Breedon’s 11 Ways To Finance Small Businesses

Simon Deane-Johns, recently quoted in the Times regarding the £20bn National Loan Guarantee Scheme, outlines how the Breedon Taskforce promises a wealth of innovation and competition in the market for SME finance over the next few years.

Following a rapid but inclusive review, the Breedon Taskforce has recommended 11 ways to improve the financing options for the UK’s smaller businesses. The government has since welcomed the report.

According to Simon Deane-Johns, who was invited to respond to the Taskforce and was supported by Keystone lawyers Tony Watts and Karl Pocock, the work of the Taskforce promises a wealth of innovation and competition in the market for SME finance over the next few years.

The report confirms that net bank lending to smaller businesses will continue to decline due to the banks’ own credit problems and the Basel III capital adequacy rules. In fact, the report estimates a funding gap of about £26bn to £59bn for SMEs over the next 5 years, and an overall finance gap of up to £190bn for the UK business sector as a whole.

But the Breedon Taskforce has found plenty of scope for growth in alternatives, both in the form of new funding sources, as well as more traditional finance options that have developed in countries where banks have not been so dominant.

The most interesting aspects of the report are:

• the acknowledgement that the plethora of government tax incentive programmes to date have failed to gain traction;
• the recommendation for either an extension to the ISA scheme or a new ‘Enterprise Savings Account’;
• the acknowledgement that the financial regulatory and promotional framework presents barriers for investors and businesses alike and that capital controls and limits on unregulated investments are creating a culture of “reckless prudence” amongst regulated financial institutions;
• the acknowledgement that there is “some sense” in the request by peer-to-peer platform operators for “proportionate regulation, to protect investors and provide confidence” but that officials are concerned that “over-zealous regulation would add to costs, destroying the market before it has a chance to gain scale organically;”
• the recommendation that the government should lend in conjunction with the private sector via direct finance platforms;
• encouragement for standardisation to promote the trade in invoices;
• the recommendation to create an Agency for Business Lending that would “aggregate a large number of SME loans and finance them via the corporate bond markets” – although, presumably, this would have to be designed to avoid the downside of previous shadow banking activity which is unduly complex compared to direct finance.

The Government has since welcomed the report, supporting further work on most of the avenues recommended, but declined to extend the ISA programme.

In particular, there was good news for peer-to-peer finance platforms (a number of which are Keystone clients). The Government has acknowledged the industry’s desire for proportionate regulation, and welcomed the establishment of the Peer-to-Peer Finance Association to “help raise awareness among SMEs and investors and establish industry standards to protect investors and borrowers”. The Government has also “allocated £100m of the Business Finance Partnership to invest through non-traditional channels that can reach smaller businesses, which could include peer-to-peer lending as well as mezzanine loans and asset-based finance. The Government will request proposals for investment in May.”

However, the Government’s rationale for resisting the Breedon recommendation to extend the ISA programme ironically provides the very basis on which it should be extended. In particular, the broad popularity of the ISA scheme means that small investors’ life savings should be placed in many more asset classes than are currently accessible.

Simon Deane-Johns was also quoted in the Times in response to the budget announcement of a £20bn National Loan Guarantee Scheme , and £1.2bn of lending via non-banks through the Business Finance Partnership.

[http://www.thetimes.co.uk/tto/business/budget2012/article3359784.ece]