§ 7.19 p.m.
§ Lord Trefgarne rose to ask Her Majesty's Government what steps they are taking to encourage the creation of small businesses, especially with regard to the provision of finance.
§ The noble Lord said: My Lords, I rise with your Lordships' permission to ask the Unstarred Question which stands in my name on the Order Paper and I must first declare an interest in that I am the President of the Mechanical and Metal Trades Confederation which indirectly enjoys the support of upwards of 4,000 industrial concerns, a high proportion of which may be considered small.
§ It is, I believe, no exaggeration to say that the small business sector, generally regarded as those companies employing fewer than 200 people, is the very backbone of our economy. There are close to 2 million such companies—a number which has steadily grown in recent years despite the recession—and it is a fact that if all those companies took on just one more employee, the unemployment problem which we have at present would be wiped out at a stroke. That is, of course, a wholly impracticable suggestion but nonetheless a real shot in the arm for those companies could certainly have an important and beneficial effect upon the nation's economic fortunes.
§ Furthermore, we are by nature a nation of entrepreneurs and our history is littered with memorials to industrialists who were, for the most part, small businessmen by any modern standards. The names of James Watt, Charles Rolls and Henry Royce spring instantly to mind, but there are of course many, many others.
§ What then can be done further to promote the creation and health of small businesses and what are the hurdles which we could help to lower in achieving those objectives? I should first of all say that Her Majesty's Government have in recent years implemented a wide range of measures to this end, and these I warmly welcome. Indeed, the recent Budget included some important provisions to which my noble friend will no doubt refer when he comes to reply. However, there is one problem above all to which I should like to direct your Lordships' attention and that is the provision of finance, and I refer both to the funds required for the initial start-up and for subsequent expansion and development.
§ It is a regrettable fact that most small businesses in this country which do not enjoy the support of a "business angel" (and I was glad to see that those splendid people have their interests properly protected in the new enterprise investment scheme announced the other day) rely to a great extent on their bank. Since the banks will only advance money by way of overdraft (which can be recalled or reduced at a moment's notice) 1329 and will not invest in equity, British entrepreneurs are left at a disadvantage compared with, for example, their German competitors.
§ I am not one of those who wishes to cast the banks as villains in this matter and of course they have to have regard to the interests of their depositors and shareholders, but I do wonder whether we should not be looking for a better and more easily available means of financing small companies.
§ Of course, I recognise that there are some institutional investors who are occasionally willing to help. But those sources are not sufficiently widely available to be considered a solution to the problem. I recognise, too, that the Government's recently enhanced loan guarantee scheme is a useful step in the right direction. But that is not designed for start-up situations and does not therefore address the whole problem.
§ What then is to be done? I offer no simple or easy solution and I am bound to recognise that many start-up propositions which fail to find support have not been properly thought through and are rightly rejected by banks and investors. However, I fear that there are too many excellent proposals which do not find support but which ought to do so. I know that my honourable friend the Economic Secretary to the Treasury has recently been giving some thought to this matter and I look forward to hearing more about that when my noble friend replies.
§ Perhaps I may now touch on some other matters arising from my Question but tangential to the central theme. I refer first to the quality of business proposals put forward to banks and other investors. It is surely incumbent upon those seeking support that they ensure that their proposals have been properly thought through and have, so far as is possible, benefited from the experience of those who have tried before.
§ Here I think that Mr. Heseltine's one-stop shops (now to be called Business Links) may have a role to play arid I hope that my noble friend can confirm that the staff at these places are willing to provide advice to would-be businessmen as well as those currently up and running. I know that some consultancy help is available from Business Links and I hope that it is available in the circumstances to which I have referred, as in others. A well thought-out business plan is surely an essential pre-requisite for those seeking to convince their bank manager, and that is where consultants can be of real help. I hope that there is no risk that a DTI consultant likely to be in a similar line of business himself will be tempted to pour cold water on a proposition just because it might represent unwelcome competition to his own business.
§ Secondly, I refer to the current discussion around the question of late payment of debt. My right honourable friend the President of the Board of Trade recently published a consultation paper on this topic which is most welcome.
§ I think that we need to be on our guard against introducing distortions in the relationship between companies on this matter. Furthermore, smaller companies ought to appreciate that if pressures are placed upon the traditional bogeymen —the very largest companies—then they will apply equally to the other 1330 end of the scale. Thus, small companies may find themselves obliged to pay rather more quickly than some do at present, which is not perhaps what they had in mind. Speaking for myself, I favour a code of practice in this matter rather than statutory controls and perhaps that could form part of some new or amended British standard.
§ However, I recognise that there are powerful arguments in favour of at least some statutory control, which the Government will want to weigh carefully. But the Government have a more direct role to play as well, particularly in areas where they have a mayor purchasing function; for example, the Ministry of Defence. I wonder whether my noble friend can tell me what has happened to the code of practice, introduced some years ago in that department, relating to the prompt payment of bills by prime contractors to their smaller sub-contractors.
§ Perhaps I may finally refer to a matter of equal interest to firms large and small but nonetheless of importance—and that is the proposed harmonisation of export credit guarantee arrangements within the European Union. This harmonisation is intended, I gather, to apply to all business written by European credit agencies whether relating to intra-European transactions or more widely. I must say that I have considerable doubts about this proposal which will, I fear, impose a straitjacket on companies to our considerable disadvantage.
§ The proposed maximum level of cover of 95 per cent. is a case in point. I very much hope that Her Majesty's Government will argue against this unnecessary bureaucratic intervention in our commercial affairs and seek to persuade our European colleagues to dlo likewise. But at the very least we should be arguing against the 95 per cent. restriction and in favour of maximum flexibility. I hope that my noble friend will be able to confirm Her Majesty's Government's position on the matter this evening.
§ I think that I have said enough to give your Lordships an inkling of the problems associated with the financing of smaller businesses. I look forward very much to the speeches of other noble Lords and, in particular, to that of my noble friend the Minister.
§ 7.28 p.m.
