John Wright, Chairman, FSB

THE FUEL IN THE TANK OF THE ECONOMY

John Wright, the National Chairman of the Federation of Small Businesses (FSB), describes the various ways in which the FSB is lobbying parliament to ensure the survival and future growth of small businesses in these difficult economic times.

The UK’s 4.7 million small businesses are a force to be reckoned with. They make up the majority of UK enterprises, employ over half the private-sector workforce and contribute to more than 60 per cent of commercial innovation. Small businesses are like the fuel in the tank of the economy and are crucial to driving the UK out of recession.

But the economic climate is causing damage to the small business engine as the sector battles to survive. Reduced consumer spending and deteriorating bank lending has led to around 120 small businesses closing a day and rising unemployment. The FSB has been working closely with parliamentarians across the political spectrum over the last year to tackle the worsening situation.

The biggest impact the downturn has had on small businesses is the lack of steady cashflow, caused by reduced footfall as shoppers curtailed their shopping habits. But cash is king for small businesses, keeping them operating, employing and innovating, and cash needs to keep flowing.

Cash is spent on three main things in a small business: rent, wages and business rates.

A falling income can leave small business owners dreading the rent bill. The FSB has urged landlords to help during these tough times by collecting rent monthly rather than quarterly in advance so businesses don’t lose so much income at once. Additionally, we have campaigned for an end to upward-only rent reviews, which leave small firms seeing their rent continue to rise even when the market contracts.

The 13.5 million people employed by small businesses across the UK rely on their employer’s cashflow for wages. The FSB has conducted numerous surveys testing the health of small firms during these tough times. Our statistics estimate around a third of business owners are considering reducing employee headcount or are considering cutting hours, while 41 per cent are contemplating curbing future hiring.

The FSB and the Trades Union Congress (TUC) have proposed a solution to help employers pay, retain and even take on more staff: a Government subsidy for short-time working, as previously operated in France, the Netherlands and Germany would really have an impact. This would avoid the need for redundancies and help businesses to hold on to and develop vital skills. The FSB also believes a healthy rise in income tax and national insurance thresholds to £10,000 would put money back into the pocket of the employee and cut the cost of employing staff for business.

After rent and wages, business rates are the third highest expenditure for small firms. While the FSB welcomed the government’s decision to stagger April’s business rate rise over the next three years, more could have been done to help firms cope with the costs. We have been campaigning for the introduction of automatic rate relief. Every year more than £400mn goes unclaimed by businesses eligible for up to £1,200 off their rates bills, and the government should make this rate relief automatic — following the lead of Wales and Northern Ireland — providing valuable extra finance for small firms at no extra cost to the government or taxpayer. The FSB pioneered a Private Members Bill with Conservative MP Peter Luff on this issue, which received cross-party support and is being closely considered by the government.

We are also working to help struggling rural firms with business rate bills. In a survey of more than 300 members in rural communities and the tourism industry, nearly one in three said the next six months will be difficult. More than 80 per cent are already suffering with rising costs, compounded by 46 per cent seeing trade decrease.

The closure of a rural firm can have more of an impact than in urban areas as it is often the only one of its kind, taking away years of tradition and experience, as well as an important source of employment and local income. The FSB is, therefore, calling for a rural recession-rate relief scheme: a top up from the Treasury of the non-domestic rates pool, which will mean local authorities can give 100 per cent rate relief to vital small, rural businesses in towns and villages across England during the recession — a lifeline that could save the heart of many of the country's rural communities.

Expenditure aside, the biggest external influence on cashflow for small firms is late payment. Increasingly, a number of larger organisations are using small businesses as an external source of credit to alleviate their own struggles. Small and medium size enterprises (SMEs) are owed £25.9bn in overdue payments, up from £18.6bn last year, according to figures from Bacs. Over 38 per cent of FSB members have seen a change in payment times in the public sector while almost 20 per cent are still waiting longer than 10 days to be paid for public-sector work despite government pledges to speed things up. We want Companies House to have the power to name, shame and fine public companies that fail to fulfil their legal obligations to declare their payment terms and that pay late. The FSB is also urging more companies to sign up to the government-backed Prompt Payment Code, which demands businesses pay fairly.

The Chancellor Alistair Darling’s Pre-Budget Report in November 2008 and Budget in April 2009 helped put some money back in small business owner’s pockets through the deferral in the increase in corporation tax and a scheme for loss-making companies to reclaim tax on profits made in the last three years. However, the chancellor’s decision to increase alcohol duty and fuel duty will create an added burden to small firms.

With cash hard to come by and little to hold on to, small firms often look to their banks for extra support.

Over the last year, access to finance has been the big talking point in the small business sector as well as among the wider public and in parliament. At the end of last year, around a third of small businesses were telling us that credit had dried up. Loans were being refused and overdraft rates were being hiked up. We raised our concerns with government ministers and banking officials and called for improved access to affordable finance. This was followed by interest rate cuts by the Bank of England and the eventual adoption of a new loan scheme — the Enterprise Finance Guarantee — in January 2009; something which we had been calling for.

Finance is now starting to trickle through, but the FSB is still keeping an eye on lenders through regular surveys, our Bank Watch scheme — monitoring local bank branch behaviour — and at meetings with ministers and financial institutions at the Small Business Finance Forum. Another victory we have achieved is altering the banking industry’s Statement of Principles, allowing businesses to switch accounts within five days instead of 10.

The FSB is helping to kick-start lending between banks and small businesses itself by arranging local meetings and distributing our own principles of small business banking. The FSB has also proposed that the government introduces a corporate mediator to act as an independent go-between, brokering agreement on bank lending to small firms.

We are also investigating alternative methods of finance for small businesses such as asset financing, selling equity through the Alternative Investment Market and diverting European Investment Bank money through Regional Development Agencies, which has already been adopted in several areas.

It is vital that small businesses can access finance and sustain their cashflow so they can survive the recession and grow. The All-Party Parliamentary Small Shops Group estimates that the UK is losing 2,000 local shops each year, which could leave the UK with no independent shops by 2015.

With this in mind, our Keep Trade Local campaign aims to stem the tide of business closures while defending the choice and diversity customers deserve. We are urging the government, local authorities, public bodies and consumers to take action to support this valuable sector. Up to 75p in every pound spent in a local shop goes back into the local community, according to a Friends of the Earth study — this is more than larger organisations, which have loyalties to shareholders and head offices internationally.

As part of the campaign, the FSB is garnering political support to help shore up pubs and the post office network. Both provide a vital focal point for local communities, particularly in rural areas, and are relied on for many services. We work with the Fair Pint campaign to ensure pub landlords can get a fair deal from pub companies to help stop the trend of 39 pubs closing a week. We are also part of a coalition calling for the creation of a Post Bank to provide financial services to small businesses and boost the Post Office network.

The campaign also includes proposals to improve access to procurement, establish fairer parking policies, help small firms with business rates and tackle crimes against business.

It is a tough time for many businesses at the moment, and they look to the FSB and parliament for support. However, small firms are still doing well across several sectors due to their flexibility and creativity. The government and opposition politicians have been largely receptive to FSB lobbying and the support is starting to work. According to Barclays, the number of new businesses opening accounts with the bank has remained at high levels rising from 432,300 in 2007 to 436,600 in 2008.

Many of our members are recruiting new members of staff, winning new contracts and finding success in new markets such as exporting or the internet.

Despite the good news stories, though, there is still more to be done and the FSB will continue to lobby parliament in the coming years to ensure small businesses can access and hold on to cash, recruit and retain staff and ultimately help drive the British economy out of recession and keep it motoring.