At this week’s party conference the Chancellor said “you cannot borrow your way out of debt” but can SMEs borrow their way to growth?Politicians love to be able to announce something new. It captures the media’s attention, catches most commentators sufficiently off guard to head off any immediate penetrating questions, and means the caravan can move seemlessly onto something else at conference the next day. So it was not hard for Osborne to win some plaudits for his idea on the government standing behind packaged-up tradeable loans to small companies. I congratulate him on his PR triumph but not much else. I did, however, find two very sensible immediate comments. One was from Andrew Cave at the Federation of Small Businesses who said “small businesses in this country have no experience of issuing bonds so there’s a hell of a lot of work to be done to look into the details of how this might function”. The other was from Lombard in the FT who, having pointed out the creation of a new securitisations market would be tricky and time consuming (more on that later), went on to say “the admirable curmudgeons who own better small companies have a long history of declining to borrow, even when lenders want them to. That is why the SME sector had net cash on deposit for much of the overleveraged noughties… Small companies will invest when it benefits them, not when it benefits the UK.” These comments go to the heart of the problem, which is the continuing poor advice from the Treasury. Alistair Darling recounted, in his recent book, the comment from his Permanent Secretary Nick Macpherson that when he became Chancellor “there were only about three people (at the Treasury) who had experienced a recession”. In my experience, this all-important organ of government is filled with bright 24 year olds, fresh from their MBA courses, long on theory and short on everything else. Somewhat to my amusement, this was confirmed to me the other day when I had a meeting with a think tank boss who said “you are absolutely right, I was one of those people”! Combine this febrile environment with a 40-year-old Chancellor lacking in business experience and you have the ideal breeding ground for half-baked ideas while ignoring the lessons of hundreds of years of history. Those lessons tell you that if you want to put in place lasting capital foundations for companies, you do it largely with equity – not debt. Indeed for the past 60 or so years we have built up a comprehensive infrastructure that, despite the ravages of recession, remains perfectly capable of advising SMEs on equity fund raising and the requirements of the associated capital markets. As Andrew Cave and Lombard point out, no such apparatus exist for small company bonds. In order for an effective capital-raising mechanism to function, you have to make sure there is an active secondary market. This existed when a previous Conservative Chancellor, Ken Clarke, made all capital gains from investing and trading in AIM and PLUS-listed shares CGT free. It is not beyond the capability (or, sadly, maybe it is?) of the Treasury to restore this for all companies with a market cap of, say, less than £50m. This would attract a large number of investors back into this vital area for the British economy, thus boosting growth and improving tax revenues. But why revive a infrastructure that works when it is so much more fun to hoodwink voters with something new? If Osborne and his band of young helpers dig a little deeper into the business world, they’ll find the objectives of the equity holder are vey different to that of the bondholder. The loan provider is not concerned about the growth of the SME. All he wants to know is that the company is generating sufficient cash to be able to pay him back at the end of the loan period. The equity holder is interested in the long-term future of the company, as growth will make his stake more valuable. Now, which of those two would you rather have aboard your business?
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