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BRIEFING PAPER

Number 7690, 13 March 2020

Support for Small Firms By Marguerite Page

Inside: 1. Background 2. Equity Investment 3. Small Firm Lending 4. Non-Financial Support

Number 7690, 13 March 2020 2

Contents Summary 3

1. Background 4

2. Equity Investment 6 2.1 The Enterprise Investment Scheme 6 2.2 Enterprise Finance Guarantee 8 2.3 The Seed Enterprise Investment Scheme 9 2.4 Enterprise Capital Funds 12 2.5 Venture Capital Trusts 15 2.6 Angel CoFund 16

3. Small Firm Lending 18 3.1 British Business Bank 18 3.2 Funding for Lending 19 3.3 Start-Up Loans Scheme 20 3.4 Regional Growth Funds 23

4. Non-Financial Support 25 4.1 Procurement Help 25 4.2 Small Business Commissioner 26 4.3 Telephone helplines and Gov.uk portal 28

Cover page image copyright: High Street market MG_3052 by Carol. Licensed under CC BY 2.0 / image cropped.

3 Support for Small Firms

Summary The problem of small firms gaining access to finance is both a long term and live issue for businesses. The Business, Innovation and Skills Committee carried out an inquiry into Access to Finance in 2016, which found that

In the aftermath of the 2008 financial crisis, bank lending to small and medium sized enterprises (SMEs) came “to a standstill”. Between 2009 and 2012, new lending to SMEs fell 23%, and it took till late November 2015 for it to return to positive annual growth.1

This paper provides details of the three main strands of assistance for small firms:

• Equity investment is the process of raising capital through the sale of shares in a company. Investors take an equity stake in the company with the aim of selling at a profit when the company has expanded. There are a number of tax incentives to encourage equity investment.

• More direct access to finance is available in various forms: overdrafts, loans and grants from government, private sources, financial institutions and non-traditional lenders including, recently, crowdfunding platforms.

• There are also a number of programmes in place to provide non-financial assistance to firms. These include help with procurement and the Small Business Commissioner, a post which was created in 2015.

The Library has a subscription to the Grantfinder database, which has information about thousands of non-governmental sources of financial support for businesses. This can be accessed through the Library intranet page.

1 Business, Energy and Industrial Strategy Committee, Access to Finance, Report, together with formal minutes

related to the report, HC 84, 25 October 2016, page 3

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1. Background During a debate in the House of Lords in December 2017, Baroness Maddock stated that ‘Small businesses are an important [part] of any national industrial strategy. They are the seed corn for larger businesses and important for international players.’2

The Gov.uk website states that access to finance and information are vital for these small and medium enterprises (SMEs), and for start-ups and fledging businesses. In recognition of this, the Gov.uk website currently offer information about 165 business support opportunities.3

During a 2016 debate on the Budget Resolutions and the economic situation, one Member, Rishi Sunak, now Chief Secretary to the Treasury, said:

for growing SMEs, there are few more important ingredients for success than solid access to finance. Indeed, there are few more important ingredients for our nation’s success than growing SMEs. Small and medium-sized businesses account for more than half of private sector employment. They are responsible for three quarters of the jobs created since the recession. They are also delivering social justice—the unemployed are six times more likely to find work with a smaller company.4

The shortage of investment funds for SMEs has been an issue for successive governments over several decades. There were debates on this subject as far back as the 1970s, 5 and the Committee of Inquiry on Small Firms was set up in 1971 as an attempt to tackle the problem.6

Despite the passage of time this continues to be a live issue for SMEs in the UK. A 2012 report from the Department for Business, Innovation and Skills (BIS) stated that

Most businesses can obtain the finance they need, but there are a number of structural market failures affecting the supply of both debt and equity finance to SMEs. This leads to some potentially viable businesses being refused finance, which is sub optimal for economic growth. 7

Two types of funding gap are normally seen as problematic: start-up funding in the form of loans and grants, and long-term equity funding, usually for more established SMEs. The main difference between these funding streams is that loans are repayable, whereas equity finance is a share of the profits of the firm. The issue for many entrepreneurs is that equity finance is welcome, as it does not place a burden on the company’s cash flow, but it means a dilution in control and ownership of the venture which many entrepreneurs are unhappy with.

2 HL Deb; 22 January 2018; cc 992 3 Gov.uk, Finance and support for your business, accessed November 2019 4 HC Deb; 22 March 2016; cc 1435 5 HL Deb; 21 February 1973; cc133-48 6 Committee of Inquiry on Small Firms (the Bolton Committee Report); Cmnd 4811

November 1971 7 Department Business, Innovation & Skills, Economics Paper 16; SME Access To

External Finance’, January 2012 p8

5 Support for Small Firms

The financial crisis of 2008 and the subsequent regulatory requirements for banks to hold more capital added the latest chapter to complaints about banks’ unwillingness to lend, especially to smaller and start-up firms.

Those companies need the fuel of deep capital markets to power their growth, but despite improvements, it is still not always easy for SMEs to get the funding they need. A 2015 report by the Business, Innovation and Skills Committee (the BIS Committee) states that ‘too many businesses still report that they find it difficult to get the financial support they need’. 8

Another problem small firms complain of is the difficulty of finding information about support available to them. This is important in encouraging the start-up and growth of businesses. Bill Esterson MP said in a debate on the Enterprise Bill 2016 that ‘better information is an important part of having a successful economy, with low barriers to entry, that encourages and supports the growth of businesses or all ages and sizes.’9

The establishment of the British Business Bank in 2014 was an attempt ‘to bring together and coordinate better its [government] SME finance schemes into one place’.10

The BIS Committee report mentioned above states that ‘businesses seeking support still face a complex and unclear offer of support from the Government.’ 11 The frustration felt by small firms over this was reflected during proceedings of the Enterprise Bill which proposed the establishment of a Small Business Commissioner. Bill Esterson said that ‘it makes sense for small businesses to have one place to go to for help, no matter the cause of complaint’ and that ‘the idea of a one-stop shop seems to make a lot of sense.’12

The remainder of this paper outlines current schemes and initiatives available to SMEs under the two broad headings of equity and loan finance. A third section looks at non-financial support schemes.

