Turning again to the banks: Steps to plug the cash gap

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The Independent Online
HERE are some current proposals that could help to encourage business:

1) The equity gap needs to be filled for small businesses requiring capital of less than pounds 500,000. Venture capital houses such as 3i are already trying to help by setting up specialist funds. Midland Bank has set up regional enterprise funds with Business in the Community, designed to supplying capital to small businesses.

2) Linked to this, many businessmen and bankers want a successor to the abolished Business Expansion Scheme, with money directed towards worthwhile and profitable businesses, rather than tax avoidance schemes that too often took advantage of the old BES tax breaks.

3) Banks and businesses need appropriate debt structures. Businesses that need medium-term finance should raise medium term loans instead of relying on overdrafts that can be recalled in an instant. This will entail a change in attitude throughout the clearing bank network, and a re-education of branch managers.

4) Coupled with longer-term lending should come loan support schemes from the Government to guarantee long-term loans for capital equipment. This would mirror work done in Germany by the Kreditanstalt fur Wiederaufbau.

5) Exams for directors - before they get business loans. (This is already required in Holland.) Why should someone be able to found a company and, for the pounds 2 fee, get the benefit of limited liability that effectively protects them from personal loss in the event of the company's collapse. The Institute of Directors would like to see more business training - but does not want it made compulsory.

6) Statutory payment of interest on late payments, as in some Continental countries. This would require legislation and faces opposition from the Government and the IOD, mainly because it would be difficult to enforce. An alternative would be cheaper and easier access to the courts for enforcement of debts.

7) Banks should increase swaps of debt for equity - converting loans into holdings in companies. These face obstacles, however, as banks would have to change from being lenders to investors and possibly face conflicts of interest. Say, for example, a bank, acting as a shareholder, votes for a rights issue, the proceeds of which are subsequently used to repay a loan to that bank. Then, some months later, the company goes bust. Its other creditors would be aggrieved.

8) Businesses should improve their cashflow by making greater used of factoring and invoice discounting, already a growing market. Crudely, factors buy a company's debtor invoices for a lump sum at a discount to face value. The company gains cash immediately; the factor profits by recovering the original debt. Critics, however, say it is expensive, and that factoring companies turn down business from firms that have problems.

9) If banks are to provide more equity capital to businesses, they will want the Inland Revenue to change the rules that bar them from writing down the value of their shareholdings in troubled companies until they go bust. They can now get faster tax relief by writing down the value of their loans to such companies as soon as they hit trouble.

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