Small Talk: Labour’s small-firm backing stokes job creation hopes

‘‘If we want to tackle unemployment, we should promote policies that favour small businesses’’

Whose side are you on – David’s or Goliath’s? It’s not too difficult to guess where most people’s sympathies lie, but those critics who are queuing up to hammer Labour leader Ed Miliband for his plans to raise corporation tax may be unwittingly aligning themselves with the champion of the Philistines.

One interesting aspect of Miliband’s announcements on business policy last week was the extent to which Labour is prepared to set large companies against their smaller rivals. The party’s plan to use a corporation tax rise to pay for a business rate cut is effectively a redistribution of wealth from large to small companies.

Mr Miliband is taking quite a political risk, for it is the largest companies that have the ability to shout loudest when they feel threatened. However, there are sound reasons for using public policy to favour small enterprises over their larger rivals – and not just because doing so panders to our instinctive support for the underdog.

Above all, the small business sector represents the biggest opportunity to tackle unemployment, simply because small businesses create more jobs. Studies over the past 20 years have reached a broadly similar conclusion – that small businesses account for around two-thirds of job creation in developed markets. The latest study, published by EY, found that entrepreneurs supplied 67 per cent of jobs created in the European Union last year.

If we want to tackle unemployment, we should promote policies that favour small businesses. One might argue that small businesses also benefit in an environment where larger companies are supported too – after all, it’s not as if these two sectors operate in isolation from one another. However, while it might seem obvious that small businesses will get a share in the spoils when larger companies are prospering, the extent of the trickle-down effect is not clear-cut.

Research published last week by Blur Group, an online business services exchange, found that 70 per cent of smaller companies complained their opportunities to get work from larger businesses had been limited by their size. Many said larger companies refused to transact with companies they considered too small. Others complained about time-consuming and expensive tendering processes.

Bacs, the payments service,  says the time it takes small companies to persuade larger companies to pay them has been rising steadily in the past year or so, with small businesses now waiting an average of eight weeks to get paid.

There are many more examples of how the interests of small and large businesses are often poorly aligned, and seemingly pro-business government policies do not recognise these competing interests will let down one sector or another.

Given this need to discriminate policymakers have no option but to choose sides. Labour’s choice is the small business community. And while not everyone will agree with that choice, if a desire to tackle unemployment lies at the heart of economic policy, it’s the right one to take.

Investors home in on small firms

The outperformance of listed small and medium-sized companies has been a notable feature of the stock market this year – and new research from stockbroker Peel Hunt suggests investors are taking note.

The FTSE Mid 250 Index managed a 16 per cent gain over the eight months to the end of August, compared with 6 per cent for the blue-chip FTSE 100 Index. Now the balance of equity investors planning to increase their Mid 250 exposure as opposed to their exposure to the Footsie stands at 32 per cent, says Peel Hunt. The figure for the FTSE Small Cap Index, at 38 per cent, is even higher, while the Alternative Investment Market also looks set to get a lift from increasing investor interest.

The growing enthusiasm for smaller companies reflects the returns earned during the first two-thirds of the year, and also investors’ views that the UK economy is set to outperform other nations. That would imply a boost for more domestically focused companies relative to large multinationals.

“Investors have more optimistic year-end assumptions for UK market levels than for the overseas benchmarks,” says Peel Hunt’s Ian Williams.

‘Work harder’ call to the banks

With banks now having to work harder to secure small businesses’ custom, one battleground in the current-account switching market could be the quality of advice and support on offer.

Only one in five small businesses has received specialist advice from their bank, according to a survey published today by Optionis, which provides technology and other services to small and medium-sized businesses. Just one in 10 say they get regular information that might be useful.

“Emerging entrepreneurs and small business owners seem to be having an increasingly remote relationship with their bank,” says David Kelly, managing director of Optionis. “Banks need to work harder to find ways to offer advice and support to these customers.”

Small Business Man of the Week: Angus Elphinstone, founder,

We launched the business in 2009. I ran a deliveries and removals company, and had always been frustrated about the amount of time my van was on the road returning from jobs and not earning money. Then my clients became more cost conscious and I’d often get asked if I could drop things off while I was on other journeys.

That’s were the idea for came from. We spent five months building a portal that matches people who need a delivery making to delivery firms. The customer puts the job on the site and the firms bid for the business – they’re often able to offer very cheap rates because they’ll do the work as an extra job alongside deliveries they already have scheduled.

“Business came in straightaway. The first year was a struggle, but we felt we had the right business model. The site has taken off over the past year or so and we’ve launched into France, Spain, Germany and Ireland. We have around 700,000 users who post around 2,600 jobs on a typical day – and we’ve just done our millionth job.

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