Desperate times call for desperate measures. There is good reason to think the Government's new supply chain finance initiative will be successful – in that sense it is to be applauded. But the fact David Cameron last week felt it necessary to ask the bosses of Britain's biggest companies to back the scheme shows just how dysfunctional the operating environment for small businesses has become.
At a Downing Street summit, the Prime Minister rightly pointed out that it is in the interests of large companies for small and medium-sized enterprises to stay afloat – there's nothing more disruptive to your supply chain than a succession of key suppliers going under. He wants to see more companies follow the example of the likes of Vodafone, which has begun intervening on small suppliers' behalf.
The idea is that as soon as large companies approve an invoice from an SME, they notify the supplier's bank. This bank should then be prepared to lend the full amount of the invoice to the small business at low interest rates, safe in the knowledge it is effectively gambling on the credit rating of a very large company, rather than that of its own customer.
Small business groups such as the British Chambers of Commerce have welcomed the initiative, which they think could make a big difference. That's good news, but the launch of supply chain finance should prompt two urgent questions.
First, do our banks have such little understanding of their SME clients that they feel unable to lend without this sort of intervention? If so, all that talk of building relationships with small businesses doesn't count for much.
Second, if the large companies participating in this scheme intend to notify the banks at the point at which they're approving invoices, why don't they just pay them? If they speeded up payments to small suppliers, these companies wouldn't need to turn to the banks for an advance on money they are owed. Supply chain finance is needed because so many small businesses are experiencing cashflow difficulties. They are solvent operations with good customer bases, but they're struggling with their day-to-day finances. Those problems are soluble in normal times, when bank lending smooths out the peaks and troughs of cashflow, but when that credit is withdrawn, businesses start going bust.
What the Prime Minister is effectively saying by pushing for this initiative is that there is nothing to be done about the root causes of SMEs' cashflow problem. He was unable to get the banks to loosen credit, and he seems similarly powerless in the face of a late payments problem that has been getting worse and worse, with small businesses suffering the most.
Where do we go from here? Well, for all the talk of forcing the banks to lend, the countervailing pressures of the capital constraints imposed by regulators in the wake of the financial crisis are likely to be more powerful. That is why Sir Mervyn King, the Governor of the Bank of England, was so pessimistic last week about the prospects for a strong economic recovery without further bank recapitalisation.
That leaves the issue of late payments. Here, one would hope, the Government has greater power. A good start would have been for the Prime Minister to use last week's summit to haul the bosses of large companies over the coals for their poor record on paying smaller companies promptly. By all means ask these businesses to intervene with suppliers' banks – and, to their credit, companies such as Rolls-Royce have even begun lending directly to SMEs – but let's also try to reduce the need for credit in the first place.
Cab seller that's really motoring
Amid the storm engulfing Manganese Bronze, the London taxi manufacturer that has gone into administration, few investors have spotted that there is another player in the market. Aim-listed Eco City Vehicles ought to be well-placed to benefit from its rival's travails.
ECV has been knocking around for 25 years, and now plies its trade supplying cabbies with the Mercedes Vito. The taxi was developed and launched by the company, but Mercedes now makes the vehicle, paying ECV royalties on each one the British company sells. Those revenues were rising even before the Manganese Bronze debacle, with ECV capturing a 37 per cent share of the market in the first seven months of the year.
The company has been attracting quiet interest – seasoned small-company investor Nigel Wray recently took a 15 per cent stake – but its stock, trading just above 2p has barely moved on the Manganese Bronze news and remains off its highs of the past 12 months. ECV has £3m of debt, though much of that is a mortgage liability, but sales could hit £28m this year, three times its current market value.
Investors loyal to Aim despite lack of floats
The Alternative Investment Market may be going through one of its slowest years for new issues, but it hasn't been deserted by investors. New figures suggest trading on Aim has been much more resilient to investors' risk aversion than the main London market over the past year.
Data from the London Stock Exchange shows the average daily value of shares traded on Aim over the year to the end of September was £1.86bn – just 1 per cent less than the £1.88bn of daily volumes seen in the previous 12-month period. By contrast, trading volumes on the main market were down by a fifth, from £5bn to £4bn a day.
Moreover, while several hundred companies have left Aim in recent times, many of those departing were smaller and less liquid. As a result, the value of trading per company has increased 40 per cent over the past three years.
"Aim's resilience is impressive, especially when you consider the buffetting effect the eurozone crisis has had on the main market," said Laurence Sacker, a partner at accountant UHY Hacker Young.
It's snow show time
Listex, a new type of trade show, is taking place at the London Rowing Club in Putney today and tomorrow. It is aimed at the growing snowsports market, but unlike most such shows, it aims to pair up attendees for one-on-one meetings. Delegates sign up in advance of such shows, indicating who else at the conference they'd like to meet. The show's organisers then produce a timetable for each delegate.
Small Businesswoman of the Week: Tracey Bovingdon, founder, Tea Monkey
I founded Tea Monkey in 2010 – I'd sold my outsourcing business in 2007 and moved to the Middle East, where everyone meets up in coffee houses.
As a tea drinker, I got fed up with being treated like a second-class citizen by coffee drinkers – and being charged a fortune for some pretty poor cups of tea. As a businesswoman, I like to spot gaps in the market and it occurred to me that in Britain, there needed to be an equivalent of the coffee shop chain.
We don't have a chain of tea shops, but just because something hasn't been done doesn't mean there isn't a market for it. We've opened stores in Milton Keynes and Bath and will be opening in central London early in the new year. We have also set up an online shop, we're expanding internationally, and we are about to launch a franchise model.
The shops have been really successful – we are turning over £500,000 a year in Milton Keynes for example – and we've won prizes for our tea. The atmosphere in our shops feels very similar to a coffee house – and our coffee is excellent too – but the point is that tea is the dominant drink, rather than the other way round.