20 ways to make Britain better – 9. How to raise billions for small businesses and the government

One of Spike Milligan’s best gags was ‘all I ask is the chance to prove that money can’t make me happy.’ If you run a start up business you will probably know that you are unlikely to get the chance to prove that money can’t make you happy.

In the early years of a business, when profits are hard to come by, raising money is tough. You might get a small overdraft, but not the kind of cash that will help you really grow. The general rule is that banks will only lend to businesses when they don’t need the money. Certainly if your balance sheet hints at desperation you have very little chance of getting a bank loan.

This is for the very obvious reason that many small businesses don’t survive. Something approaching 4 out of 5 businesses are no longer trading five years after starting out and it only takes one or two businesses you lend to, out of twenty, to default on their loan to result in a loss for a bank. Of course, an irresistible rejoinder is that many banks have found much easier ways to lose money than lending to small businesses.

There are plenty of other ways small business can access finance, like invoice financing, but these are typically costly and don’t suit every business. And there is also the possibility of getting equity finance. I was fortunate to get what is termed a ‘business angel’ to invest in my  business. But hunting down an individual prepared to take the risk of investing in your business is time consuming and, for many businesses, fruitless. A more recent innovation is crowd sourcing equity finance. There are some great platforms out there, like crowdcube, and this area has lots of growth potential. But to make a real success of crowd funding you normally have to bring your own crowd.

Governments’ of all political hues have offered support to small businesses but they have typically done it via the main banks and by underwriting a proportion of a loan the bank has agreed to, as with the Enterprise Finance Guarantee. But fundamentally banks will only lend to businesses that have already proven their case, or because the individuals running the business have proven their case in a previous business venture.

What if there was an equity model in which the government took no risk but which hundreds of thousands of small businesses could access? There is.

Every year we know businesses will be liable for tax. Even if a business does not turn a profit they have to pay employers national insurance on wages. In a new equity model government would offer, in principle, to write off a pre agreed amount of a firm’s future tax liability (or potentially current and historic liabilities) in return for an equity stake. Companies would then be bundled together based on assessed risk and collectively their equity stakes would be offered to investors.

There are several advantages to this model over conventional ones. From the firms point of view they have to do very little other than enter willingly into the bargain. Although they will give away a stake in their company if the equity sale is successful they will have a chunk of future tax liability written off, making it much easier for them to grow.

For investors the benefits are also clear. Instead of investing in a single firm, where the risk of failure is high, risk is pooled. If stakes in 100 firms with a similar risk profile are offered to investors together many are likely to go bust but at least one is likely to grow into a substantial company, giving investors a clear upside without them having to look for a needle in the haystack.

For government there is no real risk. If the sale does not achieve a pre agreed figure they do not go ahead. If the sale works they make a profit on the future tax they would have received in the coming years (if the firm did not go bust). The potential for this model is vast. By pooling risk and acting as a broker both government and the small businesses who participate could end up billions better off and many more entrepreneurs will have the chance to prove that money can’t make them happy.