve some of these issues – was supposed to sort all this. I don’t want to dwell on it – Merlin was a PR exercise designed to get the government out of a tricky situation when the bank bonus declarations were in full flow and the numbers published under the agreement are misleading.
But the economic outlook plays a huge part too.
These are difficult times for business – new and old, large and small, growing or just trying to keep going.
I’d rather talk ideas and solutions than politics, but politics is about business, it is about society in general otherwise it is about nothing – political decisions impact on society and business so it would be remiss of me not to say something about the politics at this point.
When we said that the Conservative-led Government was cutting too far and too fast, it wasn’t because we didn’t want the deficit cut. We do. But, as Ed Miliband argued in a speech he gave earlier today, the strategy has to be effective.
Debt becomes harder to pay down when your economy stops growing.
Every business knows this – which is why you hang on to your sales team as long as possible in difficult times. Sacking those who can increase your revenues is self defeating.
George Osborne inherited an economy that was growing. Unemployment was falling. Borrowing was below expectations – £20bn lower in our last year of government than forecast.
In anticipation of what was to follow after the announcement of the Comprehensive Spending Review last year, confidence nose dived, people stopped spending, orders started to dry up. The result: 0.5% growth in the last 12 months and unemployment soaring above 2.6million, with youth unemployment now above a million.
Consequently the government will be borrowing at least £46bn more over the course of this Parliament than they planned. In fact, the average of independent forecasts published by the Treasury itself last week projects the government to be borrowing more in every remaining year of this parliament than we would have been.
It is therefore no surprise that according to the SME Finance Monitor the main barrier to future borrowing by SMEs is the economic climate with 43% of ‘would-be seekers’ saying the effect of the economic climate will hold them back from seeking the finance to expand and grow going forward.
It was never a question of intent – all parties are committed to cutting the deficit.
It was, and remains, a question of judgement and approach and the government has got it wrong in our view.
What about the Eurozone? The crisis in the Eurozone is only making things more difficult, but the truth is that our economy was faltering long before the crisis became such an issue, with stagnant growth for over 12 months.
We have argued for a different approach, to get that lifeblood back pumping through the economy again, to give business the confidence to invest.
The likely negative impact of the Eurozone crisis has yet to fully feed through – it strengthens not weakens the argument to change course to ensure we have solid foundations upon which to withstand the storm if and when it comes.
We have put forward our five point plan to get demand and growth back into our economy – including tax breaks for small businesses taking on extra workers, a temporary VAT cut, and a tax on bank bonuses to fund 100,000 jobs for young people. These measures enjoy wide support amongst business – they should be adopted without delay.
Long term challenges
Business is crucial to growth and Labour is proud of our record on business.
At the end of our time in government there were 1.1 million more businesses than at the start.
On leaving office, the World Bank ranked the UK fourth in the world, ahead of the US and first amongst European countries, for ‘ease of doing business’. The latest figures out this month have seen the UK drop to 7th.
We firmly remain a party of enterprise. But there remains a lot more to do – that is always the case in a fast changing world. Even if growth returns there will remain structural issues with the UK economy that will need to be addressed.
We need a more balanced, more resilient economy: greener and more inclusive. Growth must be more balanced across regions and sectors, with the focus on creating long-term value. An economy that is fair at home, offering good jobs and opportunities, while being competitive abroad: with businesses able to take full advantage of new opportunities from technology and the growth of global markets.
And to achieve this, access to finance is, of course, one of those structural issues that we must address not just in the short term, but for the long term too.
Recently I made a speech at Bloomberg where I called for a new partnership between productive business and active government.
Looked at from the perspective of the business, I asked what – if anything – government can do – in the way it structures the rules of the game, in the support it offers, in the way it procures goods and services – to help business succeed by building value for the long term.
Not just getting some parts right, but by creating a stable, supportive environment in which productive business can thrive.
My friend Lord Peter Mandelson has written a very good piece in the Times on this – as he says Ministers and Markets can and should mix.
And that was the message of Ed Miliband’s speech at the Social Market Foundation last week too.
Now some people will tell you that the best thing a government can do for business is to get out of the way.
And sometimes government does get in the way.
Just as smart regulation is imperative to markets that function properly, fairly and safely in the interests of all, clumsy regulation or enforcement can undermine business.
But government getting out of the way is not what businesses are asking me for today.
They are saying how government should be active, working with business to develop the vision for the future new economy we need, giving them the confidence to plan and the certainty to invest.
They are saying that government should be active working with business to develop the skilled workforce they need; in putting in place the infrastructure business needs; and in improving access to finance.
That government should be active supporting sector strategies like our competitor countries are doing; supporting export growth, particularly for the mid-sized companies, as the CBI has recently outlined, where government support can be critical. And working with larger companies to develop supply chains.