8 Department Business, Innovation & Skills, Eighth Report of Session 2014–15;

Government Support for Business, HC 770, 24 February 2015, page 3 9 PBC Deb 9 February 2016 c28 10 Business, Energy and Industrial Strategy Committee, Access To Finance, Report,

together with formal minutes related to the report, HC 84, 25 October 2016, page 6 11 Department Business, Innovation & Skills, Eighth Report of Session 2014–15;

Government Support for Business, HC 770, 24 February 2015, page 3 12 PBC Deb 9 February 2016 c25

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2. Equity Investment Equity funding is the process of raising capital through the sale of shares in a company. Investors take an equity stake in the company with the aim of selling at a profit when the company has expanded. It can be used for both start-up and more established businesses. In 2012 a paper by BIS stated that ‘there is an under supply of equity finance to young high growth potential businesses due to the divergence of private and social benefits from investing in these businesses.’13

Government has, over time, introduced various schemes to encourage equity funding through tax relief and other means. These schemes

support the Government's growth agenda by continuing to help small, riskier, early stage UK companies, which may face barriers in raising external finance, to attract investment, making it easier for these companies to become established and to grow.14

2.1 The Enterprise Investment Scheme

Enterprise Investment Scheme

• Announced in the 1998 Budget

• Provides tax relief to investors in small firms

• Since its launch, 29,770 individual companies have received investment through the scheme, and £20 billion of funds have been raised.

• Investors and businesses wishing to become compliant with the scheme should visit the Gov.uk website for more information.

The Enterprise Investment Scheme (EIS) was announced in the 1998 Budget. 15 This stated that ‘to get the best out of the country's entrepreneurs the UK tax system needs to recognise the investment of individuals who nurture promising start-ups into successful businesses.’16

The scheme was launched ‘to help smaller, higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new full-risk ordinary shares in those companies.’17

Since its launch ‘29,770 individual companies have received investment through the scheme, and £20 billion of funds have been raised.’18

13 Department Business, Innovation & Skills, Economics Paper 16; SME Access To

External Finance’, January 2012 p8 14 HM Treasury, Making the Seed Enterprise Investment Scheme and the capital gains tax reinvestment relief permanent, page 1, March 2014 15 HM Treasury; Budget 1998; section 4.38, HC 620; 17 March 1998 16 HM Treasury; Budget 1998; section 4.24, HC 620; 17 March 1998 17 National Statistics, Enterprise Investment and Seed Enterprise Investment Schemes: Introduction to National Statistics, Section 1, October 2015 18 HMRC ‘Enterprise Investment Scheme, Seed Enterprise Investment Scheme and Social Investment Tax Relief, Statistics on Companies raising funds’, 29 May 2019

7 Support for Small Firms

In 2017-18, 3,920 companies raised a total of £1929 million of funds under the EIS scheme. This is an increase from 2016-17, when 3,655 companies raised £1,901 million.

London and the South East accounted for the largest proportion of investment with companies registered in these regions receiving £1,283 million (67% of all EIS investment) in 2017-18. 19

The EIS was reformed in 2011, when the rate of income tax relief on investments was raised to 30%. 20 The Federation of Small Businesses (FSB) welcomed this, stating that it would ‘provide a much-needed shot in the arm for entrepreneurship in the UK.’21

19 HMRC ‘Enterprise Investment Scheme, Seed Enterprise Investment Scheme and Social Investment Tax Relief, Statistics on Companies raising funds’, 29 May 2019 20 HM Treasury; Budget 2011; page 29, HC 836 ; 23 March 2011 21 Federation of Small Businesses, FSB reaction to the Budget, 23 March 2011

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An evaluation of the scheme by HMRC in 2014 found that companies that took advantage of the EIS ‘benefited from increased capital investment, employment and sales compared with other companies.’ 22

Starting in August 2017 HMRC ran the Patient Capital Review which considered how to support innovative firms to access the finance that they need to scale up. This identified a lack of scale up financial schemes available to businesses as a problem which can prevent firms from expanding and growing. They recommended extending the investment limit of the EIS to encourage users of the EIS to expand their businesses further. 23

It is estimated that the total Exchequer cost of the EIS is £580million in 2019-20 24

The rules for EIS approved funds will be changing on 6 April 2020 to take account of the:

• changes that will focus approved funds on knowledge-intensive investments

• increased flexibility available to fund managers in the timing of investments

Information about this change can be found here.

2.2 Enterprise Finance Guarantee In the pre Budget report in November 2008 the Government announced

‘a new Small Business Finance Scheme and a £1 billion guarantee facility to support bank lending to small exporters’25

This became the Enterprise Finance Guarantee scheme which was launched in 2009.

It facilitates business finance to smaller businesses that are viable but unable to obtain finance due to having insufficient security to meet the lender’s normal requirements. The borrower always remains 100% liable for the debt.

