Partner Article

Business bank and patient funding would help NE

If there was ever a good example of demand, it’s a room full of people eager to learn how they can access loan funding from the North East Local Enterprise Partnership’s Growing Places Fund.

My last column dealt with the fund - and I’d like to remind everyone that you have until 9 November to get your application in for the monies available. Check out the LEP’s web site for details www.nelep.co.uk

Sticking with the funding theme, it is interesting to see the Guv’nor Sir Mervyn King publicly reiterating what all of us have known for some time that the hobbled banks are holding back the recovery.

Indeed, that is one of the reasons for introducing the Growing Places Fund, to replace some of the funding the banks will not lend because of their heightened fear of risk. Of course, it will be impossible for the Government to make a U-turn and encourage the banks to ease restrictions and lend more so alternatives are required.

One of these would be a national investment bank, the subject of a report published recently by the University of Surrey for leading chartered accountants Kingston Smith.

Their research showed that most SMEs now borrow from family or friends, or re-invest retained profits. 58% of SMEs used just one source of finance to start their business, and 42% rely on only one source of finance to sustain themselves. Banks come a poor third in terms of finance sources. It concludes that SMEs need ‘patient’ capital, finance that is there for the longer term.This is the only way to stimulate and sustain high-growth businesses.

The report calls for a British Business Bank. There is a particularly strong need for property lending as banks can’t lend to the property sector like they have in the past because they have been told to rebuild their balance sheets. This creates a big problem.

We have been too used in the North East region to ‘gap’ funding to bridge the loss between the cost of development and the lower value of the completed development. This was not sustainable and prevents the private sector from investing in the region. Removing this ‘prop’ at a time of austerity creates a challenging position to achieve viable development of commercial space to attract the inward investor and indigenous occupier.

Creating viable development where there is adequate demand that can charge market rents needs demand in the system. This demand exists for some sectors, for example student accommodation and some retail, but is lacking to varying degrees in other sectors. The result is that no more space is being built speculatively. Even bespoke schemes for particular occupiers are a challenge because the occupiers will need to carry the higher cost on their balance sheets until values grow.

Thus we fall back on the two North East Local Enterprise Partnerships and the cohesive action of the 12 local councils in the region to act to create growth and jobs. This will stimulate demand for space, increase values and in the longer term grow the values sufficiently to make development viable.

But we cannot wait for these ‘market forces’ to work through the system. To do so will leave the region at a disadvantage since we will not be able to provide development for much-needed factories to meet rising demand.

This is not holding out the begging bowl for grants, nor for soft loans, but a call for that ‘patient lending’ that has a long-term view of the region to support the efforts to create growth and jobs. There needs to be a stronger investment strategy that creates this development and has a target to leverage private investment from the banks and investors.

The Growing Places Fund will help, but it is small relative to the need. A Business Bank linked to local asset backed vehicles bringing forward public sector assets, such as council assets, and the region’s pension funds, such as for the Tyne & Wear Pension Fund, that can focus investment in the region would be a significant step forward in the leverage of funding for the private sector.

This was posted in Bdaily's Members' News section by Kevan Carrick .