§ Lord Weatherill
My Lords, in my maiden speech a year ago on the same topic I expressed the hope that the fiscal inequality facing small businesses, which was a major deterrent to their growth, would be removed. It is therefore a pleasure to be able to commend a number of new measures in the Budget which have gone some way to help small firms as they battle their way out of recession. The cut in interest rates is an important help. The vast majority of small businesses are reliant upon bank borrowing as their major source of finance and therefore any measure which reduces borrowing costs can only improve business cash flow.
Then there is the Chancellor's recent announcement, which the noble Lord, Lord Trefgarne, has already mentioned, the business angels initiative, the enterprise investment scheme and the proposal to create venture trusts, all of which will. encourage much-needed 1331 investment in small firms. Equally welcome is the Chancellor's intention to seize the initiative on late payments, which regrettably contribute to so many business failures.
My own family company—here I declare an interest—has survived over many decades. I preserve in my office in Savile Row a letter written in about the 1850s in which we inquired whether we could have the,privilege of the settlement of our account overdue these 20 years",to which we received a reply stating:Sirs, I have received your letter of 14 December … and would say in reply that I am not prepared to satisfy your impertinent curiosity. Furthermore, I shall continue to shout from the housetops that you are at once the least competent and the most grasping of all the tailors in London".But we have survived. We all know that the cost of borrowing today is much greater than it was in the last century.
The burden of legislation on small companies is great, so I welcome too the Government's initiative to cut red tape. While those measures are helpful and welcome, much more needs to be done. It must be a matter of great concern that 58 per cent. of businesses in Britain use bank overdrafts to fund their development, compared with only 31 per cent. in France and 14 per cent. in Germany. Short-term borrowing arrangements leave small firms especially vulnerable to interest rate fluctuations. Every 1 per cent. rise in bank rates costs small businesses £200 million in interest. Those added costs cannot be passed on to customers without losing competitiveness, and therefore they jeopardise cash flow and survival.
It seems curious that, while the Chancellor has given tax incentives to encourage outsiders to invest in other people's businesses through the Enterprise Investment Scheme and the Venture Capital Trust, measures which would allow small business owners to retain profits before tax in their own businesses have yet to be considered. So I was interested in what the noble Lord said about the Economic Secretary's meetings with small businesses and their representatives to examine sources of finance. I, too, will listen with great interest to what the Minister has to say on the subject. I hope that he will consider seriously the introduction of long-term financing schemes at stable rates. Such arrangements are already up and running in many other European countries, where they have significantly assisted enterprise start-up and growth.
There is one other matter of much concern to small businesses; that is, the proposal that employers will no longer be reimbursed for sick pay for the first four weeks of sickness. That will add significantly to the costs of small businesses, and will inevitably prompt discrimination against the employment of people with any history of illness. Those are often the people most in need of a job and whom society—there is such a thing as society—should seek to help.
It is a plain fact that in the world of new technologies big businesses will continue to shed labour. If we are genuinely concerned about unemployment, it is to Britain's 5 million small businesses and also to new businesses that we must look for growth. Some 10 years 1332 ago in my former constituency of Croydon, I set up an enterprise agency (Croydon Business Ventures) which to date has established 700 new businesses and created 4,000 new jobs. Small businesses employ one-third of the private sector workforce and produce one quarter of our country's turnover. It is often overlooked that 97 per cent. of all businesses in our country employ fewer than 20 people.
There is one other thing that we could all do to help employment; that is, to give a voluntary preference to goods and services produced and provided by British companies, both large and small. I know that that cannot be imposed, but we should give a voluntary preference.
I congratulate the noble Lord, Lord Trefgarne, on having initiated the debate. I repeat, if we wish to see Britain's economy thrive and prosper, and if we wish to see greater employment opportunities, it is to the small business sector that we must look.
§ 7.35 p.m.
§ Viscount Caldecote
My Lords, we should be grateful to my noble friend Lord Trefgarne for introducing the subject because small companies are important centres for growth. It is relevant also that investment in small companies almost always has an objective of growing and creating more employment, whereas investment in large companies is designed all too often to produce the same turnover with fewer people.
My noble friend made so many good points in introducing the debate that there is not much more to be said, but I should like to make just one or two comments. There are two sides to the problem of financing small companies. There is, first, the supply of money. In general, there is no shortage, and recently the chairman of 3i has said that it has £1 billion available for investment. The question is how to exploit that availability.
Equity investments in small companies are important, but there is the problem of initial expenses. Therefore investments below £500,000, or perhaps £250,000, are unattractive to venture capital companies, but in the early stages many small companies require not large investment but investment of perhaps £100,000 or even £50,000. That is difficult to come by. Too often, as my noble friend said, those requirements are met by bank overdrafts—short-term money on call. It provides little stability in the longer-term, and some security, which is seldom available, is usually demanded. But most of all, in difficult trading conditions, as the noble Lord, Lord Weatherill, said, those facilities are all too easily withdrawn, creating great difficulties for the small company.
After a few years of development of a small company, the loan guarantee scheme is available. Although it was popular in boom times, it encourages banks to investigate proposals less rigorously due to the limited risk. It leads also to excessive gearing, even as high as 10:1. That presents no problem in boom times, but when turnover falls in a recession it often contributes to the failure of the company. Nevertheless, it is highly desirable to stimulate equity investment by banks. I should like to see them make more easily 1333 available equity investment as well as short-term loans through overdrafts, as they do mainly at present. In most cases, equity investment in small companies is the best way to support risk and growth in the early stages. Moreover, it provides a sound base for loan capital when the company is established and expanding.
In effect, equity investment is a loan upon which no interest is required until the company is successful and making profits. But there is a need to face up to some obstacles in providing equity investment. The first I have already mentioned. It is the initial expenses problem. So I hope that the Government will look carefully at making grants to venture capital companies for initial expenses for small company equity investments. There would be no difficulty in such a scheme for providing for repayment of those grants when the company is successful and profitable, and perhaps when it seeks a quotation on the Stock Exchange.
As has already been said, the new EIS is helpful, as is the business angels concept. I am delighted to see that the EIS will permit directors and managers to make investments through it in their own companies. That was a great defect with the previous BES. I also look forward with great interest to the details of the proposals for the Venture Capital Trust, which the Chancellor mentioned.
