As an SME owner, I'll be watching the announcement of the budget on Wednesday with interest on more than one front. My perspective will not only be that of an employer, but also of an individual and a consumer.
The government has already done quite a lot to support young businesses. In recent years, a number of schemes have been introduced, including the Enterprise Capital Fund, which aimed to address a market weakness in the provision of equity finance to SMEs, and the Seed Enterprise Investment Scheme, which provided a series of tax reliefs designed to encourage investments into SMEs. The government has also introduced the Funding for Lending and Enterprise Finance Guarantee schemes, which were both designed to boost lending to the economy.
These schemes have met with mixed success. For example, whilst banks have drawn on about a fifth of the £70bn made available by the government for the Funding for Lending Scheme, the Bank of England recently announced that net lending fell by £2.4bn in the final quarter of last year compared with the previous three months. That fact, however, seems to be due more to lack of demand for credit, particularly from small businesses (as indicated in BoE's latest "Trends in Lending" paper published this January), than to lack of credit itself. Credit appears to be improving for businesses and individuals of all sizes (mortgage approvals have generally been on the rise). But all signs show that the FLS will be extended, with a recent admission from the deputy Prime Minister that the scheme needs to be put "on steroids".
On the consumer side, however, recent signs have been encouraging. They've shown that consumer confidence is improving, with modest upticks in the last couple of months, as well as the fastest like for like retails sales growth in 4 years last month. However, despite this, consumer confidence remains fragile and I hope to see measures within the budget to address this.
Consumer behaviour is something I observe from a particular perspective. My business is purely e-retail and the spate of failures on the high street in recent months (Comet, HMV, and Jessops, to name but a few of the 54 retailers that failed last year) highlights the trend away from high street sales to online sales.
In 2011, 12% of UK sales were made online - the highest rate in Europe, up from 8.6% in 2008 - and this upward trend is expected to continue. The cost of running retail premises is hefty, with retailers spending over £14 billion in rent every year and, incredibly, one in seven UK shops lying empty. This number is also expected to rise in 2013. Online retail does carry running costs, although these are small in comparison. As ecommerce growth continues, more stores may be forced to close in favour of this more financially viable option.
Nevertheless, ecommerce companies will need an empowered and skilled workforce to flourish as well as the financial tools to invest in their own growth. So on Wednesday I will be paying especially close attention to what the government is doing in three areas that could promote a healthier labour market and enable SMEs to manage their capital more effectively.
1. Encourage more apprenticeships
Whether this is in the form of potential NI breaks or other support, getting young people to work will help chip away at the 20.8% of 16 - 24 year olds who were unemployed in the last three months of 2012. This will also help SMEs fill skills gaps, improve the bottom line and, equally importantly, help motivate the workforce. Apprentices are with your business because they want to be - they have actively made a choice to learn on the job and commit to a specific career. Businesses, on the other hand, are required to invest both time and money training young people and helping them build their futures.
2. Close the unemployment gap between men and women
Unemployment rates amongst women for all three main age groups between ages 18-49 are higher than those of men (the rate is more than two points higher in the 18-24 cohort). Policies which target and promote their employability will bring much needed skills to the UK labour force as well as have the added benefit of bolstering the UK households' finances, which have deteriorated in the last year.
3. Create new tools for more effective capital management
According to both a BoE survey published in Jan 2013 and a Q4 2012 Aldermore survey, small businesses either do not want to borrow in a period of uncertainty or are sitting on healthy cash piles that are not being invested (investment across the economy is down about 17% on historic averages). In tough times it is not reasonable to assume that debt finance would be the financing tool of choice as businesses generally are keen to de-lever and de-risk.
The relative tax advantage of debt financing vs. equity is something that the Government could address by treating the cost of equity as tax deductible, just like the cost of debt. This move, coupled with an extension of the Seed Enterprise Investment Scheme to companies which are older than 2 years, may increase the availability of and demand for equity financing, thus de-risking businesses and encouraging the greater cross participation of various players in the economy.