Small Talk: There’s trouble in the air but optimism on the ground as firms borrow to grow

Many small businesses are pressing on with ambitious plans

Knitwear brand Peter Scott is among firms that haven’t lost the thread despite the gloom (Getty)

Day by day it is becoming clearer that Britain’s smaller businesses are far more confident than we might have any reason to expect. They’ve even started taking on more debt, as they seek to exploit new opportunities.

That message feels counter-intuitive. After all, the year has begun with a series of warnings about trouble ahead – from China’s slowdown, and its impact on the global economy, to more local issues such as the uncertainties that surround Britain’s EU referendum. Small firms, moreover, face higher costs in the form of the national living wage and auto-enrolment pensions; nor are they getting much help from policymakers, who have cut taxes for larger companies and failed to reform business rates.

And yet, many small businesses are pressing on with ambitious plans. The latest SME Finance Monitor, published last week, revealed that for the first time since 2012, they are returning to sources of external finance. The proportion of small firms that describe themselves as permanent non-borrowers – that is, they have no intention of taking on credit for the foreseeable future – has fallen to 43 per cent, the lowest level for 18 months. And excluding these companies, 70 per cent of small businesses are using external finance, up from 65 per cent a year ago.

The sense of optimism is underlined by research from Close Brothers, whose quarterly Business Barometer provides an up-to-date snapshot of the views of small firms. It found that a quarter of respondents expect their business to expand over the next 12 months, and more than half believe they will at least maintain their current rate of growth.

It is also worth pointing out that forecasters are positive about the UK economy too. The IMF is still predicting growth in Britain, this year and next, of 2.2 per cent – even though it has cut its forecasts for other leading economies. The World Bank tips the UK to grow by 2.6 per cent in 2016.

The optimism is widespread, with data from the Federation of Small Businesses revealing that confidence among small and medium-sized enterprises is higher than it was a year ago – and that many firms have stepped up job creation.

But the findings of the SME Finance Monitor are most striking – all the more so given that this is the largest piece of regular research on small business attitudes. If those firms really are returning to borrowing for investment, it’s a genuinely significant shift.

It helps, of course, that the range of finance on offer – courtesy of alternative lenders and other market entrants – is wider than in the years following the financial crisis. And while the banks still aren’t particularly keen on lending to this constituency, they have loosened the purse-strings a little.

However, availability of finance is only part of the story; small business borrowing has remained muted in recent years, largely because they haven’t felt confident enough to take on debt. So what’s changed? Why do these firms appear to be confounding the gloom of those who fear the UK’s economic recovery is stumbling?

In practice, there are a variety of explanations. It helps that many smaller businesses do not have large international exposure, so the problems in China – or even the eurozone – are less problematic. It’s also the case that after a period of retrenchment, many businesses are leaner and more productive than they have ever been.

Long may the optimism of small businesses continue. And it would be nice to think the Chancellor might offer further support in next week’s Budget – rather than continuing to focus on the largest UK companies. Above all, however, let’s stop talking down the confidence of these companies; many are doing far better than most people realise.

The momentum is with medium-sized companies

Britain’s medium-sized companies are set to grow more quickly than larger ones. A study published by the law firm Gowling suggests they will increase their contribution to the UK economy by 18 per cent by 2020 – bigger companies are expected to grow by 8 per cent.

Gowling said the economy was rebalancing towards an emphasis on the mid-market, particularly in light of slower global growth, which has a greater impact on big business.

Tom Thackray, acting director of competitive markets at the CBI, said: “Medium-sized businesses are the unsung heroes of the UK economy. The Government can help them by continuing to review the tax system to ensure it incentivises entrepreneurship, improves access to skilled workers and encourages prompt payment.”

An opportunity for start-ups to get on the right path

The global payments company MasterCard has launched another round of its Start Path programme, which provides assistance to early-stage businesses with innovative ideas for new commerce solutions. The scheme, launched in 2014, has so far supported more than 60 start-up companies – and formed formal alliances with several of the businesses.

Each wave of the programme is run on a virtual basis for six months, with start-ups given access to funding, networking and new business opportunities. The firms selected – applications for the next round must be submitted by the end of March – will work closely with MasterCard’s sales teams but also gain access to its commercial partners.

“There was a time when lines were clearly drawn between start-ups and established companies,” said Stephane Wyper, who leads Start Path. “Now, early-stage companies are partnering with large financial institutions, retailers or digital players to build the future of commerce.”

Small business person of the week: Jason Stockwood, Chief executive, Simply Business

I joined the company six years ago and saw a real opportunity: in the personal insurance market, aggregation services such as MoneySuperMarket had already had a huge impact, but no one was delivering the same sort of service to small and medium-sized enterprises – chiefly because the insurance products they buy are a little more complex and less commoditised.

By bringing together technologists, underwriters and data scientists, we’ve bridged that gap, operating as an insurance broker but also as a manufacturer of insurance. We identify businesses’ needs and then take those to insurers – or, where no insurer wants to meet those needs, we build a product ourselves.

Around 80 per cent of our customers are sole traders – and it’s these businesses that most need our help.

The model works: we have become the UK’s biggest business insurance provider, with 350,000 customers.

The other thing I wanted to do was run the business according to different values. I believe the role of management is to set the strategy and get out of the way, empowering people to solve problems themselves.

It’s hard work building an open and honest culture where people feel able to challenge one another, and their managers. But we’ve just won the national ‘Best Company to Work For’ award for the second year running.

If you recruit smart people and give them more power, you’ll drive your business forward.