The government has been called on to provide SMEs with help once the economy emerges from the downturn.
The Forum of Private Business (FPB) believes that many small firms will actually struggle to cope with a post-recession upturn in business.
Consequently, the government should step in and make sure both private and public funding are available so that SMEs can take advantage of the recovery.
The FPB was making its submission to the Rowlands Growth Capital Review, set up to establish whether state intervention, along the lines of the old Industrial and Commercial Finance Corporation, will be needed to help SMEs access the capital they need after the recession ends and to ensure growth among smaller businesses.
An inability to secure finance has been a persistent problem for smaller businesses during the credit crunch, the FPB said, and the fear is that, once business activity picks up, many firms will not be in a position to exploit the new opportunities.
Pointing out that there is significant demand for longer-term financing among SMEs, the FPB argued the case for a scheme that provides public as well as private capital.
Specifically, the FPB said that financial institutions should come up with long-term investment options other than venture capital.
Funding should be focused on start-ups but should also enable established businesses to create new products and services.
Moreover, the funding criteria for businesses should be made more flexible. At levels below £100,000, investors need to be offered greater financial incentives, while investments of between £100,000 and £500,000 should be increased and restrictions on lending reduced.
Noel Guilford, the FPB’s national chairman, said: “Small firms are finding access to finance a huge problem and the smallest firms are finding it almost impossible to raise bank finance.
“This is a problem that will get worse as the economy climbs out of recession. It is a fact that more small firms go out of business coming out of a recession than going in.”
Mr Guilford added: “Most small firms have cut costs, including owners’ remuneration, reduced their working capital needs and eliminated capital expenditure. There is no more they can cut.
“As demand increases they will take on more staff and sell more on credit, increasing their working capital needs. The demand for credit will increase, but unless banks can respond, businesses will run out of cash to pay suppliers and staff.”
The Rowlands Review will report back in the autumn, and its findings are due to be covered in the pre-Budget Report.