But another problem remains on the demand side for equity capital. Many entrepreneurs are most reluctant to sell equity, even of a small share, because of the loss of full control. Even though that is understandable, it is unwise, because it is better to have 75 per cent. in a going concern than 100 per cent. in a company which is bankrupt when times get hard.
A possible contribution to solving that problem is to facilitate the issue of non-voting shares for external investors. Those shares could have voting rights restored in certain conditions; for instance, on under-performance by the company, or proposed takeover, or quotation for its shares. Until then the founders of the company would have full control of their company and perhaps be less reluctant to sell an equity stake. I recognise that different classes of equity shares are not popular in public limited companies which are quoted on the Stock Exchange. But it seems to me that there is little disadvantage in having them in private unlisted companies if it will facilitate equity investment in them.
Those are some ideas which I believe will help small companies to obtain the investment which they so sorely need, in particular equity investment. There is no single solution to the important problem of financing the growth of small companies. But let us admit that there is a problem and it needs to be tackled with determination, an open mind and a minimum of bureaucracy. I hope that in reply my noble friend will reassure us that something on those lines will be done.
§ 7.42 p.m.
My Lords, I too am grateful to my noble friend Lord Trefgarne for having asked this Question. I have seen both sides of this matter; I have been a small businessman and I have been involved in 1334 providing finance to small businesses. I do not want to say too much about what brings people to create businesses and what makes them work all the hours that God has given in order to pay all their money to the VAT man. I want to say briefly that what matters is the environment that the Government create; how well the economy is doing (that seems to be picking up now); how light a burden of regulation we can get away with (the Government are tackling that not least through the raising of the VAT threshold in the Budget); how the entrepreneur is valued in society (that has been one of the great changes during the past 14 years); and the regulation of the balance of power between small and large businesses.
In that context, I mention particularly the burden of commercial leases and the way in which they are structured at the moment. I hope that the Government will find time to tackle that. I also wish to mention the payment of debt. I remember one particularly poignant experience when I went into the office of the managing director of a company that I was considering investing in. I was shown two letters. One was his letter to a large company about a debt of £500,000, which was six months overdue, begging to be paid. The other was a solicitor's letter from that same large company threatening action over a debt of £500, which was two weeks late.
I want to confine my main remarks to the help that the Government can provide in financing and advising small businesses. First, I want to say what I believe they cannot do—that is, to help to get money out of institutions and banks. As my noble friend Lord Caldecote said, there is a problem with institutions. Their cost structures do not allow them to invest less than £500,000. I do not think that there is any way in which any government will ever change that. The only exception to that rule is 3i because of its own particular size and structure.
The only thing that the Government could do, which would have many other advantages, would be to alter the tax system in some way so that those great investing institutions which benefit so much from the tax system would be constrained to have a view for the long term rather than the short term, if they are to receive those tax incentives. As regards the banks, I do not think that we should expect them to invest much in small businesses, either. They are businesses which take their depositors' money and their depositors expect them to invest it safely. Small businesses are inherently high risk because they are dependent on one or two people.
There are two sets of circumstances in which banks can invest in small businesses. The first is when they have some risk capital of their own and have shareholders' funds set aside to do that. That is not the situation in the UK at the moment. I do not see any way in which the institutions are going to provide a lot of money to banks to invest in small businesses. The other follows the pattern in the United States where banks are local, where they are drawing their deposits from people who have an interest in the businesses in their community thriving and where they are prepared for the banks to take extra risks for the sake of the community. 1335 We have abandoned that position in the UK. There is no sign of our current structures allowing local banks to develop.
So let me now concentrate on what I believe the Government can do. It can help with training, help with the tax system and support the voluntary sector. Much training is needed by those who run small businesses. No one who is starting up in business comes to it perfectly equipped with all the skills that are required. They have no back-up within their own organisations and no one to whom they can turn for advice. They need to be able to go somewhere to learn how to market better and how to handle their personnel problems better.
What I hope the Government will do—and I know they are doing a great deal already—is to use the further education sector more. Following the Education Act 1992, that sector is transforming itself into an entrepreneurial and an effective provider of industrial training. In a recent survey carried out in my locality, 68 per cent. of individual entrepreneurs said that they would turn to their further education college for training, and only 5 per cent. said that they would turn to any offshoot of the TEC.
Secondly, as regards taxation, I am delighted that the Government have not been put off by the failure of the business expansion scheme which, to look back on it, was open to abuse and distorted too much the process of investing in real businesses. I hope that the Government will learn from that failure and concentrate on keeping the substitute small and on keeping the focus on amounts of less than £250,000, where the shortage is. They must keep it simple, make easy the tax process and other processes which must be gone through, and keep it commercial.
There are reasons why 3i adopted its investment structure and why it uses a mixture of loans, convertible preference shares and a little equity. It is because most small businesses are neither successes nor failures. Most small businesses trundle on happily for years, looking after their proprietors and one or two others. Investors need a way of getting money back out of those companies. That is what the loans and convertible preference shares are for. If you disallow tax relief on those forms of investment, you make most investments failures; and that is one of the main problems with the business expansion scheme.
I turn to the voluntary sector. The Transport and General Workers Union, in what I am glad to learn we are now allowed to call Pembrokeshire, has inspired a cashless lottery. That lottery operates not by selling tickets to the public but by persuading them to subscribe by way of a banker's order or through their pay roll. It is attracting thousands of local supporters who are happy that their money should be used to support local businesses. A team of local people who know the area and the people in it will decide which businesses should be lent money from the resulting fund. What is happening there is a renaissance of the local lender; the role that the banks have abandoned. I hope that the Government will watch this initiative very carefully and, if it proves successful, encourage its replication.
1336 My Lords, I turn from Wales to His Royal Highness the Prince of Wales to the Prince's Youth Business Trust, which he founded and which he leads. Last year the Prince's Youth Business Trust gave advice to 25,000 people on how to set up their own business. It has funded 15,000 new businesses, mostly ones which no one else would fund, founded by young, inexperienced or jobless people. Of those businesses, 65 per cent. survived three years or more. That is an astonishing figure. If those businesses had been founded by people with experience, 25 per cent. surviving three years would have been good.
