Government and the entrepreneur: Policies for enterprise

November 11, 2010

The current British political and economic climate makes the role of small businesses more important in the UK economy than ever. With the prospect of large scale public sector job cuts, the private sector, and increasingly small and medium sized enterprises (SME's), are being seen as a crucial engine of growth in the UK’s still fragile economy. As an example, 60% of private sector workers are employed in SME's and their often high growth and innovation led approach offers hopes for a more speedy economic recovery.

In order to maximise SME's growth and contribution to the economic recovery, the government is considering how best barriers to their success can be removed. Outlined below are areas where the government could consider making life easier for struggling entrepreneurs:

Debt finance
The most pressing problem for many SME's is the lack of availability of debt finance from their bank. The situation has not eased since the credit crunch in 2007 with many SME's finding funding unavailable on commercially acceptable terms. Banks have also become much more sensitive to technical breaches of loan covenants which give them an opportunity to reprice loans or levy additional charges for the breach to be waived. SME's should ensure that wherever possible they remain within the letter of their bank debt facility agreements and accord to all the bank’s requirements under the agreement to minimise the opportunities for their facility being reopened.

The net amount of bank lending to SME's has fallen by 5% year on year. The coalition has announced a £50 billion loan guarantee scheme, however, this has not materially improved SME's access to debt finance in the short term.

More radical suggestions to improve the flow of bank lending include government imposed targets with sanctions to be levied against banks if they fail to meet them. However, this is likely to meet stiff resistance from industry bodies, particularly in the light of the coalition’s commitment to pursuing a hands off approach to regulation as far as possible.

Entrepreneurs should be aware of the risks of providing personal guarantees to banks, leaving themselves open to large personal losses should their company fail to meet its requirements under loan agreements.

Employment law
Many small businesses criticise the current legal framework regarding hiring and firing of staff. It's argued that difficulties associated with removing poor performers and additional overhead and legal compliance costs over and above wages deters SME's from expanding their workforce. Concerns that the company could be left with higher fixed costs that could not easily be reduced in the event of a fall in demand for the company's products are issues limiting SME's hiring of new staff.

Many entrepreneurs oppose the abolition of the statutory retirement age claiming that this makes it harder for SME's to bring in new talent which is essential to the success of a young enterprise. There is also concern regarding possible extension of maternity rights and the requirement of companies to consider requests for flexible working.

The expense associated with employment law compliance is adding a two fold burden to companies: increasing their overhead costs and making them more reluctant to take on staff to take advantage of otherwise promising commercial opportunities.

Bankruptcy procedure
Traditionally in the UK, bankruptcy has held a significant stigma to entrepreneurs, in contrast to the US where early business failures are seen as something as a badge of honour. However, the penalties associated with bankruptcy have been reduced, with restrictions on bankrupts being automatically lifted after 12 months. This leaves serial entrepreneurs with the possibility of returning to business after a previous failure. However, bankruptcy should not be taken lightly as the consequences for the individual, their reputation and the company’s creditors can be severe.

Red tape
Governments of all hues have stressed the need to reduce red tape afflicting SME's, and the coalition is no different. SME's are hopeful that the current positive noises emerging from the government will be translated into action. Key concerns surrounding red tape for SME's include excess health and safety regulation of limited relevance in the small business environment, lengthy tax filing requirements and managing compliance with increased EU regulation from Brussels.

Companies House has attempted to improve the process by which companies are required to file public documents. The use of online filing has made it easier for companies to manage their reporting requirements, however, there is still a significant administrative burden facing companies in order to accord to the statutory requirements of the Companies Act 2006 and other relevant legislation.

Tax breaks
In the current climate of spending cuts, tax breaks for SME's do not look likely to be forthcoming. However, there is an existing commitment to reduce corporation tax rates from 28% to 24% over coming years which will benefit SME's along with larger companies.

Other, more targeted, assistance directed towards entrepreneurs and SME's have also been requested. Adjustments to the capital gains tax regime has been suggested to allow a greater proportion of the benefits of success to be retained by investors willing to invest their own cash in a business. The turnover ceiling for small business to be required to register for VAT could also be raised. Currently £70,000, raising this threshold would reduce administration and compliance costs to small firms and thereby encourage their growth.

Conclusion
The British economy continues to face difficult times ahead. The efforts of entrepreneurs and SME's are an important part of driving the economy out of recession. It is the job of the government to provide the best possible environment to allow them to thrive.


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