David Prosser: Better belatedly than never, Brussels is standing back to let us support the engine rooms of recovery

Small Talk

Governments across Europe will be able to give small businesses far greater financial support following new rules unveiled by the European Commission this week. The reform of the state aid regime, announced by Commission vice-president Joaquin Almunia, represents a big opportunity for policymakers.

The problem with the state aid restrictions in recent years has been that they have produced unintended consequences. The regime was introduced to stop one member state giving its enterprises an unfair advantage over businesses elsewhere in the EU by offering financial support that private sector investors wouldn't countenance.

At a time when markets are functioning properly, that seems sensible. In the wake of the credit crisis, however, private sector funding for small businesses shrank so dramatically that the state has often been the only possible source of finance.

Unfortunately, state aid regulation has prevented governments from playing that role as effectively as they would like. For example, when the UK Government announced an increase in the size of the investment in small companies allowed under tax-efficient initiatives, the Commission intervened to scale back the proposed £10m limit to £5m.

Other initiatives have never seen the light of day, with policymakers often forced to limit new schemes to small-scale endeavours. Given that all member states see small business growth as the key to driving economic recovery, this is bonkers.

The good news is that the new rules include some important concessions. For example, support worth less than €15m (£12.5m) a year for a company will no longer fall within the state aid curbs; the current threshold is €1.5m a year.

Meanwhile, the regulation governing support that does still fall within the regime is also being eased. Governments will have the option of offering a much wider range of financial instruments. And while they'll still be required to ensure schemes have an element of private sector participation, this may only need to count for as little as 10 per cent of the value of the support.

Brussels bashers might say it has taken an age to wring out these concessions. Nevertheless, a new regime will come into effect on 1 July, and the Commission has at least tried to embrace new opportunities as well as solving existing problems. In particular, it will allow governments to offer additional support for new small business funding platforms – through grants and loans for those behind such initiatives and tax relief for investors using them.

If policymakers accept the Commission's invitation, crowdfunding could be a big beneficiary. The opportunity now is to offer this sector, and other innovations, greater support. Why shouldn't, for example, individuals putting money into companies via these platforms be able to shelter their investments from tax through an ISA? Watch this space.

Broadband push boosts firms rich in fibre

You might call it a digital dividend. Successive governments have pledged to improve Britain's IT infrastructure, and private companies are now beginning to reap the benefits. Witness CityFibre, which will today announce its intention to float on AIM in a £16.6m fundraising.

CityFibre builds and operates fibre-optic networks in towns across the UK. Formed last year following an amalgamation of smaller players, it already has a presence in around 50 towns and has just won a contract to run a network for Peterborough City Council.

It's a low-risk business model. CityFibre's investment costs are often almost entirely guaranteed upfront – more than 80 per cent in the case of the Peterborough contract, for example – with additional revenues then raised as take-up among households and businesses increases.

Outside London, the company points out, towns and smaller cities are only just beginning to get to grips with the need for better infrastructure, with most networks still dependent on copper wires. Government support provides a fair wind.

Banks are in danger of being bypassed

Britain's alternative finance industry raised more than £1bn for the first time in 2013, according to new research published this week.

Analysis by the broker Liberum reveals that platforms ranging from peer-to-peer lending enterprises to invoice-trading operations raised £1.03bn over the course of last year.

Just over 40 per cent of the total came from Zopa, the platform through which lenders advance money to individuals, but the remainder was almost entirely accounted for by different types of finance raised for business. Liberum said that fundraising grew by 7 per cent in December alone, and Cormac Leech, an analyst at the broker, warned that the sector would become an increasingly important challenger to traditional banks.

"This exponential growth demonstrates that the internet-driven 'disintermediation' of traditional banks is well under way," Mr Leech said. "Banking is essentially about information and legal contracts making it as digitisable as music – banks need to rapidly reinvent themselves to stay relevant over the next decade."

Small business person of the week

Clive Rich; Chairman, LawBite

"I launched LawBite, an online legal service for small businesses, just over a year ago. I'd been a lawyer at several big media companies, where I'd seen all sorts of small firms with talent and brio when we were doing deals with them. In time, I wanted to do something for myself, and I realised there was a real opportunity here. The big law firms are interested in larger companies, and they have a reputation for being slow, expensive and talking in legalese. So a firm targeting small businesses with a plain-English, speedy and affordable service could be really successful.

"It took me two years to get the site right, but that is how it has turned out: we've had a tremendous response from small firms to a service that offers standardised documents for every legal need and individual advice where necessary. So much so, we've tripled our profit targets.

"We've also signed some important deals – like an agreement with Start Up Loans that it can give our details to entrepreneurs borrowing money through that scheme.

"We raised £450,000 last year from Crowdcube and we've just announced another fundraising there, this time for £120,000. We've been inundated with new opportunities and it's made us realise just how scalable this business can be; there are 25 million small firms across Europe all facing the same sort of legal problems."

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