The reason why the Prince's Youth Business Trust does so well is that it has not only a staff of 240, many of whom are seconded from industry, but a network of 6,000 successful business people who assist in setting up the business, who continue giving active advice in the following years; and this support, which no other institution can provide in the same quantity, and which many are not equipped to provide, makes all the difference to the success of those businesses.
The greatest beneficiary of the Prince's Youth Business Trust is the employment department. When His Royal Highness was raising the funds for it in celebration of his 40th birthday, the employment department agreed to provide a £1 revolving loan for every £1 that was raised from the public. Through that, the employment department has saved a great deal in unemployment benefit because the Prince's Youth Business Trust concentrates on people who are on the dole.
The employment department would have benefited substantially even if none of the loans had been repaid; but many of them have, and the employment department has benefited twice over. I hope that my noble friend will confirm that the Government recognise the extraordinary qualities of this trust, the way in which every £1 that the Government give to it saves the Government a great deal more, and will confirm that they intend to continue to give the trust all that it can use.
The same of course will apply to the local enterprise agencies, which were mentioned by the noble Lord, Lord Weatherill. What makes the difference is the help of local businessmen, the involvement in their giving advice, and I feel that the most effective way that the Government can help small businesses is to encourage and fund these local agencies which can draw on resources that are not otherwise available.
I realise that in the course of this speech I have asked my noble friend to get help from five government departments—the DTI; the Departments of Employment and the Environment; the Department for Education and the Treasury. That is a tall order for a small business Minister but one that I am sure he will be able to fulfil.
§ 7.53 p.m.
The Earl of Dundonald
My Lords, I too welcome this debate. I thank my noble friend Lord Trefgarne for introducing it. I regret to say that I shall be repeating a great deal of what he said in his excellent speech, although I shall say it in a slightly different way.
1337 I pay tribute also to the extremely interesting and informative speech made by my noble friend Lord Lucas. I found it fascinating, and I am sure that other noble Lords did too.
First, perhaps I may say how welcome is the Government's refreshing approach to small businesses and how delighted I am about how far the Government have moved in the past year in addressing themselves to the problem of assisting small businesses. I should like to single out a number of points: first, the DTI one-stop shops; secondly, the local enterprise trusts, which are now better supported and in more diverse areas; the EIS, which is much welcomed; and venture capital trusts on which I, like many noble Lords, look forward to receiving further details in the new year.
At this stage, I should declare an interest. I am a director of a number of small businesses, in particular a company which is now, I am delighted to say, in receipt of a large amount of direct government support from the DTI. The company is involved in high technology, cutting edge technology, in a joint venture with the DRA at Malvern. Therefore, my experience of small businesses is limited but fairly pointed in the direction of technology companies.
I should like to give a summary of the importance of small business to the United Kingdom. The point has been made on a number of occasions this evening. There are over 2 million self-employed people in the UK, and there are more small businesses per capita here than in any other European country. The hope is that today's small businesses will be the big businesses of the future. It is critical to the wealth creation base of this country that we support existing small businesses and start-ups.
I wish to give a synopsis from my personal experience of the problems from which small businesses suffer. The first, mentioned by many noble Lords, is that they are unquoted. There is therefore no ready market in their shares. They are generally under-capitalised which causes cash flow problems. They are far too dependent on the lending institutions, in particular banks, for finance. That is because they have no real access to the financial markets of the City. The owners of small businesses in the main wish to hold on to 100 per cent. of the business rather than sell a percentage to other investors. To do so would improve the capital base of their companies but that is not usually the way they see it. Lastly—a matter not so far mentioned—they tend to have a limited knowledge of overseas markets. In essence that is because they are small businesses and their business activities are focused upon the UK.
Some problems are self induced but a number are not. I shall give reasons. As a number of noble Lords said, there is a reluctance by banks and institutions to place money in unquoted companies for expansion or start-ups, except in exceptional circumstances when an enormous amount of collateral cover is provided by the individual company concerned. There has been a limited source of venture capital in this country for start-ups, in particular of technology companies.
When venture capitalists get involved in start-up situations, they are very greedy. They expect, typically, an internal rate of return of between 35 and 70 per cent. I stress the figure of 70 per cent. because that is what 1338 they are looking for if investing in technology companies in this country. I believe firmly that if this country is to have a future, we must invest in technology companies. If the basis of making that investment decision is a 70 per cent. IRR, most people arid most companies would do better to board a plane to the west coast of America and speak to any number of venture capitalists in California who will not be looking for such a greedy return.
I should like to presume to make some suggestions for small businesses and the needs they may have. We need to convince owners of businesses in this country to give up some of their equity in order to build their balance sheets for the future. That is a cultural problem which does not exist in America. It is a problem the Government should spend some time trying to address.
We need to encourage banks to lend to start-ups: they are not prepared to do so at present. They are rebuilding their own balance sheets. Somehow we need to encourage them back into the market. Venture capitalists need to be attracted back into start-ups and particularly into technology companies. From my own experience, I can tell your Lordships that there are only four venture capital companies in the country that invest in high technology stocks. That is a tiny number. I can also say that the amount of money that they put in is less than £5 million a year which, I am afraid to say, is pathetic; there is no other word for it.
As I said, small businesses need much help in addressing overseas markets. I would love to see the Government become more involved. I know that they are doing so through the one-stop shops. However, my hope is that they will continue to do so and perhaps push their involvement further.
We need to provide investors with a clear exit route from small businesses in order to encourage them to invest in the first place. In the United States and in North America generally, there is a very clear exit. They can float their company on NASTAC, they cart go to Toronto or, alternatively, Vancouver. It is possible to raise three million dollars almost immediately; there is no problem. However, that cannot be done in this country because of our over-regulated stock market and the entrenched views of the City of London. Those concerned do not wish to give up their market-making position.
