Archives For financing smes

Ian Murray MP

By Ian Murray MP, Shadow Minister for Trade and Investment

Improving trade will be vitally important to growing the UK in the coming decade. Indeed, boosting exports must be a national mission. The current Government has also recognised that and have set an ambitious target to increase exports to £1 trillion by 2020. However, there are concerns that the pace at which exports are expanding isn’t fast enough.

The headline news from the Office for National Statistics is that the monthly trade deficit in February narrowed, down to £2.1bn from the £2.2bn in January. The value of goods exports was the lowest since October 2010, while the goods deficit excluding oil and items such as precious stones and aircraft – widened from £8bn to £8.5bn.

For these statistics to improve, Labour believe that Britain’s small and medium-sized businesses will be crucial to driving our exports and we are looking at ways we can support them to do that.

Ensuring that firms have access to the finance they need to export is a crucial. That is why the Government’s two flagship export schemes – the £5bn Export Refinancing Scheme and the £1.5bn Direct Lending Scheme – need to start lending and I would encourage ministers to look urgently at the performance of these schemes.

The UK needs to get more businesses exporting to boost middle-income jobs and grow our way out of the cost-of-living crisis and so we can ensure Britain can compete in growing global markets. We have fantastic, innovative businesses, and many important advantages on which to build up our exports. We have a strong British brand, our language, our legal system, and even our time-zone work in our favour. We should be drawing on the rich cultural tapestry of Britain, building on the links with our Disapora communities to strengthen trade links with emerging markets, and building city-to-city links as Chuka Umunna the Shadow Business Secretary outlined last week. To grasp the opportunities and exploit our full potential needs a Government that is prepared to act and prepared to support.

If this does not happen we will not only miss being ahead of the game and fail to grasp the opportunities with regard to exports to the BRIC economies, the ship will sail on the new wave of fast growing economies – the Next Eleven, including the recently much publicised MINT (Mexico, Indonesia, Nigeria and Turkey) countries.  Ministers must do much more than offer warm words.

As April’s Western Union International Trade Monitor has shown, only 9% of SMEs have customers in China compared to 15% a year ago, whilst only 6% sell to India (vs. 14% in Q1 2013). Indeed, the percentage of SMEs planning to expand into emerging markets fell from 36% in Q4 2013 to 28%. That’s not good enough. These are exactly the markets that UK businesses should be breaking into, but they can only do this with the support of an active government which utilises its export guarantees, a future Labour Government would be as active as possible.

The next Labour government will make it a central mission to boost exports, innovation and investment as part of Agenda 2030, which is our plan for better-balanced, sustainable growth. This means engaging with our European partners using our membership of the EU to reform it and to help us as we look to boost our exports in new markets overseas and help more small firms export. The UK mustn’t head for the EU exit door, an approach which would do nothing for jobs and the ability of smaller and medium sized businesses to export.

Our Small Business Taskforce has made a number of recommendations to Labour which we are examining. These include creating export hubs in major world cities to give UK firms a foothold; export “rainmakers” who can help small businesses identify and approach potential customers; and a suite of export finance products comparable to those offered by the US Small Business Administration.

As a former small business owner, I know the importance of having a government which supports business and steps up not steps away. We have businesses across the country that have huge ambition. It needs to be matched with a government prepared to act.


Capital quandary

aksaroya —  20 May 2013 — Leave a comment

By Manos Schizas, economic analyst at ACCA

Only a fraction of the world’s SMEs are funded by public equity. ACCA considers whether the world’s capital markets can do more for small issuers.

SME capital market

Xavier Rolet, CEO of the London Stock Exchange Group, has been making the rounds recently, drumming up support for Europe’s SMEs as the most reliable job creators in the region. He’s right, of course, in identifying the sector as a powerful engine of employment, but can the capital markets supply SMEs’ funding needs?

The dotcom boom of the late 1990s ended badly – or so I was taught in university. But more than a decade later it seems to me that it was a fantastically benign episode compared to the credit bubble that followed it. Though it had to end some time, it was the dotcom era that made today’s digital economy possible, bequeathing a digital and social infrastructure that we couldn’t live without today.

But perhaps the period’s most lasting legacy may be the stereotype of the twentysomething internet billionaire: starting a game-changing business in his or her basement, then taking it public a few years later, still in jeans, as the prospectus presented to the world. It’s a great story, but also a desperately rare one.

To this day, only a very small percentage of the world’s SMEs are funded by public equity. The figure varies by country but is typically in the low single digits. Because the total population of SMEs is so massive, this relatively small share still means that micro-caps and small caps (with a market capitalisation of less than $65m and $200m respectively) made up 64% of the world’s listed companies in 2011. But they accounted for only 14% of individual stock market trades and 4% of share trading volume, according to figures from the World Federation of Exchanges.

Illiquidity is a market-killer. It scares away investors looking for reliable exit opportunities as much as it does entrepreneurs looking for fair valuation. It also endangers the social mission of markets. Stock exchanges serve society by channelling funds to productive investment through price discover; this however means that liquidity is most crucial in those segments of the market in which issuers most critical future finance needs are still ahead of them.

Appropriately a recent report by UK think tank Centre Forum singled out stamp duty on sales of shares for criticism as an effective tax on liquidity. In the era of high frequency trading, some policymakers may even welcome this outcome. But even if there is such a thing as excess liquidity in capital markets – which is subject to fierce debate – when it comes to small listings, there is no liquidity to waste, no froth to skim.

Governments have used other tax incentives extensively to promote equity finance; after all the interest on debt is tax-deductible, which creates an uneven playing field. Emerging markets, from Jamaica and Trinidad and Tobago, to frontiers such as Cambodia, offer substantial tax breaks to listed firms, subject to clawbacks, as long as they remain listed for some years. Many governments also extend these breaks to investors. In the UK, for example, investments in the AIM exchange are now eligible for inclusion in stocks and shares ISAs.

While tax relief may encourage investors to hold onto more of their gains, the ears of tax and wealth advisers everywhere also prick up at the mere mention of a tax incentive. Tax relief may increase returns, but it is only one side of the equation. Small issuers are seen as riskier – and not without cause. Students of accounting are routinely taught from seminal studies that use business size is a proxy for risk. The lack of analyst following compounds this problem: analysts’ incentives are to generate recommendations for the sell-side and micro-caps simply cannot generate enough sales to justify their time. It is not impossible to develop alternatives, but they won’t come for free either.

Back in the UK, Centre Forum correctly identified the need for a new listing culture in which all stakeholders collaborate to encourage the financing of SMEs through public equity. Ironically, this is precisely the reality in less developed markets – where government, business associations, exchanges and the accountancy profession work hand in hand to groom prospective issuers.

Why not take a leaf out of their book? After all, secondary boards aimed at SMEs, however established the main exchange boards they are allied to, are perpetually in frontier market territory.

Meanwhile, the tiny but rapidly growing crowdfunding industry, which allows retail investors to put small amounts of equity towards promising start-ups, could introduce a whole new generation of potential investors to the concepts and risks of equity investment. Policymakers and exchanges have yet to see the link between crowdfunding and the capital markets, but they should.

For more information read Protecting stakeholder interests in SME companies: good practice adopting and promoting e-invoicing in the EU and The rise of capital markets in emerging and frontier economies.

This article first appeared in Accounting and Business magazine small business special edition, May edition, 2013.