Over the past four years the ERA Foundation has conducted a number of studies under the general heading of “The Sustainability of the UK Economy in an Era of Declining Productive Capability”. Our first report (published in June 2008) looked at the serious deterioration in the balance of trade over the past decade, in large measure resulting from excessive imports and declining exports of finished manufactured goods.
Our second report (published in February 2009) looked at the make-up of the nation’s current account and the significance of manufacturing in the UK’s balance of trade. Our third report looked at the location of manufacturing capability and the impact of services. In our 4th report (published in February 2010) we looked at those factors which needed to be optimised to ensure productive industry can flourish in the UK. Our 5th report comprised our input to the Government’s Growth Framework consultation, which we wished to share with our network of industrialists, funders, investors, academics, and opinion formers. All of these reports are available on our web site www.erafoundation.org.
A consistent theme in our consultations has been the failure of the banks to engage effectively with SMEs, and the loss of confidence of many SMEs in the banks as sources of investment and working capital on other than punitive terms. This issue remains of sufficient concern that we look at the problem in more detail in this report. Although it has become fashionable in some quarters to “bash the bankers”, we wish the Financial Services Sector a speedy return to rude health as part of a balanced UK economy. Nevertheless,
the strong focus upon what appeared to be more profitable international investment opportunities has undoubtedly led to a serious shortfall in local banking. The banking sector has failed to recognise its role as a “service industry”; providing key services to Industry, and the nation at large rather than merely seeking to optimise its own profitability.
SME’s are especially important in the area of manufacturing where they contribute significantly to the balance of trade and provide an essential supporting infrastructure for larger manufacturers. The provision of adequate financing and investment for SME’s is clearly a critical requirement for a healthy UK economy. If the UK is to achieve a substantial growth in productive industry the nation needs special measures to ease access to finance for SMEs. In recent times the established banks have not demonstrated a commitment to nurturing new businesses and helping them to grow. They may lack the necessary expertise to understand the needs of productive industry and the local knowledge to work effectively with SME’s and to identify the good risks from the bad.
The steps taken by the Government to date to encourage the Banks to support productive industry are insufficient to address the national need to unleash a new generation of entrepreneurs, to allow existing small companies to grow to serve the larger companies that remain in the UK and export in their own right. A well-funded, dynamic and expanding SME community is essential if the UK is to maintain and grow its productive capabilities and close the trade gap. To achieve this end a well focussed financing capability, with the technical expertise and local knowledge to be able to identify good risks from bad and to fund them appropriately, is equally essential. If this service is not provided by the established banks it falls to Government to consider how it can best be implemented. A Bank for Industry offers a realistic solution to an obvious problem.
We are grateful to Quotec, Civitas, Oxford Innovation, SMEIA, Simpson Associates and Policy Connect for sharing their knowledge of SME funding with us.