Last Thursday, the day after the Budget, Vince Cable released a 'strategy update' on his Business Bank. While the paper contains many worthy words I can't help but feel the focus of the Bank is not quite right and that more is needed to address the most pressing problems facing SME access to finance in the UK today. Here is my potted commentary on the strategy update.
The first point I'd raise is a positive one that Vince Cable seems to explicitly link the Business Bank (BB) to his industrial strategy. This certainly fits with our own view of what industrial strategy needs to be, The Route to Growth, which encompasses key 'horizontal' policies and strategies that impact across sectors rather than focusing all our attention on specific interventions for specific sectors.
Dr Cable now needs to make sure that the BB is not siloed within his Business Department but is seen by his colleagues as part of the whole government's view on how to improve access to finance.
Broadly I'd agree with the BB's objectives to increase the diversity of debt markets, increase competition, and operate on commercial terms. Dr Cable would do well to pause there as these objectives alone would be more than enough to keep the new institution busy.
But instead the mandate is broader than this with additional objectives to diversify equity markets, improve the supply of long-term patient capital, and reorganise business support services also included. None of these latter aims are wrong - but they will spread already thin resources ever more sparsely when I think it would be better for the government to focus its firepower on the most pressing issues first.
I would agree with the analysis from BIS in the main:
SMEs are finding it much harder to access finance post financial crisis;
UK SMEs are particularly reliant on bank debt;
Compared with European competitors, our SMEs invest less and account for a lower relative share of overall investment;
Loan rejection rates in the UK compared with France or Germany are high;
The concentration of SME banking in the UK is very high.
Armed with this market analysis my suggestion would be to focus solutions on trying to improve SME banking in the UK. This however does not seem to be the central thrust of the BB.
Instead, BIS goes over a plethora of existing finance interventions the government already manages as well as flagging some future areas for amalgamation under the BB. The areas include:
Enterprise Capital Funds, designed to support early stage VC;
The Business Angel Co-Investment Fund, funnily enough, to support business angel investing;
The UK Innovation Investment Fund, established by Labour to invest in innovative technologies;
Mezzanine finance, a focus of the Business Finance Partnership (launched last year), that offers a high return to investors while avoiding companies giving up equity;
Enterprise Finance Guarantee - a scheme that operates through the banks to support firms that have run out of security;
Again all these are worthy and have their place but at most are collectively worth a few £ billion compared with the £100 billion plus SME bank lending market that urgently needs attention.
The last substantive part of the strategy update talks about the BB's role in rolling up a range of disparate types of government-supported business advice under the BB banner to provide target businesses with a more 'holistic' experience.
While there certainly was room for a thorough rationalisation of the various government access to finance schemes, I think there's a question mark over whether it is sensible to also include things like UKTI services to SMEs, the Technology Strategy Board's grant schemes, and the Manufacturing Advice Service under the BB.
These are successful advice and support services that already have effective brands. It would be unfortunate to damage them in the necessarily staged development of the BB.