Perhaps I may give the House an example. I do not know whether noble Lords are aware of it, but the Vancouver market is a completely transparent market. It has been somewhat discredited by people, but it is still used. Noble Lords may be interested to know that some of the principal traders on that market are British institutions. Therefore, there is no reluctance on the part of British institutions to invest in small companies. However, they need to see an exit route where they can trade the shares. If we were to see something that was genuinely transparent, I believe that it would greatly improve the situation. I would welcome some positive thoughts on the matter from my noble friend on the Front Bench.
I believe that the Government have done a great deal thus far. As many noble Lords have said, the EIS is of tremendous importance. I hope that it will he the success 1339 that we all wish to see. However, I suspect that it will not have enough up-front tax benefits for investors to overcome the cultural problem of investing genuinely in risk-reward situations. If it does not happen, I hope that the Government will keep close tabs on it and that they will, perhaps, be encouraged to change the up-front tax breaks if enough people are not attracted into the scheme. I should welcome more details on the venture capital trusts in due course.
I hope that DTI one-stop shops will concentrate on the investor-equity match against business opportunities and assist small businesses with overseas markets. I have a few further suggestions to make. I have mentioned the principal one; namely, the exit route. The third market and the USM did not work in the City. I like to think that other countries have got it right and have managed to create markets that genuinely work. I commend the North American model to the Government. I sincerely hope that that is something that they will seriously consider. If we can provide people with an exit route, I believe that we shall encourage more to invest in genuine start-up situations.
I suggest that one of the ways of encouraging banks and institutions back into the lending market is to provide them with some form of tax breaks. I know that that is anathema to the Treasury, but it may be a means of encouraging start-up situations. Perhaps my noble friend can give the suggestion some thought.
I hope that the Government will put increased effort behind the enterprise companies they have set up. There is certainly a culture in Scotland among some local enterprise companies that it is really a question of providing capital in order to create jobs. There is the concept that the more jobs one creates per pound put in constitutes the best form of investment criteria. I believe that that is changing. I am not sure, however, that it is changing fast enough. I hope that the pace will be forced.
In conclusion, I should like to repeat that I believe the Government have done a great deal so far. However, let us not lose the momentum now. Let us try to continue to improve the climate for young businesses to enable them to survive and flourish in the future.
§ 8.5 p.m.
The Viscount of Falkland
My Lords, I too thank the noble Lord, Lord Trefgarne, for giving me the opportunity to speak in a debate on small businesses. I am also grateful to my noble friend Lord Ezra who would normally be dealing with the matter but who is not available today. I have had quite a lot of experience in small businesses, though possibly not as much as my noble friend.
As one so often does in your Lordships' House, I have found this rather late and short debate absolutely fascinating; indeed, I have not been bored for one moment. It has been an invigorating debate and, if I may say so, some of the contributions made by younger noble Lords have been particularly expert and especially interesting. I believe that that says a great deal for your Lordships' House. I hope that people outside will take note of it.
1340 Of course, as the noble Lord, Lord Trefgarne, said, our great industrial history started with small businesses which, in many cases, became large ones and ultimately the backbone of our great industrial empire and part of our culture. I believe that it is correct to observe that many of the qualities and attributes of inventiveness and flexibility which formed part of that great industrial expansion, together with the strong entrepreneurial spirit, have probably been more conspicuously successful in small businesses than is the case in large businesses. That was often because when they became too large they became submerged—sometimes by inertia, lack of foresight, and the stubborn refusal to face change. All of that could and did lead to labour problems and the failure to attract investment which led quickly to grave problems of uncompetitiveness, especially in world markets. A good and conspicuous example of that—and it will probably be thought that I am saying this just to make a particular point—was the great motorcycle industry in which noble Lords know I take a lively interest.
Today there is still the inventiveness and entrepreneurial spirit and many small businesses are formed in a highly technological age by bright, young and resourceful people. However, unhappily—as has been mentioned—too high a proportion of those businesses fail and good ideas are wasted. As the noble Lord, Lord Trefgarne, pointed out, that is sometimes due to poor preparation and planning and poor management skills, even though there is a correctly identified need for the goods or services which are to be produced. Too often the failure is due to an environment which puts too great a burden on inexperienced businessmen entering into such ventures. It is here that the Government obviously have a most important part to play by creating the right environment and removing unnecessary burdens on new businesses.
There are two main issues that I should like to cover to which reference has already been made. However, I hope that I can produce one or two points that are new to the debate. First, there is obviously the question of finance; and, secondly, as has already been mentioned, especially by the noble Lord, Lord Trefgarne, there is the enforcement or the encouragement to pay outstanding bills.
So far as concerns finance, it seems to me from my experience that young entrepreneurs who go into business are often, if I may say so, because of the nature of their energy and their entrepreneurial spirit, somewhat autocratic and stubborn in some areas. An example of what I mean was given by the noble Viscount, Lord Caldecote, who quite rightly said that one often comes across such a situation. People stick stubbornly to their 100 per cent. or their 90 per cent. of their shareholding and are reluctant to part with any of it. It is hard to persuade them to see that it is better to have 51 per cent. of a very good business than 90 per cent. of something which will probably fail. That is a most important point.
I now come to what I regard as the most important issue. At the moment I am visiting a company that has just been set up and I know it will have problems as regards the point I am about to mention. When 1341 companies start out they have difficulties in obtaining finance. They are short of finance. Entrepreneurs are often not businessmen. They are frequently what one might call boffins. Some boffins have commercial expertise but others, conspicuously, do not. They seem to be concerned more with the positive net worth of the company rather than its cash flow. I suggest that many small business failures are connected with improper control of the cash flow which, put in its simplest terms, is a matter of watching carefully what comes in and what goes out. Companies need experienced professional advice in that situation, but that advice is expensive. I believe that many people who start businesses do not consider expenditure on such professional advice to be a high priority. They feel that they can regulate these matters themselves or that they can get an unqualified person to regulate them. In my experience, businesses quickly run into trouble by doing that.
