There are nearly 5 million businesses in this country, most of them employing fewer than 10 people. Growth among small businesses is therefore vital for recovery and for the quality, well paid jobs that are missing in this country.
Yet those same small businesses are struggling to borrow money from the banks.
One reason for this is that the banks went from a reckless disregard for risk to arguably an over cautious approach following the financial crisis.
The term “credit crunch” was coined to reflect how quickly it became very difficult to borrow money following the financial crisis of 2007. But this was not just for home ownership. Small business owners very quickly found they too could no longer borrow the money for a new van or to refit their shop. Even for smaller items such as new tools, the computer suddenly said ‘no’ even to customers who had never missed a repayment in 20 or 30 years of trading as a small business customer.
And today, when I talk to small businesses in my constituency, not much has changed. The banks are still not lending to most of the smallest businesses. They will lend to businesses who have money in the bank or who own property or other assets which could be sold to recover a loan. But for the millions of small businesses up and down the country, the credit crunch is still in force.
Now the banks will admit that they often lent money in a reckless way before the crisis hit so they have to be more careful now. This of course is true. But it doesn’t explain why so many of their smallest business customers used to be able to borrow money and were able to repay it but can do so no longer.
This problem has been highlighted by many people – including Dave Fishwick. Dave has set up his own ‘Bank of Dave’ in Burnley to lend money to exactly those businesses who need help but face rejection by the high street banks. Dave bases his decisions on getting to know the customer, understanding their business and forming a judgement on whether their business will succeed or not. He has returned to what used to be called relationship banking where the bank manager knew his customers and gave them help and advice on how to run their businesses. In the old system, the local bank manager was a trusted advisor and was a part of the business. The relationship between bank manager and business owner was a make or break part of the business success.
I ran a small business for 15 years with my wife before I became an MP. We borrowed money from our bank by having an overdraft facility. At the time we set up the facility, the bank was falling over itself to give us the money. However, at no time did the various so-called relationship managers seriously try to understand our business. The reality was they were administrators and simply not equipped to advise or support us in making our business a success. In fact when the financial crisis hit, the bank requested immediate repayment of the amount owed, which meant we had to borrow from family, rather than the overdraft facility. I know many business people were less fortunate than us and were forced out of business or lost their homes because of a sudden change of bank policy.
In this country, we long ago lost the local bank manager and the support that he or she gave.
In Germany, things are rather different, and in the summer I met representatives of the Sparkassen, the local savings banks. They operate within a defined geographical region and can only lend to businesses or individuals in that region. They build a relationship with their business customers of the sort that Dave Fishwick might recognise and they have a very strong lending record. They understand the region in which the bank operates, rather than being remote, on the end of a phone. The Sparkassen representatives I met told me that of the small business start ups they support, half survive for 5 years or more. This compares very favourably to the start up survival rates here where only around 5% of businesses survive the first year. Notably, Sparkassen lending didn’t take the dive that small business lending did here during and after the financial crisis.
I said at the start that learning from Germany might even improve the bank bonus culture. Sparkassen executives receive the equivalent of what would be called bonuses here. But the difference in Germany is that they are rewarded for success in the economy of the region in which they operate. This is possible because only one regional bank operates in each region and they don’t have the big national banks that we see in the UK. The remuneration is therefore not directly linked to how much they lend or to how much money the bank makes. Those factors are indirectly linked to remuneration but only because of the relationship between good lending, business success and economic success.
The regional banking system in Germany rewards behaviour which is in the interest of the local economy, which means it is in the interest of the businesses and of the people who work in those businesses too. Lending is based on the right level of risk for all concerned.
The setting up of a regional banking system is a key recommendation of Labour’s Small Business Taskforce. In fact they recognised it as the single most important step which could be taken to tackle one of the biggest issues facing small business.
I said that small businesses are a huge part of our economy. That’s why having a regional banking system to support those business could be a major factor in creating long term growth and jobs in the wider economy. And perhaps as an additional benefit, we can start to tackle the problems caused by having a banking bonus system that incentivises the wrong behaviours and start to encourage the right behaviours.
Bill Esterson is the Labour MP for Sefton Central