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UK/ Microenterprises left in the cold

First out in ResPublica’s Budget week, BEN HUGHES from the CDFA evaluates recent government measures that provide discounts on loans but disregard microbusinesses. 

Businesses of less than ten people are left out in the cold Businesses of less than ten people are left out in the cold

The National Loan Guarantee Scheme NLGS and other recent government initiatives for SMEs disregard the micro-enterprises which make up 95% of the UK's businesses. Announced today, the NLGS will enable participating banks to provide a 1% discount in new loans to businesses with annual turnovers of up to £50m.  Although this may attract some of the 60% of small firms that think credit is unaffordable, the majority of the UK's businesses are unlikely to benefit.

Microenterprises - firms with fewer than ten employees - make up 95% of businesses in Britain, and banks struggle to serve them. NLGS is unlikely to have any effect on the way banks assess risk and make lending decisions, and will not help the smaller firms that have trouble getting credit in the first place.

NLGS flies in the face of the recent report by the BIS taskforce on non-bank lending, recommending that larger SMEs should be accessing institutional investment and equity and become less reliant on bank debt.  The taskforce believes that freeing banks from serving the largest SMEs will open up their balance sheets, allowing them to serve the smaller SMEs.

However, this is not the case.  Banks cannot and will not lend to most start-ups, sole traders and the smallest firms, and the Breedon taskforce does not directly address the needs of microenterprises.

Other recent schemes are little different in scope; The Business Finance Partnership will see the government invest directly only in funds that lend to mid-sized businesses, providing them with a new source of investment outside the traditional banks. Other programmes, such as Enterprise Finance Guarantee, have not helped lending to microenterprises, pointing to the need for a bespoke guarantee scheme for this market.

Microenterprises have always had difficulty securing credit from mainstream banks. Many lack suitable collateral, a track record or credit history and carry a higher level of risk. A recent report by BIS, SME Access to External Finance, recognised these market failures.  Despite this, government initiatives continue to fail to redress these problems.