Commentary: Small firms need own ombudsman

There are lessons for small firms as well as banks in yesterday's report by the Small Business Research Programme. In particular, they should not take independence too far and should be imaginative in their search for finance. They should also learn from the experience of the best firms, which draw up specific growth plans, take a professional approach to staff and administration and seek a diversified customer base rather than rely on one big customer.

The banks are happy with the findings, especially as they emerge during a week in which their top men have been called in to see the Chancellor about small business lending. Barclays Bank, the Department of Trade and Industry, the European Commission and the Rural Development Commission helped the Economic and Social Research Council with the pounds 1.4m cost of the project.

David Lavarack, head of small business services at Barclays, claimed the report upheld 'much of what we have been saying over the last 12 months'.

The programme was co-ordinated by Prof David Storey of Warwick University's Centre for Small and Medium-Sized Enterprises, and took in research by several academics with the aim of increasing the understanding of small business and its importance to the economy.

It would be surprising, however, if this report helped the dust to settle quickly in the continuing row about small businesses and banks. The recession is destabilising the relationship, because it is killing off large numbers of firms. The banks are the pressure point, because it is usually they who call closing time and put in a receiver. In the great majority of cases the banks have no alternative, but there are insensitivities, mistakes and injustices as well.

One reason for the explosions of anger that litter the Chancellor's correspondence in-tray is that the relationship between banks and small businesses is too one-sided, because a firm in trouble cannot in practice shop around for a new bank if it feels it is being mistreated. Neither can most small firms afford to go to law to fight their banks.

The Banking Ombudsman is restricted to dealing with private individuals and unincorporated businesses. Big businesses can look after themselves. But the majority of incorporated small businesses are also tiny and run in a very personal way (with most of their profits going to their directors.) In these circumstances, an ombudsman specifically for small incorporated businesses would make a lot of sense. With the argument between businesses and banks now so polarised, the ombudsman would also be able to find out how much genuine abuse there is. And the Chancellor would have someone to pass all those letters to.