As has been said, many small businesses have borrowed finance from banks. Many speakers have said how difficult it is to attract investment into a company. As the noble Earl, Lord Dundonald, said, the criteria for high technology by venture capitalists are strict and the terms are harsh. In the past, government finance schemes have, in my view, been too oriented towards tax incentives. I hope the noble Lord, Lord Strathclyde, will comment on that point when he replies to the debate. It would be a great help if the Government provided companies that meet the necessary criteria with loans that are repayable over a number of years. I believe that that could be a possible solution in certain situations. A company having that additional money would gain additional flexibility. The company could then see its way clear to spending some money on obtaining proper professional advice to control its expenditure; for example, on research and development. That is often one of the main reasons for running out of cash.
A point that I believe has not been mentioned tonight is that when companies using new technologies start up they often have a key man who is involved with the new technology. I do not wish to be pessimistic about these matters, but we all have to take care of our personal affairs as regards making a will and other such matters. Where companies have such a key man, it is essential they take out "key man insurance". Many companies say they cannot afford such insurance. However, if that company's key man is knocked over by a bus on his way to work the company may well be finished as there is no one to replace him and develop the product that has been planned. That is another expenditure which companies that are starting up often cannot afford. I hope the Minister will mention a different approach as regards government support for new businesses.
I now turn to the matter of outstanding bills. I agree with what the noble Lord, Lord Trefgarne, said on this issue. It would be much better to have a code of practice which could achieve the results that we all want as regards payment of outstanding bills. Some £50 billion of unpaid bills are outstanding to companies—not just small businesses—in this country. That has an enormously adverse effect on companies' cash flows. I am told by my noble friend Lord Ezra—I have no way 1342 of confirming this—that our companies are the worst payers in the European Community, or at least among the worst.
The Government themselves were guilty of late payment of contracts, but I believe matters have improved dramatically since they gave instructions to all their departments to pay promptly. However, the Government seem reluctant to introduce legislation on this issue. The noble Lord, Lord Trefgarne, may be right to say that statutory legislation may not be the, way to tackle this issue, but the payment of outstanding bills is a grave matter that needs to be corrected, I hope the Minister will comment on that aspect. Voluntary codes have been tried as regards this matter, but so far they have failed. Outstanding bills are an inhibiting factor for businesses and some businesses are pushed under because their bills have not been paid. I look forward to hearing the Minister's reply to what has been a fascinating debate.
§ 8.15 p.m.
§ Lord Ewing of Kirkford
My Lords, I join all your Lordships who have contributed to this debate in thanking the noble Lord, Lord Trefgarne, for tabling the Unstarred Question which has allowed us to hold this brief debate. I hope sincerely that the message does not go from this House that the brevity of the debate reflects our strength of interest in small businesses, because that is far from being the case. In my view this debate—until I rose to speak—has been of a high standard and it illustrates a deep concern for the well-being of small businesses throughout the country.
Before I move to the burden of my own remarks I wish to refer to two points. One was made by the noble Lord, Lord Lucas, in relation to the Transport and General Workers' Union scheme in Pembrokeshire. It has always stuck in my mind that one of the greatest successes in this country, Girobank—albeit it is no longer a small business but a large enterprise—was sold by the Government for an enormous profit. That enterprise was the brainchild of the trade union movement. The noble Lord, Lord Strathclyde, has a furrow on his brow. He is obviously not too well aware, of the history of Girobank, which was the brainchild of the Post and Telecommunications Union. This is another good example of the trade union movement inspiring industrial development. I do not make that point to be partisan but rather to seek to encourage the Government, through the noble Lord, Lord. Strathclyde. to accept that there is an expertise across the whole of British society which can contribute to the well-being of small business throughout this country. That expertise is not confined merely to one sector of British society.
The other point I wish to take up from the debate is that made by the noble Earl, Lord Dundonald, in relation to the local enterprise companies in Scotland. They have not been the success that the Government had hoped, and indeed the Select Committee on Scottish Affairs is to conduct an investigation into the activities of the local enterprise companies throughout Scotland. One or two of them have been heavily criticised by auditors appointed to investigate the way in which these local enterprise companies have been run. However, I shall 1343 rest my remarks on the local enterprise companies there because of the inquiry that is to take place by the Select Committee on Scottish Affairs.
I turn now to the Labour Party's position on small businesses. On 3rd November this year the Labour Party published its discussion document in which a number of ideas were floated which sought to help the well-being of small businesses throughout the United Kingdom. On 10th November a conference was held which was opened by the Leader of the Labour Party, John Smith. I am pleased to say there was participation in that conference from the CBI, the Small Business Council, the Midland Bank, the Forum of Private Business, the National Federation of Self-Employed and Small Businesses and from a number of other organisations which would not normally be identified with the Labour Party.
I make that point because I believe that it is important that we listen to what small businesses and those who advise them have to say rather than dictating to small businesses what we believe is good for them. One of the purposes of the Labour Party's discussion document, as I say openly and honestly, is to seek the views of small businesses and those who advise them so that we can formulate a policy for small businesses against the background of the widespread discussion in which the Labour Party is now involved.
The experience of Europe proves conclusively that any vibrant economy badly needs a vibrant small business sector. There was a time in this country not so long ago—and I confess my own guilt—when we all thought that big was beautiful. It is interesting to note that some large companies—ICI is a good example—are now breaking themselves up into much smaller units. That leads me to the conclusion that in any vibrant economy the small business sector is vital.
It is an astonishing fact that 97 per cent. of the companies in this country employ fewer than 20 people. I do not believe that that fact has been grasped either by the business sector or the community at large. As the noble Lord, Lord Weatherill, said, companies employing fewer than 100 people are responsible for 20 per cent. of the turnover in this country. That illustrates the importance of the small business sector.
I am not partisan to the extent that I do not recognise that in their recent Budget the Government have given some help to the small business sector. However, at the end of my remarks I want to leave the Minister with a question about one of the promises that was made in the Budget which the Federation of Small Businesses now claims was misleading.
Mention has been made of the question of late payment. The noble Viscount mentioned the Government's position. I recognise that the Government have instructed their departments to pay within 30 days. I believe that that ought to be extended and that the Government ought to impose an obligation on all public bodies to pay accounts within the same 30-day period that they have now imposed on their own departments.