In this situation, EFG provides the lender with a government-backed 75% guarantee against the outstanding facility balance, with the hope that this will enable the lender to approve a larger number of loans to small businesses.

EFG supports a wide range of business finance products, including:

• Term facilities • Revolving Credit • Invoice finance facilities • Asset finance facilities

To be eligible for support via EFG, the small business must:

22 National Audit Office, Tax Reliefs, HC 1256, 7 April 2014, page 42 23 HMRC, Patient Capital Review: Industry Panel Response, October 2017 24 HMRC, Estimated Cost Of Principal Tax Reliefs, October 2019 25 HM Treasury, Pre-Budget Report, 24 November 2008, page 1

9 Support for Small Firms

• Be UK based, with turnover of no more than £41 million per annum

• Operate within an eligible industrial sector (a small number of industrial sectors are not eligible for support – see below)

• Have a sound borrowing proposal, but insufficient security to meet a lender’s normal requirements

• Be able to confirm that they have not received de minimis State aid beyond €200,000 equivalent over the current and previous two fiscal years

An accredited lender can use EFG to help a borrower access from, from £1,000 to £1.2 million. Finance terms are from three months up to ten years for term loans and asset finance and up to three years for revolving facilities and invoice finance.

To apply for an EFG-backed facility, businesses may wish to consider approaching one or more participating lenders to discuss their borrowing needs.

Full eligibility criteria, and more information for lenders can be found here.

Between 2009 and September 2019, the EFG offered 35,913 loans, of which 31,257 were drawn. The loans drawn had a value of £3,354million. The average size of the loan drawn was £107k.

Regional information about the EFG can be found below, these are projected figures are for the second quarter of the financial year 2019-20 :

26

2.3 The Seed Enterprise Investment Scheme

26 British Business Bank, Enterprise Finance Guarantee Quarterly Statistics for Q2 FY

2019-20, September 2019

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Seed Enterprise Investment Scheme

• Announced in September 2011

• Offers tax relief on investments in very early stage companies

• Higher rate of relief offered than under EIS

• Investors and for start-up firms looking to source finance should visit the SEIS website for more information about how to apply.

The Seed Enterprise Investment Scheme (SEIS) is ‘intended to recognise the particular difficulties which very early stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by EIS.’ 27

It was created partly in response to a 2011 consultation. Respondents argued that there was a need for a scheme that specifically encouraged seed investment. Some of the reasons for this included

• the gap between the risk of the business proposal and the risk the investor is willing to take is larger at this stage;

• that investments were moving away from seed stage companies; and,

• although EIS works well to encourage seed investment now, the planned changes to the amount companies can raise per year (to £10 million, subject to State aid approval) could make it more difficult for seed companies in future28

It was announced in the Autumn Statement 2011. It initially offered ‘50 per cent income tax relief on investments and will offer a capital gains tax exemption on gains realised in 2012–13 and then invested through SEIS in the same year.’ 29

The FSB welcomed the scheme and stated that it would ‘give start-ups and fledgling businesses the chance to by-pass the high street banks and find alternative sources of finance.’ 30

The 50% tax relief applies to investments of up to £100,000 a year.

The SEIS was made permanent in March 2014, and the then Government announced that this would create ‘more certainty for early stage companies raising equity, and individuals investing in such companies.’ 31 The annual cost of the in 2014/5 was SEIS was forecast to be £180 million. 32

27 HM Treasury, Enterprise Investment Scheme and Seed Enterprise Investment

Scheme, Statistics on Companies raising funds, section 2.1, July 2015 28 HM Treasury; Tax-advantaged venture capital schemes: response to consultation,

December 2011, page 9 29 HM Treasury; Autumn Statement 2011, page 7, Cm 8231; 29 November 2011 30 Federation of Small Businesses, Autumn Statement is a step in the right direction for

small businesses, 29 November 2011 31 HM Treasury, Making the Seed Enterprise Investment Scheme and the capital gains tax reinvestment relief permanent, page 1, March 2014 32 PQ 26612, [On Seed Enterprise Investment Scheme], 9 February 2016

11 Support for Small Firms

In its 2015 pre-election Budget, the Coalition Government announced changes to SEIS, EIS and Venture Capital Trust (VCT) to bring them in line with new EU legislation. The changes included:

• a requirement that companies must be less than 12 years old when receiving their first EIS or VCT investment, except where the investment would lead to a substantial change in the company’s activity;

• the introduction of a cap on total investment received under the tax-advantaged venture capital schemes of £15 million, increasing to £20 million for knowledge-intensive companies; and

• an increase in the employee limit for knowledge-intensive companies to 499 employees, from the current limit of 249 employees.33

In 2017-18, data show that 2,320 companies received investment through the Seed Enterprise Investment Scheme (SEIS) and funds worth £189million were raised. Over 1,700 of these companies were raising funds under SEIS for the first time, raising a total of £159 million in investment. The average investment per company under SEIS in 2017-18 was around £81,000. The largest proportion of funds raised through SEIS was raised by companies registered in London and the South East. In 2017-18, these regions accounted for 67% of SEIS investment, which is similar to previous years. 34

Between 2013 -2017, the last year for which figures are available, the SEIS cost £350million. 35

Since SEIS was launched in 2012-13, 8,440 individual companies have received investment through the scheme and £799 million in investment has been raised.

The graphs below illustrate the progress of the scheme since 2012.

