As this writer was able to point out at the recent meeting of the Royal Economic Society with David Miles of the Bank of England Monetary Policy Committee, there is plenty of cash around for investment in the big corporations, and the banks actually have plenty for small and medium-sized enterprises (SMEs).

Loan Guarantees

As with mortgage loans to individuals (which are in effect small businesses) – see post on housing loan guarantees – the problem for the banks lies with security of their loans.  For this reason, interest rates on overdrafts – the chief source of finance for many SMEs – are set extremely high, 10% or more, compared even with house mortgages of 4-5%.  Often bank overdrafts are subject to very short notice given to clear overdrafts – adding uncertainty to cost.

Assessing risk of loan default

Unlike houses, a collapsed business may have very little in saleable assets once outstanding wages and national insurance have been paid.  If one in ten per year fail, ten other similar businesses paying 10% interest are needed for the banks to break even on a cash-flow basis.  Failure rates and interest rates are thus directly connected.

Reducing costs of loan default

As with the proposals for first time house buyers, a government indemnity (guarantee) for a fraction of a loan to an SME would enable the banks to reduce their overdraft interest rates very substantially – very broadly a 50% loan indemnity could halve the overdraft interest changed.  Along with a 50% cut in employer national insurance contributions for a period, this would do more to improve the health of SMEs than all the expensive bureaucratic grants put together.

For a bank or private individual, investing in a business is inherently more risky than in a property – whose main features you can at least see.

The key features of a business going forward cannot be seen, but have to be assessed amid great market uncertainty.  The chief uncertainty is the volume of future sales.  To reduce uncertainty it is natural therefore that bank loan officers should concentrate their lending on those companies that have a decent order book and track record of paying off their loans.  New businesses are the least likely to obtain loans from banks.  Nothing will change this, but the odds could be improved if the banks availed themselves of the thousands of semi-retired people who have current experience of the particular markets and businesses for which loans are sought, and who can analyse a business case with the same insight which a corporate company would be able to bring to bear.

SMEs and Employment Tribunals

Besides financial costs (above), employment legislation and the tribunals set up by it (headquartered in Manchester M3 2JA) are the major obstacles to reducing unemployment.  There are around 150,000 manufacturing companies, all but 2,000 employing fewer than 250 people (i.e. SMEs), accounting for about 2.5 million employees.  Just one extra employee per SME on average would reduce unemployment by nearly 150,000 from this one sector alone.  Many British manufacturing firms are far too small to sustain the product and process development needed to ensure their long-term survival.  They need to grow.

Free of the fear of being “taken to the tribunal” by an aggrieved employee – or even a casual one looking for compensation – many firms would hire.  So, matching government help to reduce the banks’ fear of loss-making loans, halving employer national insurance for two years, and removing the rights to claim unfair dismissal by anyone over state pension age, or with less than two years with one employer, are three focussed measures which would help SMEs to help themselves and which would have an immediate impact on unemployment and the health of our manufacturing business in particular.

At the moment (24^th November 2011) the British government is considering the report into the impact of labour laws by Adrian Beecroft, a venture capitalist with experience of a number of different companies in the private sector.  Beecroft’s principal recommendation is that unfair dismissals should be scrapped so that employees could be dismissed without employers being exposed to industrial tribunals.  This proposal has been ruled out by Vince Cable, the government’s Secretary for Business Innovation and Skills, for all but micro-firms (those with fewer than 10 employees) but consultation has been launched on other aspects of Beecroft to which this website’s sponsor, Prosyma Research Ltd has made a submission.  The idea of extending the period in which an employee cannot make an unfair dismissal claim to two years (part of the idea proposed above for SMEs) is one of the proposals for which views are being sought at www.redtapechallenge.cabinetoffice.gov.uk/employment-law .

Nothing matters besides getting people of all ages into jobs – especially young people who have never had a job and mid-career people with family and mortgage commitments, who have lost their jobs in the current crisis.

Apart from defending the country from invasion, the greatest social service the state can do for anyone is reducing barriers to their getting a job and a home to live in [1].  For the economy, only jobs which are genuinely needed to expand the number of marketable products and services, will create sustainable “growth”.

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