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Matthew Hancock, Minister for Skills and Enterprise, Department for Business, Innovation & Skills

As a Government, we are working to make life easier for small businesses. We are simplifying regulation, and, where we can, cutting taxes. But I need your help.

As accountants and finance professionals, you have a hugely important role to play in supporting small business. As trusted advisers, I’m asking you to help communicate the changes we’ve made, and the support available to small businesses, to encourage firms that start-up in the UK to scale-up in UK.

December saw small businesses in the spotlight as the UK celebrated its first Small Business Saturday and government published Small Business: GREAT Ambition – our commitment to make it easier for small businesses to grow.

We are also working hard to simplify employment processes and reduce red tape. These are the issues that small companies regard as obstacles to their growth ambitions and we are doing all we can to address them, including introducing a £2,000 relief on National Insurance bills from April 2014 and making it easier for businesses to calculate their income tax and expenses. But simplifying a regulation reduces a burden only when a business knows the requirements on them have been reduced. That’s where you come in.

The Small Business Saturday campaign did a great job in encouraging the UK to support small businesses. Nearly half of all consumers in the UK were aware of the campaign, and of those over half (57 per cent) shopped at independently owned businesses. It’s vital that we don’t lose this momentum.

We’ve listened to small businesses to better understand their growth ambitions, with most telling us they aim to increase in size. Small firms have told us they need help at critical points and new measures announced in Small Business: GREAT Ambition is making it easier for them to grow.

The new offerings include; broadband vouchers to help small firms access faster and better broadband connectivity, a fairer deal on energy for small businesses, access to £230 billion of public sector contracts and new measures to tackle late payment.

The British Business Bank also received an extra £250 million to support alternative lenders and challenger banks in releasing capital to growing small businesses. This is in addition to the £1 billion already allocated.

Small Business: GREAT Ambition is part of the wider Business is GREAT campaign, which points small businesses to sources of advice and support that can help them grow, and celebrates those that have grown with the help of government support.

There is a new entrepreneurial spirit sweeping across local communities which will help our ambition to make the UK the best place in the world to start and grow a business.

Small businesses are essential to the overall health of the economy and we want them to start benefitting from these changes now. By working together we can ensure small firms understand the support on offer, and have access to the most up to date information, so they can get on with the crucial task: to grow and create prosperity and jobs.

The Department for Business, Innovation & Skills would welcome your thoughts and any further ideas you may have to help small businesses make the most of government support available. Please contact


Manos Schizas, Senior SME Policy Adviser, ACCA

Will the NLGS encourage any lenders that were previously put off by the high cost of capital?

Probably not in the short term, unless the UK banks come to be seen as undercapitalised – in which case, however, the beneficial impact of the guarantee will probably be drowned out by deleveraging.

According to the Bank of England (BoE), changes to the cost of capital have had very little impact on bank lending over the last year, and there appears to be no correlation between those and either the volume or cost of lending to SMEs during this period. That said, the banks have benefited from reasonably good liquidity conditions; during the financial crisis of 2008-9 the correlation between the cost of funds and lending to SMEs was much more significant.

However, if the guarantee is maintained in the long term there is a good case that it will help SMEs. As ACCA has repeatedly warned (see here, here and here), due to their miscalculation of the systemic risk posed by lending to SMEs, the new capital and liquidity requirements under Basel III / CRD IV would put pressure on banks’ current business models, leading to a further marginalisation of small business lending in the long run. A permanent, large-scale guarantee scheme (very common elsewhere in Europe) could help address this problem.

Figure 1: The impact of banks’ access to funding on lending to the real economy


Q. Will the NLGS encourage any would-be borrowers that were previously put off by the high cost of credit?

Possibly, although the cost of credit is not the most important disincentive for discouraged borrowers.

More specifically, the independent SME Finance Monitor, the definitive account of SMEs’ access to finance, offers us an estimate of the share of SMEs that would have liked to apply for a loan but have been put off partly by the cost of borrowing.

We know that 12% of SMEs did not apply for loans or overdrafts over the past year but would have liked to. We will assume that one third of those would have applied for loans, based on the share of applicants for loans or overdrafts in the past year who sought loans. This ratio has remained remarkably constant.