33 HM Treasury; Budget 2015 page 52; HC 1093; March 2015 34 HMRC ‘Enterprise Investment Scheme, Seed Enterprise Investment Scheme and Social Investment Tax Relief, Statistics on Companies raising funds’, 29 May 2019 35 HMRC, Estimated Cost Of Principal Tax Reliefs, January 2018

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36

2.4 Enterprise Capital Funds

Enterprise Capital Funds

• Announced in the 2010 Budget

• Combine private and public money to create equity investments in high growth businesses • Businesses wishing to apply for equity funding under this scheme should approach the fund

managers. This can be done through the British Business Bank homepage. The website also has guidance about the investment process and seminars for prospective fund managers.

36 HMRC ‘Enterprise Investment Scheme, Seed Enterprise Investment Scheme and Social Investment Tax Relief, Statistics on Companies raising funds’, 29 May

2019

13 Support for Small Firms

The ECF was launched in 2009. It was aimed at SMEs with high growth potential. The British Business Bank invests in businesses, alongside venture capital funds on terms that improve the outcome for private investors / fund managers when those funds are successful.

This investment ‘encourages venture capital funds to operate in a part of the market where smaller businesses are not able to access the growth capital they need.’ 37

In October 2013 the operations and staff of the delivery agency for the ECF finances were transferred to the British Business Bank.38 In the Autumn Statement 2014, the ECF received an additional £400 million funding to expand the programme39, a move welcomed by the FSB. 40 A 2009 National Audit Office report into venture capital support for small businesses found that businesses in receipt of ECF money reported high levels of satisfaction with them. 90% of recipients would recommend the fund to others. These, and other benefits of the scheme, are illustrated in the graph below. The chart below shows the benefits of receiving funding, as cited by supported businesses. 41

37 The British Business Bank, The Business Finance Guide, page 14, 2016 38 Source: Capital For Enterprise 39 British Business Bank, Annual Report 2015, April 2015, page 17 40 “Autumn statement 2014: how will it affect small businesses?” The Guardian, 3

December 2014 41 National Audit Office, Venture Capital Support to Small Businesses, December 2009,

section 2.4

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It was announced in the 2017 Budget that the Government would be ‘backing new and emerging fund managers through the British Business Bank’s established Enterprise Capital Fund programme, unlocking at least £1.5 billion of new investment’. It also announced that it would be

doubling the annual allowance for people investing in knowledge-intensive companies through the Enterprise Investment Scheme (EIS) and the annual investment those companies can receive through EIS and the Venture Capital Trust scheme, and introducing a new test to reduce the scope for and redirect low-risk investment, together unlocking over £7 billion of growth investment. 42

As of September 2019, the British Business Bank was working with 29 Fund Partners, and had supported over 550 UK smaller businesses, 47% of which are based outside of London. Since its inception, the ECF programme has committed more than £1.3bn of finance of which British Business Bank has contributed almost £750m. 43 The British Business Bank annual report for 2019 states that

There are now 28 Enterprise Capital Funds, with a total investment capacity of £1.2bn, including £500m of private sector commitments. In 2018/19, the ECF programme received in the region of 85 enquiries, of which six are currently in early stage discussions and two in the due diligence process. 44

As of 5 November 2019, the British Business Bank stated that there was currently approximately £300mn of headroom available to lenders this financial year.45

42 HM Treasury; Autumn Budget 2017, Box 4.1, page 49, 22 November 2017 43 British Business Bank, The Enterprise Capital Fund Brochure, September 2019 44 British Business Bank, Annual Report and Accounts 2019, page 14 45 HC Written Answer 5432, Business: Disadvantaged, 5 November 2019

15 Support for Small Firms

2.5 Venture Capital Trusts

Venture Capital Trusts

• Started in 1994

• Designed to encourage investment in smaller companies

• Managed by fund managers who are members of larger investment groups

• The Gov.uk website has information for investors and businesses interested in entering into a VCT.

Venture Capital Trusts (VCT) were announced in the 1994 Budget and started operating in 1995. Their aim is to encourage investment in smaller, unquoted companies that may present a higher risk. The then Chancellor, Kenneth Clarke, said in his 1994 Budget speech that they were ‘an effective and imaginative set of measures aimed at generating equity investment in dynamic, innovative growing businesses.’46

They are managed by fund managers who are usually members of larger investment groups.

The main features of the scheme are:

• VCTs must be listed on a UK recognised Stock Exchange.

• VCTs are exempt from corporation tax on any capital gains arising on disposal of their investments.

• Companies which qualify for VCT investment are limited to companies carrying on a qualifying trade with fewer than 250 full time equivalent employees at the time shares are issued, and gross assets of no more than £15 million before investment and £16m immediately after investment.

• Qualifying companies can raise up to £5 million in any 12 month period from VCT investment. The £5 million figure has to take account also of investment via the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) as well as any other investment the company has received via any measure covered by the European Commission’s Guidelines on State aid to promote Risk Capital Investment in Small and Medium-sized Enterprises.

The reliefs available to investors are

• Income Tax Relief – individual shareholders aged 18 or over can claim income tax relief at the rate of 30% of up to £200,000 annual investment, provided their shares are held for at least five years.

• Dividends - no income tax is payable on dividends from ordinary shares in VCTs.

46 HC Deb; 29 November 1994; vol 250 c1099

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• Capital Gains Tax (CGT) - No CGT is payable on disposals by individuals of ordinary shares in VCTs.47

Venture Capital Trusts (VCTs) issued shares to the value of £745 million in 2017-18, a 30% increase from 2016-17 (£570 million) and the highest amount raised since 2005-06.

The number of VCTs raising funds has been declining in recent years. However 2017-18 saw the first increase since 2013-14. In 2017-18 there were 43 VCTs which raised funds, up from 38 in 2016-17.

