Stuart Fraser: It is a mistake to impose government targets for bank lending to SMEs

The policy chairman of the City of London Corporation thinks there are better ways for SMEs to gain access to finance

It was heartening to hear HSBC’s recent announcement that it is to launch a £4bn fund to support SMEs engaging in global trade. The growth and stability of the small business sector is not merely a luxury, it is an essential component in facing the difficulties posed by the current economic climate.

Alongside this announcement, HSBC also published research anticipating a 60 per cent increase in the UK’s international business activity over the next 15 years. If we are to maintain our competitive edge, international trade is going to be of paramount importance, and we must recognise that SMEs are the seed core of future growth.

Everyone believes in SMEs and endorses ways to encourage them, but we need to step beyond such expressions of sentiment. Regardless of political difference, all parties agree that the SME market is integral to economic recovery.

Businesses – large or small – create jobs, take on and train those emerging from education, and importantly, stimulate the economy through innovation, creating new domestic products and exports, the latter aiding our balance of payments and generating taxation for the UK economy.

Bank lending to SMEs may be suitable for some SMEs, though not for others. Banks receive bond returns for equity risk and in many cases such lending does not make good business sense

We must recognise that all major players in national and international business started life as SMEs and that their growth creates jobs right across the supply chain.

Financing needs to adapt to sustain SMEs through their life cycles; encouraging those with potential for growth to augment and evolve, while acknowledging that some businesses may thrive better in niche markets, and absorbing the inevitable failures.

Bank lending to SMEs may be suitable for some SMEs, though not for others. Banks receive bond returns for equity risk and in many cases such lending does not make good business sense. Although innovative schemes such as the one proposed by HSBC offer great opportunities to some SMEs while mitigating some of the risk factors involved, the fact remains that there is an inherent tension in the process of such lending.

Politicians continue to call upon banks to avoid excessive risk taking, yet also continue to ask them to lend to SMEs, which on a company-by-company basis is inherently high risk.  This paradox needs rethinking.

If we are to increase the number of opportunities available to SMEs, we need to focus our attentions on maximizing access to other investment streams, such as private and public equity markets, venture capital funds and business angels.

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By spreading any potential risk across a number of financing vehicles, hazard to individual establishments is significantly diminished. By broadening the investor base, the pressure on banks to meet the quantity of lending to SMEs can be eased, allowing them to redirect such funds to more mature industries.

The City of London Corporation is committed to supporting enterprise and small businesses both in the City and its neighbouring boroughs. Currently, we are supporting a variety of schemes to help encourage growth in the smaller business sector. This includes Angels in the City – a joint initiative between the City of London Corporation and London Business Angels – which aims to unite potential investors with financial means and business experience with innovative, high-growth entrepreneurs on the City fringes, as well as our work with Tech City and the Innovation Warehouse.

During this period of fiscal constraint, public sector funds should be used for leveraging private sector resources, a process that may need to be encouraged by an appropriate taxation policy. Substantial amounts of cash currently lie dormant in corporate coffers that could be used for the good of the economy. The next few years are set to be very difficult, and it is important that the private sector – in both its financial and non-financial guises – works hand in hand with the government to produce innovation and growth.

Stuart Fraser is policy chairman at the City of London Corporation. Read our interview with Stuart Fraser.