Upstream - The Newsletter of Incentive FM Group

Missed opportunity for SMEs

Article written by Jeremy Waud – Managing Director of Incentive FM Group

I had quite high hopes for this budget particularly as George Osborne stated that it would be 'unashamedly' pro-business and designed to help kick-start economic recovery.

But, in my view it failed to deliver on a number of counts and I don't think I was alone in feeling a little let down. In particular, there were two issues which, whilst on paper looked to be good for businesses like ours, actually fell considerably short of the mark.

Firstly, it was announced that Corporation Tax will be reduced by 1%, which is of course a step in the right direction. However, let's put this into perspective - for an SME making profits of, say, £500k a year it will only save them £5000, which, while helpful, is not that significant. Having said that, Corporation Tax under Labour was 28%, and the Conservative's stated aim I understand is to bring this down to 22% over time. This is a very positive move and will ultimately benefit the business community; it is just a shame that we have to wait for this to happen. Yet I suppose UK businesses are only half of the story here, as this reduction is partly designed to attract businesses to the UK. Experts say that as a result, the UK now has the most competitive tax regime in Europe, so this bodes well. Apparently we compare very well with France, Germany, Italy and even the Netherlands, although we should not forget the fact that, by taking a short hop across the Irish Sea, companies can enjoy a 12.5% rate in the Irish Republic.

Secondly, there was the much heralded National Loan Guarantee Scheme, which the government has introduced to help small and medium sized businesses to get better access to credit. Under the scheme, £20bn of guarantees will be provided to banks on their unsecured debt, in return for a fee. In order to qualify for one of these loans you need to be turning over less than £50m a year and then you will be entitled to a discount on that loan of one percentage point on the interest rate offered by the bank.
This is potentially a brilliant initiative. However, it is entirely pointless as it doesn't address the real reason why banks don't lend to SMEs - which is that they are extremely risk averse and looking for absolute guarantees that loans can be repaid. This scheme will not manifest itself in giving more security, so the banks will continue to only lend if you have a strong enough balance sheet or other personal assets as security.

This means you could be running a great business but if the balance sheet looks weak, the banks will not lend no matter what. Instead, we should be using this guarantee to provide security for the first two years or the early part of the loan to enable people to invest in their business - be it research and development or acquisitions or service expansion. The banks need to be encouraged to lend, although various attempts by the government over the past 12 months have failed to do this. Taking the interest rate down by 1% is neither here nor there - because if things really are so tight that the 1% means the difference between success and failure, it is not the right thing to do anyway.

In reality, what companies need is finance - not cheaper finance. SMEs aren't too worried about interest payments. The key problem is actually getting a loan in the first place.

So, Mr Osborne, whilst I think your ideas were coming from the right place, they do seem to need a little more thought if you really see the SME sector as vital to the UK's economic recovery.