The CBI says the government should make up for the shortfall in bank lending by working with the financial services sector to enable more MSBs to issue bonds and to develop derivatives based on these bonds to attract investors.
Printers such as Dave Broadway, of CFH Total Document Management, which has a turnover of £28m, have spoken out about the difficulties of obtaining finance in the current climate and the company recently switched its banking from RBS to Clydesdale because of a "lack of interest" from its former bank in lending money to businesses.
He explains: "In general, finance is hard to find for English companies. The Royal Bank of Scotland was not as supportive as we felt that it should have been."
Broadway believes that the issuing of bonds could be extremely effective in helping MSBs obtain finance, particularly if the bonds are backed up with public money.
"The issuing of bonds could work," he says, "and if the scheme had government support, it would make the bonds more attractive to investors."
Broadway feels that the CBI report is right to highlight a lack of government support for MSBs and a policy gap, where initiatives are targeted at only the smallest and largest businesses, leaving those who aren’t covered by either category to fall through the cracks.
He says: "MSBs are often overlooked. A recent example of this in the print sector was when the government handed a £250m printing contract to Williams Lea, taking work away from the numerous smaller printers that had been handling it previously.
"Also, there are regional differences in the support available that should be addressed. CFH is based in the Norton-Radstock area of Bath and North East Somerset, a former coal-mining town with high unemployment, but there is no grant support for businesses here. If you travel just 30 miles west across the Severn Bridge to South Wales, there are all sorts of grants – what does an English business have to do to qualify for support? All the government support in this area goes to Bath and the tourism industry, which is very frustrating when you’re trying to build a manufacturing business."
Positive in theory
Alan Padbury, of £18.5m-turnover commercial printer Westdale Printing Group, is also enthusiastic about the potential of an MSB bond scheme, but he warns that the success of such an initiative would depend on the fine print. "Many of these systems for obtaining finance are so expensive once all the advisors and other parties involved take their cut that they become unrealistic to undertake," he says.
"At present there is a bubbling mass of good, innovative businesses that can’t break through because
they cannot get hold of any money. It is stopping genuinely innovative people doing what they would be very good at."
Padbury also feels that MSBs are overlooked by government policies that focus on their larger and smaller counterparts.
He says: "There are huge organisations that are deemed too big to fail, which are given all sorts of resources and attract money even if they are financial basket cases. MSBs are a forgotten breed, particularly by government."
Other experts share Padbury’s concerns that bond schemes for MSBs could become unworkable once operating costs have been taken into account.
Nicholas Mockett, partner at Moorgate Capital, says: "I know some MSB bonds have been issued, but the costs of such an exercise, including accountants reports, regulatory costs and brokers fees, could be relatively high in comparison to the sums being raised."
Mockett says that other recommendations made in the report, such as encouraging the use of venture capital, could be a better solution, but adds that this route to attracting finance could also be costly for MSBs because of the risk-adjusted returns that would be expected by investors.
Mockett believes that greater tax breaks, which would give investors more of an incentive to risk their capital, are the key to growing and tapping into the venture capital market.
"The tax foregone on investment realisations would happen in the future, so would not hamper the government’s current deficit reduction strategy," he adds. "Any diminution may in fact be netted off as volumes of investments and realisations should increase."
How far the report’s recommendations will be taken on board by government and the business sector remains to be seen, but the report has certainly provided food for thought. And while only time will tell whether the UK’s MSBs will ever be celebrated in quite the same way as the German Mittelstand, this "forgotten army" of businesses can at least welcome the CBI’s attempts to put them in the spotlight.
READER REACTION
How essential is it for MSBs to be supported in England?
Alison Branch, managing director, Park Communications"I do see MSBs playing an important role; they are large enough to gain economies of scale and to start to have a structure but still small enough to easily engage with staff which is critical to a business’s success. However, all businesses need funding to invest in new technology, and it has been difficult for some businesses to gain funding. Any initiatives that can help businesses to find funding at reasonable rates must be good for the industry. If funding can be directly given to businesses, that can only be helpful."
Lance Hill, group sales and marketing director, 4DM "We have been lucky in that we have always had good support from our bank, which is Barclays, and HSBC have also been good when we have needed to buy kit. I think there should be more support for medium-sized businesses but there is quite a lot already going on; we are currently undergoing the Vision in Print manufacturing process, which is 50% government-funded and we have also received sales training in the past. So the problem could partly be a lack of awareness that the support is actually out there."
Simon Biltcliffe, managing director, Webmart"I would change the definition of a medium-sized business to include those with a £5m+ turnover as these are good sized businesses that will have a very different dynamic to a smaller company. We do not have any debts and we don’t borrow, but the R&D tax credits have been a fantastic boon and I think it’s absolutely right that these should be extended to include design. We can see from the likes of Apple and Dyson that design is integral to the success of a product. The report’s recommendations make a lot of sense."