The number of VCTs managing funds has fallen from 75 in 2016-17 to 70 in 2017-18. Since the introduction of VCTs in 1995 they have raised approximately £8.3 billion of funds. 48

2.6 Angel CoFund

Angel CoFund

• Launched in November 2011

• Makes investments in companies alongside syndicates of investors

• Businesses wishing to obtain funding under this programme should secure the interest of a business angel syndicate or network as the fund cannot be contacted directly. There is information about how to contact an angel investor at the UK Business Angels Association website. Businesses wishing to invest through the syndicate scheme should visit the Angel CoFund website for more information.

The Angel CoFund was launched in 2011 with an initial grant of £50 million from the Regional Growth Fund.

It was launched with the aim of

providing direct investment to high potential SMEs, enabling them to unlock their growth potential; and supporting the development of the UK business angel market, by encouraging syndication and best practice.49

Investment is subject to an upper limit of 49% of an investment round and 30% of the equity in a business, although investments are usually less than this.

It has since been expanded with a subsequent investment from the British Business Bank of £50 million in 2013. As of December 2018, the last date for which figures are available, the Angel CoFund has enabled smaller businesses to secure c.£280m in investment.

47 HM Treasury, Venture Capital Trusts: Introduction to National and Official Statistics;

page 1, September 2014 48 HM Treasury, Venture Capital Trust Statistics, December 2019 49 Angel CoFund website, ‘About Us’, accessed June 2018

17 Support for Small Firms

The fund has invested and committed £41.5m, alongside a further £238m from business angels and other investors, providing support for 82 businesses.50

It is an independent company with its own board of directors, staffed by employees of the British Business Bank.

50 British Business Bank, Angel CoFund, accessed 6 December 2019

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3. Small Firm Lending There has been a long-standing problem for UK SMEs in accessing finance, recognised at least as far back as the Bolton Committee Report in 1971.51 Funding comes in various forms: overdrafts, loans and grants from government, private sources, financial institutions and non-traditional lenders including, recently, crowdfunding platforms. The Business Energy and Industrial Strategy Committee carried out an inquiry in 2016 into Access to Finance. Their final report stated that

the [2008] financial crisis had a major impact on the UK business banking market. The banks, while still the largest form of lending to SMEs, reduced the amount of risk they were willing to take in their lending decisions… Longstanding structural barriers remain which have a particular impact on SMEs, including the difficulty, and cost, of calculating the viability of SMEs with limited credit history.52

Many local councils have their own business support teams which may also have access to, or provide, localised sources of funding.

The Gov.uk website has a business finance and support search engine.

The Library has a subscription to the Grantfinder database which has information about thousands of non-governmental sources of financial support for businesses. This can be accessed through the Library intranet page.

3.1 British Business Bank The British Business Bank was established in 2014. It is a

publicly-funded, development bank described by the Government as its “centre of expertise for SME finance”. It is owned by the Department for Business, Energy and Industrial Strategy but has operational independence. It does not operate as a direct competitor in the marketplace but delivers a range of products through third parties.53

Their objectives are to

• increase the supply of finance available to smaller businesses where markets don’t work well.

• create a more diverse and vibrant finance market for smaller businesses, with a greater choice of options and providers.

• Identify and help to reduce regional imbalances in access to finance

• encourage and enable SMEs to seek the finance best suited to their needs.

51 Committee of Inquiry on Small Firms (the Bolton Committee Report); Cmnd 4811

November 1971 52 Business, Energy and Industrial Strategy Committee, Access To Finance, Report,

together with formal minutes related to the report, HC 84, 25 October 2016, page 4 53 Business, Energy and Industrial Strategy Committee, Access To Finance, Report,

together with formal minutes related to the report, HC 84, 25 October 2016, page 6

19 Support for Small Firms

• achieve this whilst managing taxpayer resources efficiently and within a robust risk management framework.

• identify and help to reduce imbalances in access to finance for smaller businesses across the UK.

• Be the centre of expertise on smaller business finance in the UK, providing advice and support to Government. 54

As of December 2019, they oversee the provision of the following finance programmes –

• Start Up Loans Scheme

• Enterprise Finance Guarantee

• ENABLE Guarantees

• ENABLE Funding

• Investment Programme

They also oversee the delivery of several regional funding programmes. These include micro and small business debt finance, and regional equity finance in the Northern Powerhouse, Midlands Engine, and Cornwall and Isles of Scilly regions.55

They work through more than 100 finance providers in the market, and as of 2017 were supporting 59,000 companies and had a net operating profit of £49.8million.56

At the end of the financial year 2017-8 89,000 businesses were benefiting from £6.6bn of finance supported by the British Business Bank. 57 As of November 2019, British Business Bank programmes were currently supporting over £6.6bn of finance to over 89,000 smaller businesses.58

3.2 Funding for Lending

Funding for Lending

• Launched in July 2012

• Aim is to incentivise banks and building societies to increase lending by providing funding to financial institutions

• Set up in response to the weakness of provision of small business credit by the major banks

• Replaced by the Term Lending Scheme

The Bank of England and HM Treasury launched the Funding for Lending Scheme (FLS) in July 2012. It aimed to incentivise banks and

54 British Business Bank, Annual Report 2019, page 6 55 British Business Bank, Annual Report 2019, page 7 56 British Business Bank, Annual Report 2017, April 2017, page 10 and 11 57 British Business Bank, Annual Report 2019, page 4 58 HC Deb Written question – 6244, Small Businesses: West Midlands, 5 November

