The government's business bank could do just the job

If the business secretary sets it up correctly, the proposed 'business bank' could be just the shot in the arm that the SME community needs.

by Edward Craft
Last Updated: 19 Aug 2013

The news that the economy grew by 1% in the last quarter shows that, at last, light is appearing on the horizon.  Initiatives including the Business Secretary Vince Cable’s announcement of a £1 billion government-backed business bank for small and medium enterprises, and Lord Heseltine's recent report, ‘No Stone Unturned in Pursuit of Growth’, demonstrate that the coalition government has a preoccupation with being seen to be in control of delivering new growth.

Lord Heseltine argues that spending and investment decisions are best made by local business and political leaders as there is no ‘one size fits all’ solution when it comes to stimulating growth.  There is no mention in his document of the government business bank. The idea at the heart of Heseltine's strategy is for government to develop a national growth framework and industrial strategy but for £58 billion of funding to be devolved to the already existing Local Enterprise Partnerships and for business investment decisions to be taken at a local level in partnership with the public sector.

Cable’s business bank faces at least two challenges: how to make the lending criteria sufficiently flexible to accommodate the diverse range of borrowers, and of course how to offer more with less, given the scarcity of financial resources. The answer is to promote and offer finance through non-conventional routes: little change will happen if the government simply tries to compete with existing banks.

Making venture capital debt and equity investments could be one way of doing this. These would give growth businesses, for which bank debt is unlikely to be appropriate or available, the resources to step up to the plate and deliver new growth.  

Appropriate state aid approvals would be needed, but the business bank could target its investment directly into new businesses to help them reach the next level in their development, rather than just lending. This will create new jobs, increase tax revenues and, in time, deliver investment returns to the new bank.

Subject to satisfying the investment criteria, some of the monies managed within the newly established National Employment Savings Trust (NEST) which has been set up to manage auto-enrolment pension schemes, could also be put into a growth fund to seek to support the development of the UK's new business of the future.

Government can ‘make the unfundable fundable’, and act as an engine of new growth, if it seizes the opportunity to deliver innovative and flexible funding to assist the development of new and vibrant businesses for the years ahead.

Edward Craft is a corporate partner at City law firm, Wedlake Bell. 

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