Of this 4%, 22% claimed to have been put off by the price of credit among other factors. This distinction is important as we don’t really know how influential different discouraging factors are; only how common.

Anyway, at this rate a maximum of 0.88% of businesses – around 40,000 – could potentially be encouraged to apply for loans by the promise of cheaper loans each year. Assuming success rates remain constant, 63% of these should end up with a loan – that’s 25,000 businesses. In fairness, since discouraged borrowers tend to be higher-risk, the approval rate for these might be lower. For SMEs with worse than average risk rating, approval rates are 53%, which would return an estimate of just over 21,000 successful applicants.

To this number we should also add the 2.2% of loan applicants who ended up with no loan after being offered unfavourable interest rates by their bank. Our best estimate based on the Monitor data it that that would at best add another 3,000 to 5,000 successful borrowers (although the margin of error here is very substantial) for a total of 24,000 to 26,000 new borrowers.

This may not sound like much in a business population of 4.5 million, but it’s important to note that borrowing activity is not evenly distributed among businesses. When ACCA last modelled the borrower population in our submission to the Rowlands Review of Growth Capital, we found that about 12% of the stock of businesses, or just under 500,000 firms, accounted for 57.5% of the SME sector’s total demand for external finance.

Q. And how many SMEs would normally take out loans over a year?

The SME Finance Monitor found that 3% of SMEs applied for new or renewed loans over the 12 months to Q4 2011 – that’s about 135,000 businesses, and ca. 85,000 successful applicants. Thus the additional 24,000 to 26,000 would increase the number of borrowers by 28-31%. Even if the latest percentage is just a seasonal fluke (5% applied in the year to Q1-2 2011), the number of borrowers could increase by 17%-19%.

Q. Won’t all of this be mostly renewals though?

The inclusion of renewals to the guarantee scheme complicates things a little but most renewed facilities are overdrafts, not loans. According to the SME Finance Monitor, the ratio of new facilities to renewals is about three to one in the case of loans. Importantly, this ratio has been rising (from 2:1 to 3:1) over the last year. So our best guess is that about a quarter of the 24,000 to 26,000 businesses encouraged to apply will be renewing facilities.

Q. How much new lending would this trigger?

This is where it really becomes difficult to make any estimates. The beneficiaries are not typical businesses so their financing needs are also not typical. According to the SME Finance Monitor, the average loan application in the past year was for £135,000 – although this will tend to be skewed by the largest applications. Using this figure, we would estimate an additional £3.24bn-£3.51bn of loans per year, a quarter of which will be renewals. By using this figure, however, we’re making a lot of silent assumptions – since discouraged borrowers tend to be smaller, and they will tend to account for the bulk of new lending, we could be overestimating substantially.

Then there is the benefit to all applicants of a lower interest rate. If we estimate 110,000 new loans and renewals to SMEs in the coming year (based on the discussion above) at £135,000 each, the saving in interest will be £148.5m per year. The more significant effect, of course, could be the possible additional investment and job creation, but here analysis is limited. We would have to wait and see the impact here.

Q. How much of a difference can 1 percentage point make?

A substantial one. For reference, the typical (median) loan taken out in the past year had an interest rate of 5.3% for fixed rate loans and 3% over the base rate for variable rate loans.

Judging from the above, the 1% reduction could make a significant difference to the interest burden – 19% off the typical loan. That said, interest is only part of the cost involved in taking out loans. According to the SME Business Finance Monitor, 66% of SMEs that took out or renewed a loan in the past year paid some kind of fee and more SMEs objected to the fees they were offered by their banks than the actual interest rates.

Q. But that’s only the best-case scenario, right?

Correct. The reality is likely to be much more modest. Our estimates depend on a lot of very strong assumptions:

  • One assumption is that all banks will sign up to the guarantees and take every opportunity to use them: it is not clear how coercive the roll-out of the guarantee will be. In previous cases, awareness has not cascaded perfectly down bank hierarchies and individual lenders have tended to dominate individual schemes: Lloyds TSB, for instance provided a disproportionate share of loans under European Investment Bank (EIB) guarantees, while Barclays has at one time boasted of providing 40% of all Enterprise Finance Guarantee (EFG) loans. Then there’s also the case of the failed Working Capital Guarantee, which most banks simply refused to sign up to as they saw it as too restrictive and expensive.
  • All new loans and renewals to SMEs will be eligible: but we know this is not true as state aid rules restrict how much government assistance can be provided to any one business.
  • All would-be borrowers will be made aware of the guarantees: this is unlikely as awareness of government schemes is sometimes low. Larger and finance-hungry SMEs tend to be more knowledgeable, but even among medium-sized businesses (those with 50-250 employees), fewer than half of the owners and managers who responded to the SME Finance Monitor knew about the Enterprise Finance Guarantee Scheme (EFG) – and that was the best known of the host of programmes the survey asked them about.  In fairness, the government have learned the lessons of the EFG roll-out and made sure to make more information available in a timely fashion. ACCA is working with the government on this as our membership provides a valuable channel for reaching the SME sector.

Q. But if that’s the case, isn’t the Guarantee a lot of hot air?

No it isn’t. Any amount of additional lending the government can enable without undue costs or risk to the public purse is to be welcomed, and a permanent, European-style guarantee scheme would be even more welcome. But the Government could succumb to the temptation of spinning this good scheme into something it is not, which would risk discrediting it when it inevitably fails to deliver to inflated expectations. If the Guarantee is spun as a tool to steer Britain’s SMEs away from a double dip recession, it will not live up to the hype. If instead it is established as part of a long-term framework for industrial policy, it will eventually come into its own and SMEs will be better off for it.

By Manos Schizas, senior SME policy adviser, ACCA

This post is the second of two posts on the problem of late payment. The first post can be read here.

Part III: A realistic solution

What ACCA suggested to BIS and the colleagues at our meeting is that if Government can’t count on more coercive measures to abolish late payment and abusive terms of credit, then it should also look at ways of making them irrelevant.

In theory, invoice discounting can help – if a finance provider can buy your invoice and chase it up for a reasonable discount then it doesn’t matter when your customer ends up paying. The problem of course is that paying a third party to take on your credit risk can be a pretty expensive business. They’re taking on a risk that depends on your customers, but their contract is with you, not them, and they don’t get to choose your customers for you. This is part of the reason why banks, for one, are really not keen to take on their customers’ credit risk (evidence here and here) and can usually only offer invoice discounting facilities with substantial restrictions (more details here).  As a result, only about 2% of the business population (some 90,000 businesses) use such facilities, and accountants around the UK often report significant complaints from clients.

But what if the risk to the finance provider could be reduced substantially? Suppose your customer were a major corporate, or the government itself. And suppose there were a way for the finance provider to know whether the customer has accepted your invoice and even how it is progressing through their payment systems. Even better, suppose your big, creditworthy customer (who would normally have an incentive to use their advantage over you) could borrow against their own superior credit rating and use their greater bargaining power with the finance provider in order to pay you ahead of time. They should be able to obtain a discount that reflects their borrowing costs rather than yours, then pay the finance provider on their preferred terms.

That makes things a lot easier; it gives powerful customers a means of obtaining cheap credit without narrowing their supplier base over time; and of course small suppliers can plan their cashflow and expect fewer surprises (which their banks will also appreciate). The arrangement, known as supply chain finance, is far from exotic; it may not be widely used but it’s there, and considering how many SMEs get finance from their customers through discounts for early payment (9% in this survey) the concept at least should not be alien to many businesses.

The problem is that supply chain finance relies on complete invoice transparency – the supplier, the customer and the finance provider need to know at all times how far the invoice is along the payments process and be assured that it can’t be lost or tampered with. This is where electronic invoicing comes in. E-invoicing and supply chain finance are a natural match. As it happens, BIS has just come out in support of further use of e-invoicing as part of the solution to the late payment problem, and recognised the UK E-Invoicing Advocacy Group (UKeAG) as the UK’s national multi-stakeholder forum on e-invoicing and thus a partner in promoting e-invoice adoption. Excellent timing.

