UK: Faith in small wonders.

UK: Faith in small wonders. - A more positive small firms policy is needed to promote growth and jobs.

by Roger Eglin.
Last Updated: 31 Aug 2010

A more positive small firms policy is needed to promote growth and jobs.

The legion of small firms that sprang up during the boom of the 1980s has been savaged in the 1990s. In early autumn the Federation of Small Businesses, which represents 55,000 companies, complained that interest rate cuts had come too late for many and that 280 small firms a day were going bust.

This failure rate has inevitably strengthened calls for a more positive government small firm policy, one in particular that focuses on the financing problem of the small entrepreneur. The cynics shrug such pleas off. The recession, they argue, has hit us all. Why give special treatment to small firms? After all many of them went under because of their own poor management.

Many small firms feel this cynicism sums up a disinterest in Whitehall that John Major has done nothing to dispel.

The CBI has frequently called for government to champion the needs of industry and Michael Heseltine has indicated that he sees this as an important part of his job as president of the Board of Trade. But if the CBI's membership of large firms feels it needs a champion, the small firm sector needs a latter-day Florence Nightingale.

Consider the lot of the small firms in the 1990s. Many finance themselves through short-term bank borrowing, often secured on property, and have been crippled by high interest rates. Often the small firm is trapped in the 80/20 cycle where 80% of its business comes from 20% of its customers, making it particularly vulnerable to market fluctuations.

There finances are strained by the calculated decision of larger firms not to pay bills on time. And with a NatWest survey showing that some 60% of small firms are financed exclusively by overdraft, small firms are on the receiving end of the banks' determination to restore their profitability. Nor is there any relief to be gained by turning to the venture capitalists. They gave start-ups a cold-shoulder in favour of more lucrative MBO business and, having in many cases burned their fingers, are reluctant to lend on anything but the surest proposition.

That there is a deep-seated problem which the recession has exacerbated is recognised by many. A series of small firm studies, many of them sponsored by the Government, have invariably come to similar conclusions. But despite numerous recommendations nothing happens.

Barriers to Growth, the most recent study, produced by Cranfield School of Management and the Bank of Scotland's subsidiary, Kellock Cashflow, paints a gloomy picture. Caution, lack of marketing know-how and low investment, provoked by high interest rates and the economic climate, emerged as dominant characteristics from the 451 firms who responded. "Between 40% and 50% of all companies in the survey do not plan to launch any new products or services over the next 12 months," says the study. Such caution is understandable, it says. "It is a fact that following the last two recessions, more businesses failed in the recovery period than during the recession because of shortage of working capital."

Few of our main industrial rivals allow such a harsh environment to stifle small firm development. Germany and America, for example, both have well developed small firm support systems. Unlike this country, they have recognised the important part that small and medium-sized enterprises have in promoting economic growth and jobs.

Developments like "lean" manufacturing, the growth of global competition and the constant struggle to shed the fat that accumulates around large corporate waistlines means that there is little point in looking to manufacturing giants like British Aerospace, Ford or Lucas to create new jobs. They have to come, at least in prosperous times, from small firms. More than one million additional jobs were created in the economy between 1985 and 1989 by companies employing fewer than 20 people according to a study by Professor Colin Gallagher of Newcastle University. This, he says, is twice the number of jobs created by larger companies.

Other evidence suggests - Germany is a good example - that small firms can be more innovative than their larger, hidebound rivals. Professor Ray Oakey, a specialist in high technology management at Manchester Business School, believes small firms played a major part in innovation in semiconductors which led to explosive growth in the computer industry. They are essential, he argues, if large firms are to be stopped from developing stultifying "technology monopolies".

What is to be done to help small firms? Firstly, the Government should introduce legislation to ensure bills are paid promptly. It should take a lesson from its own agency, the Inland Revenue, which charges interest on unpaid tax, and recognise that someone's unpaid bill is another's free loan.

Secondly, it should listen to the calls of the Forum for Private Business and the Union of Independent Companies for the creation of a specialist small business bank capable of supplying longer term finance at competitive and stable rates. The quick way would be to study what the Germans do.

Thirdly, more should be done through fiscal measures. The BES scheme could be revived to bring it closer to its original goal of helping finance small manufacturing start-ups. There is much more to be done. But what is needed first is recognition of the special importance of small firms and an end to Whitehall cynicism.

Roger Eglin is managing editor of The Sunday Times.

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