They are not asking for a government that stands back, but for a government that will back their success. A government that shares their ambition for their business.
The bottom line is that businesses have huge potential to succeed but we all know it is much easier to do so in a supportive environment:
• Where markets are healthy, allowing small insurgents with good ideas a fair chance to challenge incumbents who dominate a market;
• Where there is good local and sectoral support available, and business incubators;
• Where the IP regime – as well as government procurement – encourages innovation;
• Where the right skills are there to draw on;
• Where the tax regime doesn’t distort behaviour; and
• Where the finance is there to support and grow your business.
So what would an active government be doing to help the flow of finance to our SMEs?
The government needs to use its influence, in particular with those banks in which the state has stake, to insist the banks not only get the money out of the door to the responsible businesses with sound business models who are struggling to access finance, but also get them to adopt a better lending culture, for example by ensuring they have local relationship managers on the ground who get to know the businesses concerned.
Not so long ago I visited a family run private nursery employing over 50 people in my constituency; a few weeks after I also spoke to a young entrepreneur running a digital media outfit in Leeds.
Both successful established businesses run by people who work hard, play by the rules and are passionate about the service they provide and the communities they provide them in.
Both bank with one of the major retail banks and were told in the last 18 months – out of the blue – that their lending terms and conditions would be changed despite the health of their businesses, creating great uncertainty and stress.
We cannot go on like this.
We wait with anticipation for the credit easing announcement, due in next week’s Autumn statement, to see what the government is going to do about all this.
What are our ideas? Here are a few things for you to think about.
We are exploring a number of ways in which we can crack the finance conundrum – I will outline just 2 of them; there are of course others.
In his speech to the Labour Party conference Ed Balls announced that we are considering whether to set up a national investment bank for SMEs to help get credit to businesses. This is an idea that has been floated by the MPC’s Adam Posen and others.
However, we do not think a focus solely on debt finance is the whole solution; we should look at all options together including equity financing.
So at the beginning of this month I travelled to Washington with the leading private equity investor Nigel Doughty, the Chair of our Small Business Taskforce, and others to meet with senior members of President Obama’s administration at the White House and at the Small Business Administration – the purpose of the trip was to learn about the successful things they are doing in the U.S to get finance to their businesses and how we might transpose those ideas over here.
In particular, we spent a considerable amount of time examining their Small Business Investment Company programme.
The SBIC was created by President Eisenhower in 1958 to fill the gap between the availability of venture capital and the needs of small businesses in start-up and growth situations. AOL, Fedex and Apple are examples of firms that benefitted from the scheme in their early years.
Small Business Investment Companies are privately owned and managed investment funds, licensed and regulated by SBA – they use their own capital plus funds borrowed with an SBA guarantee to make investments in qualifying small businesses.
The SBA guarantee enables these funds to leverage in investment from the market – the important thing is that the SBA does not invest itself but helps assist qualified investment management firms with expertise in certain sectors or industries to raise finance which they then decide how to invest – so it is market driven.
The beauty of the programme is that is revenue neutral – the extent to which the government is required to pay out under the guarantees given where a fund defaults is covered by the fees charged by the government. Just last year $2.05 billion was invested in 1,300 small businesses through the programme.
We are exploring how, in government, we could institute such a programme here in a revenue neutral way, always mindful of the need for fiscal responsibility.
There is also government procurement – I outlined a little earlier this month a new approach to government procurement and how we can use the £240bn of buying power of the state to help SMEs. Procurement can:
• Encourage innovation, by expanding the value of contracts going to high-growth potential, innovative companies under the Small Business Research Initiative created by the last Labour Government; it is based on a much larger but similar programme in the US that gives contracts to innovative SMEs, reducing the need to seek other sources of funding.
• Encourage workplace training by awarding procurement contracts worth over £1m to companies that offer apprenticeships; and
• Develop sectors strategically, by giving clear market signals about future needs, allowing firms to plan and invest in the capabilities and capacity needed to win future contracts.
These are some of the things we are looking at – by no means an exhaustive list – to give you an idea of our direction of travel. I am keen to hear your ideas in the Q&A.
Let me finish by making this point: there is no doubt that we face big challenges as a nation – in the short term and over the long term.
Some say that in this era of globalisation and increased global competition, the UK’s decline is inevitable.
But we know it doesn’t have to be this way – we can and should aspire to more given our history as a country and a people.
You, the entrepreneurs, the innovators are key to this.
You are the people who see possibility where others cannot, who see opportunities where others only see obstacles, who take risks when others urge caution.
You need a government that shares your ambition about what is possible, that will believe in you, and that will back your ideas.
We never got on by thinking small and being defeatist. As we look to the future, we should do so with confidence in our ability to succeed.