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Small Talk: Bank finally using its toolkit to fine-tune financial stability

David Prosser

Successful policymaking requires both luck and good judgement. The small business leaders who got lucky last week in the rush to hear the first public speech from Mark Carney will have been delighted to hear the new Governor of the Bank of England appears to have both. Mr Carney was able to address the cream of Nottingham’s commerce armed with positive second-quarter GDP figures that arrived just as he settled into the hot seat, but he also offered them an important goodie.

The Bank’s announcement that it is to relax the liquidity requirements for eight banks and building societies that meet its capital strength tests could, Mr Carney suggested, free up as much as £90bn of funds that could be offered in additional lending for small businesses. It is the first instance of the Bank using the macro-prudential toolkit handed to it in the wake of the financial crisis for exactly this sort of fine-tuning of financial stability.

Not before time. Nationwide Building Society, the country’s biggest, confirmed last week that it has postponed its much heralded launch into the small business lending market. Though it will not say so publicly, reports suggest an explanation for the delay is Nationwide feels its finances are too constrained by regulatory requirements for it to launch the new venture.

The latest evidence on the flow of finance to the small business sector, meanwhile, paints a decidedly mixed picture. The good news is that small businesses do, finally, seem to be getting their hands on more credit. Market research company BDRC, which publishes its SME Finance Monitor quarterly, reported last week that 44 per cent of small businesses were able to access external sources of finance during the second quarter, up from 39 per cent during the previous three months.

Less happily, BDRC’s research suggests this additional finance hasn’t been coming from the banking sector – 33 per cent of small businesses said they borrowed from the banks during the second quarter, exactly the same figure as in quarter one. Rather, the flow of credit has picked up from alternative sources of funding – grants, invoice finance and self-finance, for example.

Nor do the Bank of England’s schemes to boost lending seem to be inspiring much confidence. Just 16 per cent of small businesses told BDRC that Funding for Lending and similar programmes would make it more likely they would seek bank credit – that’s down compared to the first quarter.

In that context, Mr Carney’s liquidity initiative is much-needed. However, the better-known forward guidance policy, the Governor’s boldest move since arrival at the Bank, may prove just as important to small businesses. As we tackle the supply of credit, we must also consider demand. The mindset of small businesses needs to change.

The banks have consistently argued that one reason for the low aggregate lending figures is that large numbers of small businesses do not want to borrow. And BDRC’s research supports that contention – three-quarters of small businesses describe themselves as “happy non-seekers of finance”.

However, there now seems to be broad agreement that the UK’s economic prospects are improving – albeit slowly. And with interest rates still at rock-bottom levels, those businesses that need to borrow in order to make the investments necessary to capitalise on the recovery have never had an opportunity to do so more cheaply.

Mr Carney’s forward guidance stance is designed to reassure business owners who don’t yet have the nerve to take the plunge. The Governor hopes his pledge that the Bank will keep rates low for some time to come will calm the nerves of two groups of business owners – those who believe the recovery won’t be sustained and those who fear it could be nipped in the bud by a premature rise in the cost of borrowing.

SyndicateRoom deals only in firms previously funded

Britain’s crowdfunding sector continues to develop rapidly, with new launches and innovations adding to the mix almost continuously.

The latest addition to the sector is SyndicateRoom (see syndicateroom.com), which, like several other crowdfunding services, offers a pool of private investors the chance to buy equity in the growing businesses listed on the site.

The twist is that all of the businesses on the site have already received some funding from business angels. The founders believe this will reassure many would-be investors – the idea being that professional investors with experience of having backed small companies have conducted due diligence on the firms seeking cash.

The launch is an interesting innovation for a sector still in its infancy – the next big question for the industry will be regulation, with the Financial Conduct Authority signalling again last week that it has concerns that not all investors understand the risks inherent in putting money into start-up businesses.

Burnley wins 2013 business award

Burnley is this year’s most enterprising town in Britain, according to the Enterprising Britain Awards 2013, a scheme backed by the Department for Business. The Lancashire town won the award for its efforts to back small, growing businesses – and to get the public to rethink perceptions of the former industrial stronghold.

The “Burnley Bondholders” scheme has seen more than 100 local firms pool their resources in a bid to promote the town as an attractive place to do business. So far, the scheme has attracted more than £10m of investment to the area.

Julie Cooper, the leader of Burnley Council, said: “We are building an innovative aerospace supply village in the former Michelin tyre factory, emphasising how we are transforming an old manufacturing site symbolic of Britain’s industrial past into a shining example of our country’s high-tech manufacturing future.”

Small Business Woman of the Week: Elizabeth Gooch, chief executive, EG Solutions

I launched my back office optimisation software company business in 1988. I’d always wanted to work for myself and suppliers kept telling me they needed someone to come into their businesses. The firm was self-financed and profitable from the start, initially as a consultancy and then, on the suggestion of my chairman, a software business, because we were effectively giving away our proprietary technology.

It was good advice – I’d brought him in as I really believe in adding to the skills base. You can’t possibly know everything yourself. We floated on the Alternative Investment Market in 2005 as we needed funding to continue growing. We were no longer a £1m-£2m a year business in terms of turnover and we kept bumping up against our bank overdraft limit.

Our turnover is now £5m and the next stage is to internationalise the business. We have won accounts from three large global banks. I was awarded an MBE in 2012 for ‘services to the financial services sector’.