There is a case for saying that part of the qualification for the British Standard certificate BS 5750 should be a requirement that accounts are paid on time, within 30 1344 days or certainly within a reasonable period. BS 5750 has nothing to do with the quality of the product which a company produces. It has everything to do with the quality of the management of that company. Surely a test of the quality of the management of a company is how promptly it pays its accounts.
There may well be a case for introducing a system whereby companies indicate in their annual report and accounts their policy in relation to the payment of accounts. As the noble Viscount said, the question of late payment is a very serious matter. I accept that the Government realise that it is a serious matter and are trying to do something about it. My comments are designed to leave with the Government some ideas as to how the whole question of late payment ought to be tackled. It is a very serious matter indeed.
I turn now to the financing of small businesses. As the noble Lord, Lord Lucas, said from his extensive experience, there is a major problem. I do not join in the chorus of condemnation of the banks either. The banks naturally see small businesses which are starting up as a risk and they do not involve themselves greatly in risks. The competitive nature of banking in this country at present puts small businesses at a distinct disadvantage when it comes to attracting finance. What small businesses need is not short-term finance which can be withdrawn almost at a day's notice but long-term security so that they can plan their development for some years ahead. The problem for small businesses in this country has been that they have been unable to plan ahead for any decent length of time. That is one of the main reasons why Great Britain has a poor record in growing small businesses into medium-sized businesses; it is the uncertainty of the availability of finance.
I have no doubt that the noble Lord, Lord Strathclyde, has been advised by the researchers employed by Central Office that the Labour Party document floats the idea of a private-sector managed investment fund in order to provide the finance which small businesses need to be able to plan on a long-term basis. That is one other aspect which we should consider.
I suggest to the Minister that the DTI should make a study of our experience in the recession. I join those who hope that we are coming out of the recession. All my political life I have said that I would far rather contest a general election in conditions of full employment and a vibrant economy so that we can discuss other issues—moral and social issues and all the other issues which affect people's daily lives—rather than go on the hustings and discuss high unemployment and the resulting tragedies which we have seen over the past 14 or 15 years.
One of the experiences of the recession has been the almost indecent haste to push small businesses into bankruptcy at short notice. We ought to look at our insolvency laws to see whether something can be done to protect small businesses, particularly in periods of recession. As a constituency Member of Parliament for 22 years, my experience of small business has been in trying to protect people whose homes have been sold because their businesses have been put into bankruptcy. I do not suggest that we should create a situation in 1345 which people with small businesses can divert all their resources into houses that become palaces in order to protect their businesses. However, there ought to be some level of protection for the home of someone who has taken a risk in order to provide employment. Therefore we should examine our insolvency laws.
We ought also to look at the possibility of a moratorium law in this country under which a small business could apply to the court to delay debt collection in order to allow the possibility of that small business being restructured. The court itself would decide the period that would be allowed for the company to be restructured.
The final point that I want to leave with the Minister is that raised by the Federation of Small Businesses, which claims that the Budget was misleading on the question of the statutory sick pay scheme. The Government indicated in the Budget that the total burden for statutory sick pay will be transferred to companies. When that scheme started in 1980, the Government bore 100 per cent. of the cost. In 1990 that proportion was reduced to 90 per cent. Now the whole burden is to be transferred to the employer.
Small businesses are claiming that even the 1 per cent. reduction in the employers' national health insurance contribution will not be sufficient to compensate them for the cost of meeting the sickness pay arrangements that have been in place and continue to be in place. They make the point in particular in this year when there has been a flu epidemic. Small businesses employing fewer than 20 people have been hard hit. Bill Anderson, the Scottish secretary of the small business federation, has been particularly critical of the Government for misleading the small business people on the promise that was made in the Budget.
I conclude as I began, by thanking the noble Lord, Lord Trefgarne. I look forward to hearing the Minister's reply.
§ 8.30 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Strathclyde)
My Lords, it is a great pleasure to respond to the debate on behalf of Her Majesty's Government and to reply to the Question put down by my noble friend Lord Trefgarne. It is a welcome opportunity to discuss the subject of small firms; their success; their financing requirements, and so on. At the same time, I should like to welcome all those who have spoken. I join with the noble Viscount, Lord Falkland, and others in saying that it has been an extremely high quality debate. The brevity of the debate will not lead anyone to believe that no one has a great deal of interest in the subject.
I welcome, too, the contribution of the noble Lord, Lord Ewing of Kirkford. It is the first time that he and I have parried across the Dispatch Box, and I enjoyed his professionalism in making his speech. It was, of course, that very professionalism which allowed him to keep a straight face throughout the course of his discussion. The Labour Party discovered small firms on 3rd November of this year. For years they have decried 1346 the existence of small firms, falling at the feet of the trade union barons who payroll the Labour Party. But I shall come back to that subject in a moment.
Small firms are the seedcorn for future large companies. They are the companies which provide the enterprise and the innovation for our economy. The noble Viscount, Lord Falkland, and my noble friend Lord Caldecote are absolutely right in saying that they will provide the growth in terms of employment and financial growth for the future. But it is not just Government who help small firms to grow. It is also the private sector. I salute the work of the noble Lord, Lord Weatherill, in his former constituency in Croydon in setting up the Croydon business ventures, and my noble friend Lord Lucas who mentioned the excellent work carried out by the Prince's Youth Business Trust which has given so much hope to so many small businesses up and down the country.
The Government's main concerns are to create the essential conditions in which business can develop and flourish through sound finance, low inflation, low interest rates, free trade, minimised burdens on business and a flexible labour market. If the Labour Party is so serious in supporting policies for small firms, I hope that it, too, will subscribe to those policies.
To help achieve our aims, we have a range of specific measures which are relevant to the creation and development of small businesses. The first is Business Links—formerly called one-stop shops, to which many noble Lords have referred—with the provision of quality services delivered locally for businesses to provide them with the information they need, based in one location, providing expert help. The first of those Business Links has opened over the past few weeks. We hope to have some 40 Business Links in operation by the middle of next year, and 200 within two years. The partnership organisations bring together the training and enterprise councils, the chambers of commerce and the local enterprise agencies. They are designed to help riot just with existing companies but also with start-ups. Perhaps I may say to my noble friend Lord Dundonald, that it is my wish that they should play an important part in developing overseas markets and providing the information that so many small firms need in order to take that step to export.