So our suggestion to BIS and the Cabinet Office has been simple. Offer those businesses you can influence (Government suppliers and major listed firms) a deal: either commit publicly to paying your suppliers in x days of receipt, or give them the option of signing up to an e-invoicing system and provide them with a supply chain financing facility. Of course, government can do the same to its own suppliers. Visibility is key to such an initiative; the market needs to know the facilities are in place and lower-tier suppliers need to know that prime contractors are getting paid in this manner so they can demand a better deal for themselves. Would they get it? It’s hard to know but at least their bargaining power would be greatly enhanced.

The story doesn’t end here. Perhaps government can’t coerce major customers into supply chain finance arrangements, but their suppliers still have many ways out. Along with traditional finance providers, who are not without products of their own in this area, ACCA has, for the past year, been following the progress of a number of innovative platforms allowing businesses to auction their invoices online to sophisticated investors. Organisations such as MarketInvoice or Platform Black are growing exponentially and others are sure to follow. Already they are organised in the Next Generation Finance Consortium; the Government has a credible interlocutor. Major customers can use such firms if they don’t wish to commit themselves to a relationship with other intermediaries, at least for those suppliers who would agree to have their invoices auctioned. If this arrangement could be managed by the customer, suppliers would face neither the admin cost nor the stigma (real or perceived) of factoring their invoices.

[Note: very bad pun to follow]

Part IV: Vend it like Viking

Will late payment ever be eradicated? Of course it won’t. But on the other hand we shouldn’t accept that current levels are somehow inevitable. Across Europe, payment times are much better in many countries than they are in the UK – all of the Nordic countries, for instance, enjoy much lower levels of late payment. Sure, one can put this down to ‘culture’, whatever that means, but other, harder, factors are at play too. It’s no coincidence, for instance, that these countries tend to be the best-known early adopters of e-invoicing. What other practical tools they have brought to bear I don’t know in detail, but the know-how is out there, and since current financing conditions for SMEs seem very persistent, the UK needs to start catching up fast.

By Manos Schizas, senior policy adviser, ACCA

Part I: Great Expectations

If you’ve been following enterprise news over the last week, you will know that Enterprise Minister, Mark Prisk MP, held a late payment workshop last Thursday at the Department for Business, Innovation and Skills (BIS), where, among other things, ACCA launched the research report, Getting Paid: Lessons for and from SMEs.

Joining us at the workshop were representatives from the Federation of Small Business, the Forum of Private Business, the Institute of Chartered Accountants in England and Whales (ICAEW) and the Institute of Credit Management (ICM), as well as officials from BIS. But perhaps most intriguing was the presence of the Cabinet Office’s Behavioural Unit – the people in charge of assessing whether behavioural ‘nudges’ can be used instead of regulations to improve outcomes for society and the economy. If this comes to mind, I don’t blame you, but there was a good reason for them to be there. 

You see, while waiting at the BIS lobby, the ICM’s Philip King, the Institute’s Clive Lewis and I talked about how many times our organisations had all been there before – a meeting at 1 Victoria Street, to discuss prompt payment. We were slightly worried that this time around only the names had changed. We were all there back in 2008, when BIS was called the Department for Business, Enterprise and Regulatory Reform (BERR), and the Prompt Payment Code was launched to the satisfaction of all participants. Just as we were all there back in 1998, when BIS was the Department for Trade and Industry (DTI) and the new Labour government launched the Late Payment of Commercial Debts regulation, which gave small businesses the right to charge a penalty rate to late payers. Needless to say, we were all there when the regulation was revised in 2002 too.

But regardless of everyone’s enthusiastic support, none of these measures proved to be a silver bullet. Between 1997 and 2007, the late payment problem barely budged. And of course it didn’t get much better in the recession. Fifteen years after Government first decided to tackle the problem head-on, there’s an inescapable feeling that we must be doing something wrong or we wouldn’t keep meeting right back where we started from.

Part II: Of Hammers and Nails

The many businesses that have signed up to the Prompt Payment Code deserve recognition, and so do our longtime partners, the ICM, for administering it. The Code itself is important, not because it has the power to dictate long term payment policies to large corporates (I’ll be surprised if it does), but because it provides a benchmark for what is good practice and what is poor practice. Without that neither government nor the private sector can begin to hold anyone to account. Similarly, the UK’s late payment regulations as well as the EU Directive on its way in 2013 are worthwhile; not because they can deter late payers, but because they put meat on the bones of governments’ denunciations of late payment and give small suppliers a little additional bargaining power – small comfort perhaps to those who feel they have been mistreated by powerful customers, but a useful tool if used correctly.

