Valley of death: How we can close Britain’s dire SME funding gap
George Osborne should be satisfied with progress in driving forward the British economy, which the OECD applauded last week for its outperformance against other Western countries and its textbook economic reforms.
As part of its package of initiatives to ensure momentum is maintained and growth accelerates, the UK government recently announced a new Help to Grow scheme. This aims to replicate Germany’s Mittelstand model of small to medium-sized firms, which generate the majority of that country’s exports and GDP. Designed to help fast-growth firms secure financial support, under Help to Grow, 500 companies each year will receive backing from the British Business Bank. A study by the bank showed that the finance gap for small firms could be as much as £1bn a year. Given that SMEs in Britain represent 50 per cent of GDP, employ 60 per cent of the workforce, and create most new jobs, support for this group should be an area of huge focus.
As the UK economy picks up, access to capital will become an increasingly high priority for businesses. Recent PwC data shows that companies globally will require over €300bn (£218.8bn) in cash, yet at the same time typical banks continue to withdraw from the market in order to rebuild their balance sheets. The Bank of England’s most recent data on lending trends showed, as they have for the past few years, further falls in lending to small and medium-sized enterprises.
The current system is not supporting UK GDP growth. David Cameron recently admitted that “many fast-growing firms find it hard to access finance… the ones that want to become a medium-sized business cannot. We need to help small firms across this ‘valley of death’ funding gap.” Innovations in working capital solutions are more vital now than ever before. Better capital flow through fast and secure online invoicing, combined with the ability to get invoices paid early, is part of the answer. Interestingly, the PwC report also estimates that improved working capital management could release €1 trillion worldwide.
At the same time, recent data from the UK’s Association of Business Recovery Professionals show that late payment is a primary factor in 20 per cent of business insolvencies. The Federation of Small Businesses is assembling an influential cross-party group of MPs to identify possible solutions to the deterioration of payment practices in the UK. While progress is being made with the government’s consultation on how to properly incorporate the EU’s Late Payment Directive into UK law, the effects of all these and other initiatives will take time to work through.
We applaud all these new initiatives, but we believe that the problem needs solving immediately. Tungsten Bank already enables suppliers to take early payment on their Tungsten e-invoices, enabling the free flow of working capital to suppliers, large and small, and helping to support business in the round. That’s an immediate solution, available right now.