Michael Dugher: Small businesses are Britain’s lifeblood; we just can’t afford to keep failing them

A POLL of 1,000 small firms by YouGov found that one in six fear their business will fold by the end of the year. Another report, published recently by Capital One, found that one in five small businesses have empty bank accounts, leaving them highly vulnerable.

For many small businesses, the worst has already happened: in the last quarter of 2011, over 4,000 firms went to the wall (“compulsory liquidations”), an increase of 7.2 per cent on the same period a year ago.

These depressing figures show that many companies are still struggling to get access to the finance they need to compete. The truth is the very banks that caused the financial crash in the first place are now not lending enough and, as a result, are failing in their responsibilities to support the real economy.

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This picture was backed up by the latest SME Finance Monitor report, which found that over 40 per cent of firms that applied for a loan for the first time were turned down. Official figures from the Department for Business show that the stock of lending to small and medium-sized enterprises (SMEs) peaked in 2009 and in November 2011 declined by 6.1 per cent compared to the year before.

These figures make a mockery of the Government’s Project Merlin scheme that was supposed to increase lending to small firms. Indeed, the Bank of England’s official assessment found that banks have fallen short of the agreed target by over £1.1bn – the very same banks that had to be bailed out by the taxpayer and who the Government has allowed to continue to award themselves millions of pounds of in bonuses for top executives.

In the longer-term, we need to look at how to reform the banking system to make it work better for small businesses. For many banks, when credit is already being rationed, lending to small firms is often not deemed worthwhile.

As Ed Miliband said in his “Made in Britain” speech, the market on its own does not always work for small businesses. The Government can and should play a part in helping to ensure that finance reaches the right place.

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Other successful economies around the world have recognised this, like in Germany with their support for the Mittelstand or in the United States where there is the Small Business Investment Company. These schemes have been extremely successful, with famous companies like Apple and Intel both receiving vital funding when they were starting out and expanding rapidly.

We also need a much more diverse banking system, more rooted in local communities. It is interesting that in the UK, the largest four banks provide 85 per cent of SME accounts, whereas in Germany only 14 per cent of business loans come from the large banks. But the Government could also be doing more now to help small business in the forthcoming Budget. It could, for example, introduce a one year national insurance holiday for small firms taking on extra employees.

It could also repeat Labour’s tax on bank bonuses to fund 100,000 jobs for young people – desperately needed after yesterday’s terrible youth unemployment figures in Yorkshire. Another way would be to change the Government’s approach to procurement so that it properly utilises the £240bn of state buying power to help SMEs.

Official Government figures I revealed last month showed that the percentage of public procurement contracts going to SMEs has decreased across the majority of Whitehall departments in the last year. Embarrassingly, even the Department for Business – which is supposed to be responsible for helping small businesses – saw a decline in the percentage of procurement spend going to SMEs.

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We also need the private and public sectors to work a lot closer together to get the system working for small businesses. This means looking at things like establishing a British Investment Bank, which would back entrepreneurs and help SMEs when the market fails.

But all of us need to listen much harder to Britain’s small businesses. That is why I have launched this week, together with Shadow Minister Toby Perkins, who used to run his own small firm, a survey of over a thousand small and medium sized companies.

My “Thousand Business Voices” campaign will help us build up a picture of the real pressures that local businesses are facing in Yorkshire. It will also help us to find out what more the Government could be doing to help.Small firms account for over half of all companies in Yorkshire. In the UK as a whole, SMEs employ nearly 14 million people, accounting for almost half of private sector turnover. Small businesses are the lifeblood of the economy.

Their success is fundamental to achieving the jobs and growth we all desperately need to see back in our economy. The Government could choose to act now in the way that Labour and other organisations have proposed. But the truth is no one has all the answers. All of us have to listen much harder. As a country, we simply cannot afford to keep failing small businesses.

* Michael Dugher is Labour MP for Barnsley East and Shadow Minister without Portfolio.