But ultimately, as Mark Prisk acknowledged from the outset of the meeting, it is not realistic for governments to expect to outlaw late payment. Imagine trying to outlaw unauthorised overdrafts for consumers – then imagine consumers being able to access them for free because they are individually powerful enough to impose their terms on banks. Science fiction, of course, but it should give you an idea of the impossibility of the task. Regulation is a much more useful tool when it comes to non-payment, and indeed businesses only seem to make use of their legal rights when a customer proves to be so unreliable, or so close to failure, that it’s best to just cut their losses and collect what they can.

Knowing that this is not news to any of us, the minister then asked the only truly relevant question in this policy area: what can government influence? Short of regulating the entire informal market for trade credit – a task that would defeat even the most crushingly authoritarian state – government can only exert control over the payment patterns of its own agencies; its suppliers, who would not be willing to risk being excluded from the public procurement market; and the most visible listed firms – say, the FTSE100. This may not sound like much, but the ensuing culture change can be profound – the supply chains of these organisations are substantial.

The government’s partners can also co-ordinate their messages, guidance and products to drive a gradual culture change. Building behavioural cues into ERP systems, organising at the community level, naming and shaming (an old favourite but not nearly past its sell-by date), or even educating business owners in credit management; all good points that we were all keen to examine.

Most of these we have tried already. The ICM, for instance, offers its excellent Managing Cashflow Guides. As part of BIS’ Getting Paid on Time campaign, ACCA published Get Paid!, our guide for owners and managers of small businesses, in collaboration with the ICM and the Forum of Private Business. Others have prepared their own resources for their members. But there’s only so much we can achieve by focusing on the weaker party in cases of late payment – and we are likely to be accused of blaming the victim in any case, by pointing out the SME sector’s frankly disappointing track record in credit management, invoicing and collection (more here and here).

So we return to the original question: what tools do we have, short of regulation, for steering powerful customers in the right direction? As they say, if all you have is a hammer, everything looks like a nail.

Parts III & IV will follow later this week…

By John Davies, head of technical, ACCA

Today sees Vince Cable announcing plans to give ‘more than 100,000’ small businesses the chance to choose whether or not they audit their accounts. The department of Business, Innovation, and Skills (BIS) tell us that over half a billion pounds could be saved.

This isn’t the first time that Cable was wandered into SME-audit territory.

There are a couple of points to make regarding these latest proposals.

The current UK exemption criteria amount effectively to gold-plating of the EU’s ‘fourth directive’ - the directive only requires companies do not exceed two out of three tests (turnover, balance sheet and employee numbers) to qualify as small businesses. Currently in the UK, small companies must fulfil both the balance sheet and turnover criteria, rather than ‘any’ two of the three. On this basis, aligning UK exemption criteria to the EU criteria is not unreasonable.

Theoretically though, it will open up the possibility that companies with turnover of much higher than the turnover threshold (£6.5m) will in future be able to opt out of the audit. We have to acknowledge that fast growing companies, and the increasing number of companies which employ very few or no staff, are likely to be able to claim this statutory exemption. In respect of such companies we would expect lenders of finance to remain keen to see audited accounts from them, so this must be taken into account in projecting cost savings.

As regards the potential savings for the SME sector, the FT reports that BIS claims that the average cost of an audit for a small company is £9500. We should wait to see how they come to this figure but on the face of it, it seems like something of an exaggeration.

BIS will also allow companies which are part of a group to be exempted (currently group companies are only exempt if their group as a whole is 'small'), on condition that their parent companies guarantee their debts. The principle of audit exemption for group of companies is already established, so this would be an extension of it, albeit a significant one. But remember, any material guarantee of subsidiary company debts will represent a liability for parent companies so this cannot be presented a win-win situation for them; as for stakeholders in small companies, any guarantee is of course only as good as the solvency of the guarantor.

If subsidiary companies exempt themselves from audit, the audit of the consolidated accounts would also become altogether more difficult, since the group auditor would not be able to use the results of the audit of any of the group companies. This would materially increase the amount of work and time involved in the group audit, and its cost.