2019

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building societies to increase lending by providing funds linked to the lending performance of the institution. According to the National Audit Office it had a broader aim of expanding net lending to the wider economy.59

The scheme was set up in response to the weakness of bank lending, partly due to the worsening crisis in the Eurozone, which had caused bank lending costs and interest rates to increase. Commenting in its Bulletin for the fourth quarter of 2012 the Bank of England said:

given the heightened level of risk aversion associated with the intensification of the euro-area crisis, funding costs seemed likely to remain elevated and impair the flow of credit from banks to households and businesses for a considerable time. The FLS is a direct policy response to that threat to the UK economy posed by elevated bank funding costs. 60

As at December 2015, the FLS had 36 participants. In a report published in December 2015 the Bank of England reported that net lending to SMEs during the third quarter of the same year was £0.7 billion. 61

Firms were able to borrow from the scheme from 1 August 2012 to 31 January 2018.

It was replaced between 19th September 2016 and 28th February 2018 by the Term Lending Scheme. This:

provide[d] funding to banks and building societies at rates close to Bank Rate. It [was] designed to encourage them to reflect cuts in Bank Rate in the interest rates faced by households and businesses. It also encourage[d] them to lend by providing a cost-effective source of funding. It [was] a monetary policy tool of the Monetary Policy Committee and operated as part of the Asset Purchase Facility.

The TFS allow[ed] firms to borrow central bank reserves in exchange for eligible collateral. It [was] open to firms that take part in the Sterling Monetary Framework and signed up to our Discount Window Facility.

From the launch of the service to December 2019 it had carried out £3million of draw downs.62

3.3 Start-Up Loans Scheme

Start-Up Loans Scheme

• Pilot trial announced in the 2011 Budget

• Offers personal loans to entrepreneurs, along with mentoring and advice

59 National Audit Office, Improving access to finance for small and medium-sized

enterprises, HC 734, November 2013, paragraph 18 60 Bank of England, Quarterly Bulletin 2012 Q4, page 307, December 2012 61 Bank of England, Bank of England and HM Treasury Funding for Lending Scheme –

2015 Q3 usage and lending data, December 2015 62 Bank of England, Results and Usage Data, December 2019

21 Support for Small Firms

• Finance is provided by a set of delivery partners

• More information about SUL, including how to apply, can be found on its dedicated website.

The 2012 Budget announced a pilot trial to help young people start a business through a programme of enterprise loans.63 This became the Start-Up Loans Scheme (SUL). Businesses that are new, or having been trading for less than 24 months may be eligible for this. The scheme has no application charges. This is an unsecured personal loan with a fixed interest rate of 6%. Customers can borrow between £500 and £25,000. The loan repayment period is between one and five years. The programme also offers 12 months of mentoring and a range of offers for business offers. To be eligible for a Start Up Loan an applicant must fulfil the following criteria – • Be 18 years of age or older • Be a current UK resident • Be starting a new business or have been trading for up to 24

months • Have been unable to secure finance from other sources (self-

declaration is ok) • Have a business which is based in the UK • Have the right to work in the UK • The business type and loan purpose is eligible under terms of the

scheme • Be able pass the credit checks and afford to repay the loan • Start Up Loans are designed to finance the initial costs of starting

and developing a business, and therefore cannot be used to fund the following activities:

─ Debt repayment

─ Training, qualifications or education programmes

─ Investment opportunities that do not form part of an on-going sustainable business

It was initially offered to people aged 18-24 with the upper age limit being removed in the financial year 2013/14. Also in that year the scheme started lending to people under the New Enterprise Allowance scheme. In a House of Lords debate on entrepreneurship opportunities on 24 May 2012, Baroness Wilcox said that the scheme was developed in response to evidence which shows that:

to build enterprise, ambition and capability in young people it is important to provide hands-on experience at school and ensure ongoing access to support and advice.64

In the same debate Lord De Mauley said:

63 HM Treasury; Budget 2012 page 46; HC 1853; March 2012 64 HL Deb; 24 May 2012; cc 857

Number 7690, 13 March 2020 22

The Government are committed to rebalancing the economy, encouraging private sector investment and creating the conditions for confidence to return, small companies to thrive and growth to revive. Ensuring that small businesses and micro-businesses can access the finance most appropriate for them is a core priority.65

The 2013 Budget widened the age limit eligibility for the scheme from 24 to 30 and announced £30 million in additional funding.66 The FSB described it as ‘good news’.67 Since its inception in 2012, the Start Up Loans programme has lent over £400m, making over 54,000 loans.68

As of December 2019, the Start Up Loans programme has delivered over 63,000 loans, providing over £500m of funding to an average of 25 businesses a day. The programme has contributed to the creation of more than 75,000 jobs. 69

The 2018 Autumn Budget announced an extension of the programme until 2021.70

A breakdown of the sectors helped by the SUL scheme, as of 2016 (the last date for which figures are available) can be seen below.

65 HL Deb; 24 May 2012; cc 953 66 HM Treasury; Budget 2013 page 28; HC 1033; March 2013 67 “David Cameron boosts funding for Dragons' Den-style start-up loan scheme”,

Telegraph, 3 January 2013 68 PQ 136333, [On New Businesses], 18 April 2018 69 British Business Bank, Annual Report 2019, page 13 70 HMRC, Budget 2018, 29 October 2018, para 4.42, page 59

23 Support for Small Firms

71

The Start Up Loans Company joined the British Business Bank group on 1st April 2017.72

3.4 Regional Growth Funds

Regional Growth Funds

• Announced in the 2010 Labour Budget and remodelled under the Coalition Government

• Promote high value investment in the regions and national and industrial growth policy

• In October 2016, it was confirmed that no future rounds of the Regional Growth Fund were planned.

