Tony Drury issues paper to the Treasury on the financing of SMEs

NOTE for Mark Hoban MP

The Financing of Small Businesses (“SMEs”)

To do justice to this complex subject would take at least six months. However there are TWO principles which, if not understood and accepted, would render any outcome of any academic and/or practical exercise, worthless at best and more likely to waste vast amounts of tax payers money.

Ever since the Committee on Finance and Industry (‘The Macmillan Committee’) was formed in 1929 the Holy Grail for every Government, and now the Coalition Government, has been to find a way of financing SMEs ( a meaningless term but one everybody uses) efficiently and politically. Every single solution proposed has failed and cost huge sums of money (try Business Link, Advantage West Midlands and so on.)

The reason for this is strangely quite straightforward:

Principle One

You can neither off set nor eradicate risk. It is inherent with SMEs. It’s because of their size. They have  neither the history, the financial reserves nor the experience to offset setbacks. Thus some will fail.

Why should banks accept this risk? They are commercial operations.

Early stage finance can only come from Government subsidy. Only the Government has the power and incentive (SMEs employ a lot of people) to accept the risk.

The Government will try tax-based schemes and they are not to be ignored. If however you would like me to explain the complexities and likely pitfalls of the SEED/EIS scheme I’m happy to do so. The Treasury paper itself only expects a minority of companies to take advantage of it.

I accept Mr. Hoban that this paper will shortly reach your waste paper bin (“What is he talking about? Government subsidy? Does he not realise Gordon Brown spent all the money”).

THE ONLY PRACTICAL solution to the financing of SMEs is Government subsidy.

If you fail to accept this principle your ideas are almost certain to fail: see history.

 

Principle Two

SMEs are unable to access the advice they desperately need at an economic price.

In the time I built up St. Helen’s Capital I calculate I conducted in-depth interviews with over 800 companies. I’ve put over sixty companies on public markets.

Trust me, this is the second key problem.

 

I have a solution and it can work. It will require an investment from Government but in this case I think it can be offset by an improvement in the default rate (because the companies will prosper from better advice).

Hope this helps. Sorry about the style but I deal in answers.

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