The Prime Minister’s recent visit to Tech City underlines the growing sense of optimism that surrounds this cluster of technology companies scattered around City Road roundabout in London. While many commentators have dismissed the visit as little more than a publicity stunt, this seems an overreaction.

While it would be unrealistic to think that these small startups will power the economic recovery that this country needs, it is also wrong to dismiss this government support entirely.

This sort of public recognition will encourage this entrepreneurial community that its efforts will be supported in the long run. At the same time, it’s good that government is supporting an industry that, with the right support, will aid economic diversification.

Public endorsements of this kind need to be backed up with meaningful policies too and the ‘Tech City Launchpad’ competition, which Funding Options has already benefited from, shows the government is willing to complement its warm words with financial commitments.

However, the government must not forget its obligations to the wider small business community as well. Encouraging a small group of businesses in a small area of East London, will not help the vast number of SMEs across the country which are struggling.

To be clear, the issue of small business loans should be the government’s top priority.

For this reason, it was encouraging to see the government’s announcement in the Autumn Statement that it would make cheap loans available to small businesses within months.

Although the full details are yet to be released, it sounds like the government will use its triple A rating to allow banks to borrow on its behalf and then pass this beneficial borrowing rate (at least some of it) on to small business.

For anyone with any knowledge of supply chain finance, this is not a revolutionary idea. Many corporations resorted to exactly this model in order to help their small suppliers when the financial crisis first hit and it is surprising the government has taken so long to catch on. However, with an aim of targeting businesses with up to 50m turnover, it should be commended for trying to help those businesses that have been hit hardest.

Only time will tell whether this seemingly sensible new approach has the desired effect.

Setting the correct regulatory environment for business is not only one of the most important tasks for government, it is also one of the most difficult. Even when politicians are able to ignore the distractions of party politics, ensuring that big business is controlled while small business is free to grow, can be tough.

It is encouraging therefore that the Coalition government is trying to improve the situation by signalling its intention to cut business red tape. The cynics will say that generating ‘soundbites’ about cutting red tape is about as much as this government can do at present. However, whether you believe this or not, it is a generally accepted that cutting red tape does help businesses to prosper. It enables existing businesses to save time and money so they can become more efficient and more profitable, while also encouraging entrepreneurs to start up new ventures.

This is not to say that every policy aimed at cutting red tape should be commended and waved through unchallenged. One proposal that has been suggested involves removing the requirement for the smallest companies to file annual accounts at Companies House. While some business owners would gladly rid themselves of this, the full implications of such a move should be examined. Firstly, we should not forget that the economic downturn we are experiencing at the moment is a direct result of uncertainty about economic risk. Do we really want less information to base our judgements on? Also, at a more micro level, the importance of financial information to any business should not be forgotten. As well as helping owners, managers, directors and shareholders to make decisions, it is a vital part of successful applications for small business loans.

Bringing this back to where I began, the task of setting the correct regulatory environment in which business can succeed is an unenviable one. Cutting red tape is one of the few weapons the government has in its arsenal and it would be wrong to imply it shouldn’t use it. However, before it declares all out war on the area of financial reporting, it would do well to step back and consider the collateral damage such a campaign could cause.

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This is a guest post by Joe Carstairs (@JWCWords), who provides his own commentary on accounting and finance industry issues; Joe was formerly a market reporter for EuroWeek, and currently blogs for a number of leading finance and small business publications.

Three of the Funding Options team attended yesterday’s launch event of the NESTA/Telegraph consultation on “credit easing“. It was a fascinating event with an excellent panel, and we were delighted that Funding Options was mentioned in the Chair’s opening remarks (you can see the video here).

The discussion centred around the concept of an “SME Bond Market”, with Will King of @KingofShaves giving a great account of his “shavings bond“ experiences.

A repeated piece of audience feedback, echoing some of the more nuanced recent press commentary – such as Anthony Hilton’s views in the Standard - is that the an “SME Bond Market”, whilst a fantastic option for medium-sized firms, is not practical for small firms, which – in volume terms – represent a segment an order of magnitude larger (totalling some half-a-million term loans alone): typical financing sizes are small (the average term loan to firms under £1 million turnover is less than £100,000), meaning that direct bond issuance is not credible on cost grounds.

