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Tackle lending and late payment in Budget to mend small business cash flow crisis, says Forum of Private Business

Forum calls for better lending information to support new National Loan Guarantee Scheme, increase choice and help alternative funders compete with banks.

As part of its Budget focus on boosting bank competition and prompt payment the Forum of Private Business is calling for better, more standardised lending data to support the Government's new National Loan Guarantee Scheme (NLGS) and increase choice for small firms.

The Forum believes the Government should work towards increased standardisation in order to provide firms with better information about the many different financial products available, and to make it easier to securitise or underwrite loan portfolios as part of any long-term ‘credit easing' initiative – such as the imminent NLGS, which is being launched in an attempt to bring down the cost of lending.

The not-for-profit employer organisation is welcoming the scheme in principle but, with figures from the British Bankers' Association (BBA) showing small businesses are seeking loans of approximately £20,000 on average, warning that credit easing must work for the smallest businesses that need it most.

In addition to tackling the perennial problem of late payment the Forum believes that greater competition in parallel to the NLGS is necessary to avoid a cash flow crisis for small firms – particularly allowing alternative funding platforms to compete more effectively with the big banks.

"Small business owners are being expected to drive the economy forward yet find that relentless cost increases, mounting late payments and continued credit restrictions severely hinder their ability to control cash flow," said the Forum's Senior Policy Adviser Alex Jackman. "Cash is the lifeblood of any business and there must be definite action in the Budget if we are to mend this cash flow crisis among small firms.

"Providing it works, and crucially reaches the smallest firms that need it most, the new National Loan Guarantee Scheme will be a welcome step towards bringing down the steep cost of lending - but we also need more competition allowing non-bank funders to compete more effectively in small business finance markets dominated by the big banks.

"Particularly, we want support for innovative crowdsourced funding models that are less dependent on automated risk criteria, the over-reliance on these being a central criticism levelled at major lenders in recent years."

Mr Jackman added: "In addition to tax incentives to act as a stimulus, it is important to provide better, more standardised information for non-banks funders and small business customers – and for use in the operation of the NLGS itself."

Banking competition

In September 2011, the Independent Commission on Banking reported that 85% of SME current accounts are controlled by just four banks – a lack of competition compounded by various barriers to switching lenders.

In the same month, the findings of the Forum's Cash Flow and Finance Panel member survey suggested business owners are sceptical about recent finance initiatives - including the government-brokered Project Merlin, where the banks fell short of their lending target by £1 billion – coinciding with declining confidence in mainstream lenders and falling demand.

Alienated by restrictive risk criteria and subsequently steep costs, there are increasing signs business owners are looking elsewhere for affordable funding. Around a quarter of respondents called for more choice between ‘traditional' banking services and 21% want better access to non-bank funding. Approximately 1 in 5 businesses were positive about the potential of using crowdsourced funding, suggesting it could offer a good solution to their finance needs in the near future.

In its Budget submission the Forum is calling for more published information to be made available to allow alternative lenders to better assess whether to enter small business finance markets traditionally dominated by the mainstream banks.

Further, in order to help non-mainstream financial services play a greater role in providing sustainable lending in the future, the Forum wants the Government to financially back peer-to-peer lending projects under the Business Finance Partnership and hand private lenders further tax breaks.

Specifically, the Government is being urged to reduce to 0% on the tax on interest received during the lifetime of a loan, instead of the 50% top tax rate, providing the loan is still outstanding after three years and an additional tax relief if a business fails before the loan is repaid.

The Forum is also calling on the Government to open up the Enterprise Investment Scheme (EIS) to alternative lenders who wish to lend to small businesses.

In addition to addressing competitive barriers to alternative funders in its Budget submission the Forum has submitted evidence to the Government's Breedon Review aimed at boosting SME access to alternative, non-bank finance.

Late Payment

With the latest figures from payment body BACS showing that SMEs are owed an all time high of £33.6 billion, up from £30.4bn in 2010, the Forum is leading the call to action on late payment.

The organisation's Budget submission calls for measures that enable prompt invoice payment to cascade down the supply chain, beginning with large companies at the top.

These are: introduce the new EU Late Payment Directive – which standardises 30-day payments - into UK law as soon as possible, subject to a review of its transposition into UK law; use the public procurement process to promote best practice by avoiding using businesses with over 250 employees if they are notoriously bad payers; require more detailed information on payment times from FTSE companies and, finally, work towards a strengthened Prompt Payment Code. 

The Forum led a recent late payment campaign backed by many of the UK's leading trade bodies. The campaign has secured a commitment from the Government to address the issue without delay and has resulted in the re-formation of the Late Payment Working Group.

With one emphasis being how business owners can proactively minimise the problem, the Forum is carrying out research with Graydon UK, a credit rating agency, into firms' payment and cash flow management systems and barriers to implementing them.

The Forum is lobbying for better access to finance and payment practices in order to improve cash flow as part of its headline Get Britain Trading campaign. For more information and to join the campaign visit www.getbritaintrading.co.uk or call 0845 130 1722.

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