Regional Growth Funds were announced by the Labour Government in the 2010 Budget, and was maintained by its Coalition successor. The initial policy proposal was:

A regional growth fund will be established by the Regional Development Agencies (RDAs) within their capital budgets for

71 Start Up Loans Company, Annual Impact Report 2016, page 2 72 British Business Bank, Annual Report and Accounts 2017, page 15

Number 7690, 13 March 2020 24

2011-12, to promote high-value investment in support of regional and national growth and industrial policy to ‘promote high-value investment in support of regional and national growth and industrial policy.’73

The Coalition Government remodelled the RDAs:

to help areas and communities particularly affected by reductions in public spending make the transition to private sector-led growth and prosperity, the Government will create a Regional Growth Fund in 2011-12 and 2012-13. This Fund will operate in England only and support increases in business employment and growth.74

RDAs provide grants to projects and programmes through a mixture of public and private funding. They had invested £2.85 billion by February 2015.75 To date there have been six funding rounds. £2.9 billion was awarded in rounds 1 - 4; £450 million in the first round, £950 million in the second, £1.05 billion in the third and £506 million in the fourth.

While rounds 1 - 4 were open to both private and public sector organisations, rounds 5 and 6 were only open to the private sector. £306 million was allocated in round 5 and £297 million in round 6. Successful bidders from round 6 were announced in February2015. Successful bidders from rounds 5 and 6 have until March 2017 to draw down their allocated funding.

In October 2016, it was confirmed that no future rounds of the Regional Growth Fund were planned.

More information can be found in Commons Briefing Paper ‘Regional Growth Funds’.

73 HM Treasury; Budget 2010 page 62; HC 451; March 2010 74 HM Treasury; Budget 2010 page 30; HC 61; June 2010 75 BIS; Regional Growth Fund; February 2015

25 Support for Small Firms

4. Non-Financial Support

4.1 Procurement Help

Procurement Help

• Government provides support for businesses wanting to tender for contacts

• UK and EU legislation sets out principles and rules for choosing of suppliers

The public sector spends around £200 billion buying from the private sector each year – this offers significant opportunities for small businesses.76

The UK government is keen to open public procurement opportunities to small businesses – the 2019 Conservative manifesto pledged to “support start-ups and small businesses via government procurement”.77 The government’s broad approach in this area has been to make the procurement process ‘simpler, more open and less bureaucratic – so all businesses, no matter what their size have a chance of success.’78 They have implemented a range of measures, for example, simplifying bidding procedures and making contract opportunities easier to find.79

UK and EU legislation sets out the principles and rules that should be followed in choosing suppliers for public sector procurement contracts, along with remedies available when the rules are breached. Businesses wanting to explore the use of these remedies are recommended to take legal advice.

The UK government runs a Public Procurement Review Service (previously called the Mystery Shopper service) that allows suppliers and potential suppliers to raise concerns anonymously about unfair public sector procurement practice – it covers the public sector (outside areas devolved to Scotland, Wales and Northern Ireland) and prime contractors working on government contracts. 80

76 HM Treasury, Whole of Government Accounts 2017/18, May 2019. The figure

quoted covers all procurement spending except money paid between the public-sector bodies covered by the Whole of Government Accounts.

77 Conservative manifesto 2019 78 HM Government, Consultation Document: Making public sector procurement more

accessible to SMEs, 19 September 2013 79 See the previous source and Crown Commercial Service, Procurement Policy Note –

Reforms to make public procurement more accessible to SMEs, 18 February 2015. Policies under the current government are so far largely a continuation of those under

previous governments – see the oral question on Small and Medium-sized Businesses: Government Contracts on 27 February 2020 for a more recent discussion (HC Deb 27 Feb 2020 c672).

80 See gov.uk, Public Procurement Review Service: scope and remit for more information about the service.

Number 7690, 13 March 2020 26

The Contracts Finder website has details of contract opportunities worth over £10,000 from central government and £25,000 for the rest of the public sector.81 There are a range of other websites that show public sector contracts – there is a useful list on the Gov.uk page, Sell goods or services to the public sector.

The Gov.uk website has a useful website Doing business with government: guide for SMEs.

For information on support for small business and procurement in devolved areas, see:

• Scottish Government, SME access to public contracts • Business Wales, Sell2Wales - selling to the public sector and

Business Wales, Tendering • Northern Ireland Department of Finance, A guide to public

procurement for small and medium sized enterprises

For more information on policy, statistics and Brexit see the House of Commons Library briefing paper, Public Procurement.

4.2 Small Business Commissioner In summer 2015 the Coalition Govt proposed establishing a Small Business Commissioner, and made statutory provision for his new office under the Enterprise Act 2016. Its dedicated website can be found here.

The Small Business Commissioner service was launched on 20th December 2017. The first Commissioner was Paul Uppal, who served in post between October 2017 to October 2019. On January 27th 2020 Philip King was appointed the interim Small Business Commissioner with immediate effect. Suzanne Burke served as temporary Commissioner between October 2019 and January 2020.

The SBC handles complaints from small businesses about unfair payment practices. It is part of a package of measures to tackle late payment and unfavourable payment practices in the private sector. The SBC is an independent public body and covers the whole of the UK - England, Wales, Scotland and Northern Ireland.