The Federation of Small Businesses (FSB) has made exactly this point today:

“Treasury is looking at the direct purchase of corporate bonds in small and medium sized enterprises, through the creation of a new market as one way to make the credit easing scheme work. 

The FSB believes that this would miss the very smallest of businesses that need access to small amounts of finance, as those businesses would not have the manpower to develop bonds. And, the value of bonds from a micro firm would also not be large enough to prove efficient for the Government to be a bond investor.”

We agree, and believe that – whilst there is no single ‘silver bullet’ – the application of modern technology – as well as better involving trusted expert advisors of small firms – is a good place to start.

A valuable contribution to the small business lending debate

I’ve just finished reading the excellent submission by Will Hutton and Paul Nightingale to the Independent Commission on Banking (ICB) on behalf of the Work Foundation. Anyone interested in small business lending should read this concise report, which contains the most coherent and factual argument for bank ‘ringfencing’ I’ve read (for example, I was fascinated to read that specialist SME bank Handelsbanken operates profitably in the UK with a 17% capital ratio, and that doubling capital ratios would be expected to increase bank funding costs by just 0.1%~0.4%, both of which cast doubt on claims that ‘ringfencing’ will make small business lending prohibitive).

Also interesting is the overview of current bank risk management practices for small business loans, where the report notes that “because SMEs are so different, the risk associated with SME lending is less easily turned into mathematical models” yet “expensive upfront investment in relationship building and detailed credit assessment is also problematic” as small firms are “too small to merit the investment in time and effort”; more controversial is the claim that “when the mathematical models underpinning lending to SMEs broke down in the recessions, banks lacked the ability to analyse individual firms and resorted to absolute rationing.”

The Work Foundation’s report is – by its own admission – “tentative”, having been prepared to meet the deadlines for the ICB recommendations earlier this month, and a more detailed report is being prepared by the end of this year, which I’ll certainly be reading. One area I’d like to see covered in more detail is the challenge created by the quality of some small business loan requests (for example, the recent SME Finance Monitor reported that just 1 in 5 SMEs sought external advice before applying for a bank loan, and less than 1 in 3 have a written business plan), which undoubtedly hinders some small firms’ access to finance. This is something that we at FundingOptions – and we hope government and industry leaders – will be trying to tackle.

Guest post: Banking reform: Ringfencing can wait, consumer choice cannot.

The banking reforms outlined this week by the Independent Commission on Banking appear prudent and sensible. Let us not forget that these findings have come about as a result of a widespread investigation into the banking collapse of 2008-9 that has already caused one recession and the ripple effects of which threaten to cause another. Quite simply, something had to be done.

Not only did something have to be done, the individuals assigned the task of making recommendations are more than appropriately qualified to do so. Their knowledge and experience of financial markets is vast and they understand better than most the importance of the financial sector to this country’s economy.

It is therefore pleasing to see such widespread political support for the Commission’s findings. With press speculation before the announcement as to whether he would, the Chancellor took the wise step of not only trusting in the work of these independent experts, but also following the mood of the public. Commendably, the other parties did the same.

However, although the Chancellor made the right decision to back the reforms, he does find himself in a difficult position. On the one hand, the fact that he’s peering over the edge of a recession makes it very difficult to heap extra regulatory burden on a fragile banking sector. On the other, he must be seen to be doing something by a public that wants a change in the way banks operate.

His get-out clause seems to be allowing the changes to occur over time. Sensible enough. However there are certain reforms which would help garner more public support with which he could force through more tricky reforms. The introduction of a switching system for personal and small business accounts could be completed as soon as possible. A crucial part of the government’s battle to raise economic growth must be ensuring that small business lending increases; the improved choice that could come from easier switching could help.

Banking reform won’t be easy. It will require significant changes, some of which will be bitter pills to swallow for many large financial institutions. But by fast-tracking popular changes that will benefit individuals and small businesses, he will build the public support he needs to help force the banks to swallow the other medicine they so desperately want to avoid.

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This is a guest post by Joe Carstairs (@JWCWords), who provides his own commentary on accounting and finance industry issues; Joe was formerly a market reporter for EuroWeek, and currently blogs for a number of leading finance and small business publications.