|We want to make heroes of entrepreneurs, say banking bosses
|It has been one of the issues of the week. After the Bank of England confirmed The Sunday Telegraph’s report last weekend that its Funding for Lending scheme for small businesses would be extended, debate has raged about financial support for growing companies.
Is there a sufficient supply of credit? Is there a funding gap? Are the high street banks stifling opportunities to expand because they are too focused on deleveraging and building up their capital positions following the financial crisis? Or is it all a demand problem, with smaller businesses either not wanting to take on more debt or unaware of alternative financing opportunities?
Such questions have been on the mind of Michael Sherwood, vice-chairman of Goldman Sachs and the co-chief executive of its international division, and Ana Botin, the chief executive of Santander UK.
For both, this is an issue as much about helping small businesses understand routes to financing – either traditionally through banks or via alternative mechanisms – as it is about whether banks are lending.
Last week, Goldman Sachs produced a major report on its 10,000 Small Business programme, which offers training courses run by the bank and five university partners for business founders and chief executives.
Sherwood and Botin know it is a vital sector, with SMEs accounting for almost half of all UK economic output and providing 60pc of private-sector employment.
“It is staggering,” Sherwood says. “When you look at the private-sector growth that has come from these companies, it has over the past few years cancelled out all the public-sector jobs that have been lost.
“If you extrapolate further, we are going to have many more public-sector jobs lost. This [small business sector] is a sector that the Government could do more for by better signposting the support that it offers.
“Cutting red tape is a big thing. Having less bureaucracy for setting up companies, being able to apply for these public/private funds. There should be more business parks where you create communities of entrepreneurs where they can feed off each other. We don’t seem to do enough of that.”
Botin agrees, explaining that her bank’s Breakthrough programme offers peer-to-peer training, master classes and equity as well as debt finance to growing companies. “We found that quite a small cohort of higher-growth companies are actually responsible for two-thirds of the jobs being created,” she said. “We want to make a difference and help companies get to the next level.
“We asked businesses what did they actually need. Many companies had too much debt, whereas actually they just needed equity.
“One of the key things that the UK economy needs to change – and the reason we don’t have the Mittelstand type of companies we have in Germany – is that too many people give up right at the point that they should actually be growing.”
The Goldman Sachs report found that of those businesses that have been through the course, 77pc said that they had subsequently increased staff numbers and two-thirds said that turnover had increased.
Problems that were regularly raised as issues businesses wanted to understand better included access to finance and exporting opportunities, and developing leadership skills.
“We take flourishing businesses that are small and we teach them all the basic things about how to build a business, how to lead, how to write a business plan, how to get ready to apply for funding,” Sherwood said.
“It has been incredibly successful. It has also been a convening power and you find that these businesses start doing business together.”
The Goldman Sachs scheme was originally launched in America and is the bank’s effort to show that it is “putting something back” into society. “It is not a particularly commercial proposition, but it is absolutely the right thing for us to do,” Sherwood said.
“Will we get credit for it? Slowly, over time.”
Goldman Sachs does not finance small businesses in the UK and, despite it recently gaining a UK banking licence, Sherwood is quick to point out that the American giant is not seeking to enter this market in Britain.
“That’s not what we’re about, that is not our businesses,” Sherwood said. “We are an institutional business.”
Sherwood says there is plenty that British firms can learn from the US, where the small business community not only has more routes to finance but also has a louder political voice.
“There is more of a culture of keep on going and going in America. Failure in the UK has negative connotations in a way that is doesn’t in the US. The businesses that have been through our programmes have increased revenue and have increased jobs.”
Botin hopes that the innovative programmes being put together by banks such as Santander and Goldman will move the debate on from the rather tired discussion about whether banks should simply provide more loans to SMEs.
“It is offering a different service to companies that we would otherwise have to turn away,” she said of Breakthrough, which offers a type of mezzanine funding mix for companies.
“It validates what I always say – that at the margins there is demand, but the kind of financing that banks can give is not enough. Some companies should not have more debt.
“It is absolutely vital because banks are right to say 'no’ sometimes to these companies.
“Of the transactions we have done, if they had not had our mezzanine, quasi-equity loan they could not have survived or they would not have grown. However, banks are probably right in saying 'no’ to them for a pure loan – they need a different kind of finance.”
Botin argues that although government funding schemes – the Regional Growth Fund supports the £200m Breakthrough programme with £50m – are good, they can be over-bureaucratic.
“Government programmes are very well thought-out and great, but because they end up with so many restrictions they are not always as effective as they could be.
“Government can reach millions of small companies through the banks in a much more effective way,” she said.
It is time, Botin says, to stand up and support wealth creators and risk-takers, groups that are often overlooked or actually face the opprobrium of some in society.
“People need to understand that being an entrepreneur is recognised,” she said. “[We want] entrepreneurs as heroes.”