Should the Government do more for small business and should the banks lend?

SMEs have enjoyed an increased presence in the limelight of part politics this Autumn.

David Cameron's VAT holiday and National Insurance contribution calls come on the back of a £350 million aid package deal for SMEs that will see support being provided in many areas including skill training.

The important parts of the package are state agencies to pay bills within 10 days – something the government can deliver – and the instruction to the banks to lend at 2007 levels – something the state cannot.

However, as Richard Northedge of Director of Finance Online says, "for small firms facing falling sales and margins that are turning negative, training and investment are luxuries that are already on ice: their short-term objective is survival."

The cashflow benefits of prompt payment are important for small firms but refinancing old loans and access to increased working capital even more so.

Calls have been made from within industry for more financial assistance to be made by the Government. This morning Piers Cracknell, Commercial Director of currency specialist Moneycorp summed it up when he said:
 
“While small and medium-sized businesses will welcome the Government’s aid package, £350 million is a paltry sum compared to the £500 billion that was used to bail out the banks. Huge challenges lie in store for SMEs, particularly the 30 per cent that engage in cross-border trade. The pound continues to fall heavily against both the dollar and euro which means costs are soaring at the worst possible time."

The banking challenge for SMEs

Northedge has hinted that it is unlikely things will get easier for small businesses when it comes to seeking finance: 

"As the main shareholder in three of the big banks, the government should be not be encouraging imprudent lending. It is quite legitimate that banks now refuse loans they would have provided – or did provide - last year, or that they demand higher interest rates or greater collateral.

In practice banks may advertise credit availability to keep the government happy, but in practice it will be on terms that companies will decline. Short of the state offering guarantees or subsidies, the banks couldn’t and shouldn’t do anything else.

It is welcome that ministers appreciate that small firms are a key driver of the economy, but many operate on models that are unviable in a recession. Banks cannot be forced to make bad loans."

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