We also have other initiatives. There is our continuing support for training and enterprise councils, the DTI's enterprise initiative, the business start-up scheme, and the loan guarantee scheme which has been providing finance to small firms since 1981 and was substantially improved in July of this year. I welcome the words of my noble friend Lord Trefgarne on that subject.
I am sure that the House will agree that the recent Budget was excellent for smaller businesses, containing many positive measures to encourage their growth and help them to achieve their potential. I was particularly pleased by the measures to address the financing needs of smaller businesses. I refer to the new enterprise investment scheme which will, at last, include investors who are also directors and managers. The details of those schemes and the venture capital trusts are still being drawn up. I look forward to seeing the closer 1347 detail shortly. There is, too, the extension of capital gains tax rollover relief. Perhaps I may say this to the noble Lord, Lord Ewing of Kirkford. If the Labour Party is serious in its encouragement to small firms, it will have to reform in a wholesale manner its treatment towards capital taxes, inheritance tax and gains tax.
All those measures will help to provide the smaller amounts of equity that can currently be difficult to secure. The noble Viscount, Lord Falkland, suggested that rather than financing companies through the tax relief on those schemes that I have mentioned, it should be through grants. As he will know, there is some direct help but it is minimal. Generally, tax incentives are better. I cannot support the view that civil servants should decide who receives grants from the taxpayer.
I am also particularly pleased with the deregulatory measures which were announced in the Budget. I refer to the relaxation of audit requirements for small companies, the agreement to look at the administrative complexities of PAYE and national insurance, and the raising of the VAT and corporation tax thresholds. A subject which has raised a great deal of comment this evening is the publication of the DTI's consultation paper on late payment. That paper seeks views on the legislative option of a statutory right to interest but also includes many other possibilities. One factor is clear: that the statutory right to interest is in itself no panacea. It is an extremely complicated issue, which is why we have brought forward that consultation document. The Government have never ruled out the possibility of legislation; but we have been concerned that there is a downside which may be damaging for small businesses. It is therefore right that at this stage we keep an open mind. I am sure that the consultation process will enable us to make a more informed decision on the next steps. If it has not been done, I shall ensure that a copy of that consultation document is placed in the Library.
I cannot confirm to my noble friend Lord Trefgarne what has happened to the Ministry of Defence's code of practice. I am sure that it is still in existence. However, I can tell the House this evening that I, as small firms Minister in the Department of Trade and Industry, have an outstanding commitment to all small firms which have not been paid either by Government, government bodies, or the top 100 stock exchange companies. Those small firms can write to me; and I shall write direct to the chairmen. I can tell noble Lords that that normally has the desired effect.
Despite the measures already in place and those announced in the Budget, the Government are not complacent about the provision of finance for industry in general and small and medium-sized enterprises in particular. Access to adequate finance is vital to all businesses, and at a time when the economy is recovering it is vital that the employment-creating and producing base is not denied the resources it needs.
The noble Lord, Lord Weatherill, was absolutely right when he said that the interest rate reduction was most welcome. The reduction over the past 18 months has done a great deal to improve the competitiveness of British industry. He and other noble Lords were also right when they said that British business relied too 1348 much on short-term overdraft finance. Therefore, the Chancellor of the Exchequer has asked the Economic Secretary to the Treasury, Anthony Nelson, to examine the contribution which the City and financial institutions make to facilitating the growth of commerce and industry in this country. His review is assessing all the current sources of funding for industry with the aim of identifying whether there are any market imperfections which may distort the flows of finance and, if there are, to consider how the present arrangements can be improved. His review is particularly to look at those lower levels below £½ million, as mentioned by my noble friend Lord Caldecote.
As part of the review, Mr. Nelson and Treasury officials have embarked on an extensive programme of visits and meetings. He is talking not only to banks and other financial initiatives but also to business, both large and small. The initiative will help to inform the consideration of public policies that bear on the provision of finance for industry. Already a number of broad themes are emerging. Short-termism is a perennial concern, and one question will be to ask whether there are institutional barriers to investment. Another common theme is the relationship between banks and businesses. Although often repeated, it remains true that the relationship between smaller firms and their banks is crucial to the provision of finance.
However, there still remain a number of concerns in this area. In order to tackle those, the banks are taking steps to improve the training of their managers and to understand better the needs and the perspective of industry. While on the subject of training, perhaps I may say to my noble friend Lord Lucas that the Government are working closely with industry to raise awareness of best management practice: for example, the Management Charter Initiative, Managing in the 90s and the Enterprise Initiative Scheme, which covers management and production, business planning and financial information assistance.
However, we should always remember that the problems are not always one-sided and small businesses in turn need to accept that banks are businesses too. The banks are also taking action to deal with the criticism that they too often lend on the basis of security offered rather than of the business proposition and that they are too risk-averse. For example, they have introduced better risk assessment techniques. Also, the Government will continue to seek to encourage more diverse financing for small firms, in particular to encourage less reliance on debt finance, especially overdrafts. Much greater use could be made of equity finance, both through institutions and informally through individuals. I understand the point made by my noble friend Lord Dundonald that many owners of small firms do not wish to sell equity. There is a cultural problem, and it is one that we shall have to tackle.
Perhaps I may finish by mentioning the TGWU initiative. If it is the sign of things to come from the trade union movement, surely it must be welcome. I thank my noble friend Lord Lucas for bringing it to our attention. It is an initiative at which the Welsh Office is looking closely, with a great deal of interest, and I hope it will be a great success.
1349 In the light of those remarks, I hope that noble Lords will acknowledge the positive steps which the Government are taking to encourage the right climate in which small businesses—both start-ups and established firms—can develop and flourish and the continuing steps we are taking to ensure that businesses are able to secure the finance that they need.
1350 I conclude by again thanking my noble friend Lord Trefgarne for initiating this debate and putting down the Question. I hope it is an area to which we may return soon.
§ House adjourned at a quarter before nine o'clock.