The function of the SBC is to -

• Provide general advice and information to small businesses on matters such as resolving disputes

• Signpost small businesses to existing support and dispute resolution services through the SBC’s website

• Consider complaints about payment issues between small business suppliers (that is businesses with fewer than 50 staff) and their larger customers making (non-binding) recommendations on how the parties should resolve their disputes.

The issue of late payment of invoices, especially to small firms, is an ongoing one within the business community. As far back as 2001,

81 Crown Commercial Service, Procurement Policy Note 02/17: Promoting Greater

Transparency, 13 December 2017. Note that there are some exceptions to the requirements to publish contracts over these thresholds on Contracts Finder.

27 Support for Small Firms

research by the FSB found that 73% of small businesses had experienced late payment in the previous 12 months, with half having outstanding invoices of £5,000 and a fifth having £20,000 outstanding.82

BACS, the company behind Direct Debit and Bacs Direct Credit in the UK, reported in July 2017 that the UK’s smaller businesses are facing a total bill of £2.16 billion to chase overdue payments. They state that ‘Out of the 1.7 million SMEs in the UK, almost 640,000 say they have to wait beyond agreed terms for payments.’83

Although, other avenues exist for dispute resolution for small firms, the SBC aims to specifically address the issues faced by small businesses over payment and the uneven ‘power dynamic’ between small and larger firms.84

On the occasion of its launch, the then small business Minister, Margot James, said:

This government’s Industrial Strategy is building a Britain in which small business can continue to thrive. Over the last 5 years the amount owed to smaller businesses has more than halved from £30 billion to £14 billion. Today’s Small Business Commissioner service will empower small businesses to take action if they are paid late, potentially delivering a £2.5 billion annual boost to the economy.

Mike Cherry, National Chairman of the Federation of Small Businesses (FSB), said:

“The UK is gripped by a poor payments crisis, over 30% of payments to small businesses are late and the average value of each payment is £6,142. This not only impacts on the small business and the owner, it is damaging the wider economy. The Small Business Commissioner is crucial to turning the tide on this late payments culture. FSB will be encouraging small businesses affected to use the service, and we hope then to see clear actions taken to tackle the worst examples of supply chain bullying. Success will be a UK economic culture where a business that does a job promptly, is paid promptly.”85

It was initially estimated that the public cost of setting up the SBC would be £1.1 million.86 The running costs will depend on the demand for the service and the number of complaints. In a debate on the subject in the House of Lords Grand Committee on 6th December 2017, Lord Henley stated that

82 Federation of Small Businesses, Late Payment, July 2011 83 BACS, ‘Late Payments Costing Smaller UK Businesses More Than £2BN a Year’, 11

July 2017 84 See: BIS, Small Business Commissioner Impact Assessment, September 2015 85 BEIS, Government launches Small Business Commissioner to help small firms resolve

payment disputes, 20 December 2017 86 BIS, Enterprise Bill Impact Assessments Summary, September 2015

Number 7690, 13 March 2020 28

the annual running costs will be roughly £1.4 million, most of that going on staff costs … [I]t is estimated that there may be 390,000 enquiries and 500 complaints.87

The direct costs to businesses are expected to be zero.88

In April 2019, the Commissioner reported that 17 companies had been removed or suspended from the Prompt Payment Code during the past quarter. 89

More information about the problems of late payment and the attempts to improve it are set out in a separate Library briefing paper.

4.3 Telephone helplines and Gov.uk portal A government-run Business Support helpline provides information about funding and other sources of help for new and existing businesses. There are devolved versions of the helpline available and support is also available on Twitter, Facebook, YouTube and via webchat.

It was launched in September 2011 as Business Link.

The telephone helplines complement the Gov.uk business support portal and is intended to offer bespoke information and signposting that customers could not get from the website alone. It offers two tiers of support, light touch and in-depth business support. It is named differently in the devolved regions - Business Wales Helpline, Business Gateway (Scotland) and Invest Northern Ireland

The aim of both the Gov.uk business support portal and the telephone helplines are to address market failures where

• businesses find it difficult to place a value on the benefits of formal assistance, particularly prior to receiving assistance,

• businesses face difficulty assessing the competence and trustworthiness of external information or advice, and

• businesses face difficulties finding information and advice.

In 2018, it helped 31,500 businesses, of which 65% were entrepreneurs and start-ups.90

Business Support Helpline (England) Telephone: 0300 456 3565 enquiries@businesssupporthelpline.org Monday to Friday, 9am to 6pm Find out about call charges

The Business Support Helpline for England is also on:

─ web chat

87 HL GC Deb; 06 December 2017; cc 55GC 88 BIS, Small Business Commissioner Impact Assessment, September 2015 89 Small Business Commissioner website, accessed December 2019 90 HC Deb Written question – 6244, Small Businesses: West Midlands, 5 November

2019

29 Support for Small Firms

─ Twitter

─ Facebook

─ YouTube

Scotland

Get business support online, or over the phone.

Find Business Support Scotland Telephone: 0300 303 0660 Textphone: 0800 023 2071 Monday to Friday, 8:30am to 5:30pm Find out about call charges

Wales

Get help with your business online, or by calling the Business Wales Helpline.

Business Wales Helpline Telephone: 0300 060 3000 Monday to Friday, 8:30am to 5:30pm Find out about call charges

Northern Ireland

Find advice and support for starting a business. You can also contact the Invest Northern Ireland helpline.

Invest Northern Ireland Telephone: 0800 181 4422 Monday to Friday, 8:30am to 5pm Find out about call charges

91

91 Gov.uk, Business support on the phone and online, last accessed December 2019

BRIEFING PAPER Number 7690, 29 June 2018

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