For our latest SME Economic Corner
feature, which sees Real Business look at the economic developments impacting British SMEs, we’ve spoken with Rishi Khosla, CEO and co-founder of business bank OakNorth.
Khosla is well placed to know what will impact SMEs on the back of the general election, as the business bank has a focus on entrepreneurs and growth companies. (1) What was your take on Theresa May’s decision to call for a snap general election on 8 June?
I think it was a really smart move on her part – assuming she wins, it will give her a larger majority and thus more leeway on Brexit, liberating her from rebellious backbenchers. It will also give her a full five years to hopefully lay a solid foundation for Brexit before having to face voters again. If we’ve learned anything in the last two years, it’s that nothing is a “sure thing” when it comes to politics, but I’m confident that May will get the result she’s looking for, especially if last week’s local election results are anything to go by. Labour lost 382 seats nationwide, while the Tories won 500 – the best local election performance by a governing party in four decades. (2) Did you receive any feedback from clients – good or bad?
The Tories have historically been known as the party for business and as OakNorth’s borrowers are businesses, the feedback has generally been positive. May’s predecessor, Cameron, led the country through an entrepreneurial recovery which rescued Britain from the abyss of the financial crisis. His commitment to globally competitive corporation tax has enabled London to become a leader in numerous sectors including technology, fintech and financial services. During his time as PM, more new startups were launched, more apprenticeships were created, and more money was invested in Early Stage Venture Funds than any other period on record. May takes a similarly pro-business stance so I think many businesses will see it as a positive. (3) What business pledges should a party make to get your vote?
A. Getting rid of the Corporation Tax Surcharge for new banks. As a business bank, OakNorth lends to SMEs, specifically mid-market companies, helping them to scale up. We also support house builders and property developers, helping them fund affordable housing around London, as well as new homes around the country. Replacing the Bank Levy with the Corporation Tax Surcharge reduces the amount of capital we have available to lend to these businesses, which seems counterproductive when the loans we’ve provided thus far have already helped to create over 3,000 new homes and 2,000 new jobs in the UK, as well as adding over £1.8bn to the UK economy. Ideally, we’d like the government to reconsider its position on the Surcharge, freeing up more capital for new lenders such as OakNorth to help SMEs achieve their growth ambitions. B. Introducing proportional risk-weighted assets. Large banks pose a systemic risk to the UK economy, small banks do not, so we should not have to adhere to more onerous capital requirements.
Earlier this year, the PRA announced that it would be taking steps to address the disparity in risk weights between firms using the standardised approach and firms that use their own models. Unfortunately, the focus of this will be on mortgages which we think, again puts us at a great disadvantage to other business banks in the market. For any property development or property investment loan we grant, we have to set aside 150 per cent of the capital. For any SME loan we grant, we have to set aside 100 per cent of the capital. This is very different from the other challenger banks who have an issue with the 35 per cent RWA on buy-to-let mortgages – where the overall contribution to the economy is less clear. By being able to apply our own model regarding risk weighting instead of having to use the Standardised Approach, we would have a larger amount of capital at our disposal which would ultimately mean more money that we can lend. This would be good news for competition and good news for borrowers. C. Extending the Term Funding Scheme. For a new business bank like us – which has a small and bespoke (rather than a large standardised/traditional loan book) – the usability of the Term Funding Scheme is limited as we are unable to post collateral at volume. The current drawdown window until February 2018 isn’t much help as by the time we do manage to qualify, we will have a very short timeframe to make the most of it. Given the fact that the Scheme was designed to increase access to capital for SMEs – and we are the only UK business bank focused on helping these businesses grow – it makes sense for the government to extend it so that players like us have a chance to benefit from it.
[rb_inline_related] (4) Elsewhere, Donald Trump has now been in power for over 100 days – has his rule presented any problems or benefits for UK businesses?
It is still far too soon to know what the full effect of president Trump’s policies will be. The “Trump effect” helped boost global markets with investors betting on policies related to infrastructure spending and lower corporate tax, and I imagine this will have a positive ripple effect on business confidence in the UK.
However, UK SMEs should remain optimistically cautious – 43 per cent of them export to the US, a total of £20bn annually. During the campaign, Trump was very vocal about his desire to rebuild the US’ manufacturing capacity and to introduce favourable tax policies to encourage US businesses to hire Americans and build in America. This is likely to make things more difficult for UK-based manufacturers selling directly into the US, and will require them to re-think their market entry strategies if they want to maintain their current position. (5) Deloitte reports that consumer confidence fell by one per cent in Q1 2017 – is it possible for B2C SMEs to prosper and resist economic factors driving that customer doubt?
I definitely think so – the best entrepreneurs can build in any environment, even ones that are as uncertain as ours has been since the referendum vote, and even when consumer confidence is low. We’ve definitely seen this and have had a great pool of strong entrepreneurs coming to us for loans to scale their business despite the ongoing uncertainty. It’s this that has helped take our loan book from the £100m that it was before the vote, to the £450m it is today. Some recent examples include Notes, the popular London coffee chain and wine bar concept. Despite being a business that arguably relies more heavily on the EU workforce than many other businesses, it is pursuing growth plans, opening a further two sites following a £600,000 loan from us. Pocket Living, London’s fastest-growing affordable housing provider, is another business we’ve recently lent to. We provided them with a debt facility of £4m for the development of a 153 new homes in East Croydon. These are just two examples of businesses that are prospering despite falling consumer confidence and ongoing economic uncertainty. (6) Virgin Media released VOOM Fibre broadband, which is said to be four times faster than rival services. MD Peter Kelly declared the product will support the UK economy – are you familiar with the perils of slow internet and how it can hamper business?
Slow internet can be extremely damaging for businesses, not just in terms of getting work done via email, accessing servers, etc. but also in terms of impacting ecommerce sales. If we had to deal with slow internet, it would have a significant impact on our ability to process loans quickly – one of our USPs – and the amount of retail deposits we could take in which help fund our lending. With communication with clients and colleagues in other offices often taking place over video conference, slow internet would also have a detrimental impact on our ability to maintain “business as usual”. (7) On the theme of the internet, online card spending grew 28 per cent over two years. What words would you offer businesses that neglect the ecommerce movement?
It depends on the business but I think any retail business that’s neglecting the ecommerce movement is simply delaying the inevitable – 80 per cent of UK internet users made a purchase online last year, and with 92 per cent of the country’s 65m population being online, the potential for ecommerce is huge. Huge multi-nationals such as Alibaba ship almost 13bn items a year with their average user making 52 purchases with them annually. Amazon receives 35 orders per second.
Although the most popular items ordered across the UK and Europe are clothing, books and home electronics, more and more consumers are getting comfortable with the idea of purchasing other items online too – such as their food shopping.
Retail businesses should ensure their websites are fully optimised, user-friendly (i.e. customers can make a purchase in three clicks or less), and offer several payment methods. This is because although most online payments in the UK are made by card (50 per cent), PayPal and other similar services are closely behind with 40 per cent of consumers choosing this method.
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