22/12/2010

By Matthew Giddings, Associate at Fox Williams LLP

The current economic climate makes the role of small businesses more important in the UK economy than ever. 60% of private sector workers are employed in SMEs and their often high growth and innovation offers hopes for a more speedy economic recovery.The current economic climate makes the role of small businesses more important in the UK economy than ever. 60% of private sector workers are employed in SMEs and their often high growth and innovation offers hopes for a more speedy economic recovery.

Outlined below are areas where the government could consider making life easier for struggling entrepreneurs:
Debt finance. The most pressing problem for many SMEs is the lack of debt finance. The situation has not eased since the credit crunch in 2007. 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.

The net amount of bank lending to SMEs 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. Entrepreneurs should also be aware of the risks of providing personal guarantees to banks, leaving themselves open to large personal losses.

Employment law. Many small businesses criticise the current legal framework regarding hiring and firing of staff. Entrepreneurs are concerned that they could be left with higher costs that could not easily be reduced in the event of a fall in demand.
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 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 often seen as a badge of honour. The penalties associated with bankruptcy have been reduced. 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, and the coalition is no different. Key concerns for SMEs include health and safety regulation, tax filing requirements and EU regulation compliance.
Companies House has attempted to improve the process by which companies are required to file public documents, however, there is still a significant administrative burden 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 SMEs 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 SMEs along with larger companies.
Other, more targeted, assistance directed towards entrepreneurs and SMEs have also been requested with adjustments to the capital gains tax regime to allow a greater proportion of the benefits of success to be retained by investors.

Conclusion. The British economy continues to face difficult times ahead. The efforts of entrepreneurs and SMEs 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.