The backbone of our economy
Small businesses are the backbone of our local economy. Plumbers, hairdressers and beauticians, charity workers, arts professionals and creatives. In the North East they represent around half a million jobs. In fact, 95% of businesses in our region are micro-businesses, employing ten people or fewer. And, sadly, small firms often struggle to get the financial backing they need.
The pandemic has been tough on them. Excluded UK represents a whopping 3 million limited companies, sole traders and freelancers left out in the cold by Government and the Treasury. Locally, the North of Tyne put £5 million into giving a lifeline to some of the most vulnerable, but we were only able to scratch the surface. Soon, firms will face the combined effects of their VAT deferments falling due, furlough coming to and, Bounce Back Loan payments kicking in, and a host of other temporary support measures all ending within months. Add in recent National Insurance hikes, and many small firms fear for next year.
Small businesses often trade with each other. If a customer goes bust, and doesn’t pay their invoices, there’s a risk of a domino effect. I’ve suggested to the CBI and others that Government develop a scheme to prevent this. They’d need to crunch the numbers, but the concept is simple. If you’ve fulfilled a contract, but your customer goes bust for Covid-related reasons, Government should step in and pay a substantial part of the invoice.
It’s not dissimilar in concept to insolvency support that workers get. If your employer goes bust, you can apply to the Government for your outstanding pay and unpaid redundancy money. So many people are now self-employed one way or another, they need this protection. I hope this becomes Government policy.
Even before Covid, though, small businesses faced an uphill playing field against big business. Access to finance is difficult. For a bank loan, you typically have to risk your family home as collateral – if you have one. Even amongst people aged 35-44, only 50% of people are homeowners. Working class people of any age with good business ideas find it hard to raise the cash to start a business.
Too often when funding is available, it extracts wealth from our local economy. Loans have to be paid back of course, with interest. If it’s from hedge funds, or commercial banks, this sucks out wealth to pay shareholders’ dividends and profits. This rarely feeds back into the local economy. More likely it gets funnelled through tax havens.
Last week at the North of Tyne cabinet, we agreed a package of access to finance measures to address this. Backed by £15 million over five years from our Investment Fund, it will boost small business growth. It will give people of ordinary means a chance to become their own boss. And it will recycle local capital, keeping wealth in our region.
It’s got the heft required to make a real difference. There’s £10 million in the package for equity investment – a challenge the North East faces. Although we account for 2.3% of the UK economy, only 1.4% of the total UK private equity and venture capital is invested here. By having a fund to directly invest in small, local firms, start-ups and scale-ups, we can accelerate the economic recovery. As the fund grows, the money will be recycled, supporting more local firms, and creating more jobs here.
For cooperatives, and businesses trading with a social purpose, it’s even harder. Investors expect a vote in your business, and the legal structure of worker-owned or community-owned businesses often prevents that. So we’ve made £4 million available to directly invest in these businesses, as a source of patient capital to help them grow.
We’ll underpin these funds with strong ethical values. I was presenting an award at the North East Business awards on Thursday. It’s heartening to see how many local firms really want to look after their employees. How many take real steps to give something back to their communities. And how many take their environmental responsibilities seriously.
This is a win-win approach. The investment will pay for itself and do much social good along the way.
*Originally published in the Journal and Evening Chronicle 27 Sept 2021