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Peer2Peer Finance News | August 18, 2019

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Small is beautiful

Small is beautiful
Suzie Neuwirth

Small businesses are the lifeblood of the UK economy – and of many peer-to-peer lenders. The Federation of Small Businesses’ policy director Martin McTague (pictured) talks to Peer2Peer Finance News about the funding gap, Brexit and “corporate bullying”…

IT’S NOT THE EASIEST time to launch a small business. With Brexit negotiations barely underway and a recently reshuffled cabinet, the political and economic continuity that small- and medium-sized enterprises (SMEs) need to thrive and grow has been put under threat in the UK.

Yet Martin McTague, policy director at the Federation of Small Businesses (FSB), says that politically, their voice has never been any stronger than it is right now.

“Small businesses employ over 60 per cent of the workforce in the UK and contribute nearly half of GDP, so I think it’s universally accepted that we are vitally important to the success of the economy,” he tells Peer2Peer Finance News.

“I feel people in political circles do understand and value the importance of the FSB, but it’s essential that we keep focused on the things that are most important to our members because we’re entering some pretty choppy waters over the next few years.”

The FSB was established more than 40 years ago as a single-issue campaigning group, in response to the increase in national insurance contributions. Now it has a broader remit, aiming to ensure that the environment in which small businesses operate is as good as possible. The trade body has 186 branches across the UK and around 170,000 members.

Read more: Inflation holds steady but SMEs will still feel the squeeze

McTague was elected to his current role at the FSB in March 2016, having volunteered at the organisation for 15 years, and has a wealth of business experience to offer. He started his own company 28 years ago and now currently owns and manages three businesses, offering public policy, engineering and IT consultancy services.

Access to finance is indisputably a pivotal part of SME growth. Despite Brexit woes, the FSB’s research that shows the availability of finance for small businesses is almost at an all-time high, although McTaguee thinks the efficiency of the process from the incumbent lenders still leaves room for improvement.

“We’re getting very good feedback about the availability, while the conversion rate from applications to success is also at a very high level,” he explains. “But the perennial problem is – and I’m sure peer-to-peer lenders would understand this better than anybody – that big banks still are very slow at processing credit applications. They can be quite beaurocratic.

“The other area I think is misunderstood is the suitability of debt or equity finance. Some firms will be at a completely different stage in their development cycle and they don’t seem to recognise the importance of applying for the right kind of finance at the right time.”

He thinks that the British Business Bank has “a big role to play” in educating SMEs about different types of credit, as well as the FSB itself and resources like Peer2Peer Finance News.

“Most small businesses launch using a bit of friends’ money and credit cards,” he adds. “The level of financial sophistication for many companies is pretty low.”

McTague says he definitely expects P2P lending to small businesses to grow and become more mainstream.

One particular issue that McTague singles out – which P2P platforms such as MarketInvoice or ArchOver could help to address – is late payments from larger, corporate clients.

Read more: £266bn of late payments hamper UK SMEs’ growth

“A lot of them indulge in what I can only describe as corporate bullying, where they pose very one-sided conditions in contracts and delay payments,” he asserts. “They effectively sit on our members’ money and use that to fund their own businesses. That’s been a consistent problem.”

A combination of government policy changes and increased education about working capital finance options would help to address the problem, he says.

“The government should and is starting to do more on poor payment practices,” he comments.

“They’re looking at the governance arrangements in bigger companies to make sure there is at least somebody that’s speaking up for the supply chain and making sure big corporates treat them properly.

“There is also the small business commissioner who is going to be responsible for trying to improve payment practice but I think there is definitely a role for invoice discounters and credit finance institutions.

“I think in the past, a lot of people have been reluctant to use them because they were expensive. A more competitive environment, driven by P2P, will improve that situation I’m sure.”

Read more: Government urged to boost British Business Bank’s P2P resources

The FSB may have a strong voice, but it also has strong headwinds to face, McTague warns.

“At the moment I would say most SMEs haven’t seen a direct impact from Brexit,” he comments. “We survey our members every quarter and confidence levels are still holding up well but there are some worrying signs further down the track and we’re expecting some of those issues to hit our members in the coming months.”

McTague expects Brexit to “dominate everything for the next couple of years”, which could be to the detriment of small businesses.

“There’s very little bandwidth left in government to deal with anything other than Brexit and that will mean a lot of domestic priorities get put on the back burner for the foreseeable future,” he asserts. “I think that is a bad thing but I don’t think there’s any way we can avoid trying to make sure the Brexit deal is as good as it possibly can be and that’s going to take a super-human effort in government.”

It is clear that McTague sees the UK’s post-Brexit relationship with the EU as fundamental to the future of SMEs. The export opportunities and funding that the bloc provides are the lifeline of many small businesses in the UK, he explains.

“I’m an optimist when it comes to Brexit talks,” he says. “I think it’s possible to negotiate a deal that will protect the interests of small businesses in the UK. The FSB has contributed a lot to government thinking and provided them with a lot of evidence about how small businesses trade in the EU.

“This includes how Brexit could impact them in terms of funding – this is perhaps a misunderstood area. How they’re reliant on EU labour and what the priorities for reform should be when EU rules are reincorporated into the UK statute book.

“These are all big issues and if we get them wrong, it could have a major negative impact but equally, there are some opportunities for us.”

McTague’s ideal Brexit deal would be something close to the existing trading arrangements for small companies.

“A large percentage of small businesses start exporting in the EU before they go for more complex markets so for me, a really good deal would be one that allowed them to continue to operate in that environment in as frictionless a way as possible,” he explains.

“The ideal outcome would mean that they could still hire the right talent without massive obstacles and that the government would sort out some of the gaps in funding that are going to be left when EU structural funds go.”

Read more: Small firms cutting back to cope with national minimum wage

McTague warns that this funding gap could have a particularly detrimental impact on “the creakier areas” of the country, which he names as the North East, Wales and the South West.

“In North East England for example, I know that the failure to sort this out is causing serious financial hardship to some firms,” he affirms. “The funding arrangements have just ground to a halt.”

He also expresses concerns about the FSB’s members in Northern Ireland, who he thinks could be seriously affected by border issues, and firms that employ mid-skills employees and technicians, which are sectors dominated by EU labour.

“They’re going to find it extremely difficult to find that labour in the UK because we have quite a severe skills shortage in those areas,” he says.

With Brexit headwinds looming on the horizon, the FSB’s role in lobbying on behalf of small businesses is more important than ever – something that McTague takes very seriously.

“Many people who decide to set up businesses are taking enormous risk with what will sometimes be family assets,” he says. “They’re working incredibly long hours, sometimes very poorly paid.

“They don’t have the normal perks that most people associate with a working life such as holidays and sick pay, or pension provision. So, they are in a very vulnerable position and we want the government which recognises they are massively committed to the economy to make sure they nurture them rather than squeeze them.”