Make no mistake: SMEs and entrepreneurs are vital to the UK's economic recovery. If you want to see this in pictures rather than a thousand words, take a look at the SimplyBusiness infographic: SMEs make up 99.9% of the total number of businesses in the UK, they provide 59.1% of all private sector jobs and they generate 48.7% of total public sector turnover in the UK. So anything that hinders small business, hinders big growth.
We need to talk to our public bodies and private firms to release our SMEs and entrepreneurs from any downward pressure. We have to urge the UK government to rethink its policies regarding payment terms for SMEs. We also need it to address the equity gap that prevents favourable lending terms to smaller companies. And we must convince banks that Intellectual Property (IP) represents a vast pool against which to secure investment.
The first measure the government needs to take is simply to level the playing field for SMEs for payment terms. Currently, large corporations can extend payment terms to 90 days. This is surely unfair, as it squeezes out the smaller competition - and, worse still, our large companies are crippling our smaller ones.
Only last year, payment company Bacs reported on research showing that large companies are behind 48% of SME late payment debt. This amount totalled £33.6 billion - the highest since its first late payments survey in September 2007. This is a huge burden on what should be an agile, fast-moving sector, without even considering that it represents a significant portion of the UK's total debt, currently standing at around £800 billion.
There is consensus about this too. In December of last year, a group that included the Institute of Chartered Accountants in England and Wales, the Food and Beverage Industry Suppliers Association and the Forum of Private Business, wrote to Business Minister Mark Prisk calling for a number of measures to help SMEs. Among these measures was a request to bring forward 30-day mandatory payment terms to 2012. The group regarded late payment as 'decimating small firms' cash flow'. That's a fairly unequivocal statement.
The answer is surely to introduce equity if not equality between our larger and smaller businesses. Make payment terms standard across all businesses, at 30 days. This way, smaller business owners will not only get some breathing space financially, they will feel supported rather than penalised by a government that needs entrepreneurs now more than ever.
SMEs are also suffering the dreaded equity gap - that is, the problems faced by small companies with neither the security required for collateral-based bank lending, nor high enough returns to attract formal venture capitalists and other risk investors. The government acknowledged this publicly in its January 2012 paper (link to PDF), produced by the Department for Business, Innovation and skills, in which its opening sentence stated that "If the UK is to continue to thrive, it is critical that entrepreneurs are able to start, finance and grow a business without any necessary impediments."
It is important to find a solution to this problem if we want to stop the trend which is seeing many promising start-ups going to the US. Silicon Valley is regarded as the natural home for venture capital funds and angel investors, and prominent commentators are seeing a growing trend for UK firms to consider relocating to San Francisco, simply to access funding. And yet, even in what is arguably the epicentre of technological innovation, funding is still tough.
For once, we shouldn't be led by the US. The UK government should think seriously about how to help small businesses close the gap for equity fund raising of between £1m and £2m to support the growth of start-ups.
Finally, banks also need to recognise that companies hold capital in their Intellectual Property (IP). Just take a look stage left and you'll see huge tech companies waging internecine wars over who thought of what first. Possibly the most famous recent example is that of the Winklevoss brothers suing Mark Zuckerberg for taking their idea and turning it into an operation notionally worth over $100 billion, a plot explored in the film The Social Network.
We've seen other scraps over massive IP valuations. In more recent times Yahoo has sued Facebook over patent infringements; Apple sued Samsung; Apple sued Google; BT sued Google; HTC sued Apple; and, in more of a vicious circle than a virtuous, the Winklevoss brothers sued Zuckerberg yet again (and were told that "at some point, litigation must come to an end. That point has now been reached.")
That's not even counting the huge IP acquisitions in the tech sector. Last August Google bought Motorola for £12.5 billion in a bid to shore up its portfolio of patents. That was hot on the heels of a consortium including Apple, Microsoft, Sony, Research In Motion, Ericsson, and EMC picking at the IP remains of bankrupt telecoms firm Nortel for the not inconsiderable sum of £2.8 billion.
Why should banks be any different? Lending against IP is nothing new. Bowie Bonds are still around from when David Bowie raised $55 million in 1997, by issuing bonds backed by current and future revenue from 287 of his songs. There is a huge store of IP. Indeed, according to a recent study by Brand Finance, intellectual property (IP) now makes up 62% of the collective value of the world's publicly traded companies. If our banks feel they can deal with esoteric derivatives, they should have no problem envisioning - and liquidating - intellectual property.
So we should encourage banks to lend to growing businesses, particularly those in the technology, medical technology and hi-tech engineering sector by securing lending against intangible assets such as IP. Banks can lend up to 95% mortgages and facilitate student loans on far less security than that required for a small business or start-up loan. So why are entrepreneurs getting a raw deal?
We often hear about how public and private need to work hand in hand. We need our public bodies to create an infrastructure that releases the powerhouse of our economy - the small businesses, the entrepreneurs who are trying to create wealth. We also need our private investment firms to realise that ideas make money too. The engine of small business needs fuel, and it needs that fuel now.Suggest a correction