Partner Article

Long-term thinking needed to avoid SME financing time-bomb

Figures released on Friday from the Bank of England show that that net lending to businesses plunged by £4.5 billion in the three months to May, impacting small businesses particularly hard. While we’ve recently seen many positive signs towards a return to growth and economic stability, we must not get complacent. The challenges facing UK small businesses go beyond just business lending from banks. Longer-term challenges such as a ‘capital-lite’ younger generation unable to invest in or buy small businesses are still very real. Factors such as this could have a profound impact on the UK SME economy in the long-term.

The post war baby boomer generation is the backbone of Britain’s small business economy, but the vibrant UK SME sector they have built could suffer a significant growth challenge in the years ahead. Over time small businesses and entire industries pass from one generation to the next. But, with lower levels of personal capital and home equity than their baby boomer parents, as well as a worrying trend of growing indebtedness, the next generation of would-be small business owners (Generations X and Y) may face a significant financial challenge to taking over.

This dilemma is detailed in a recent Economist Intelligence Unit report, commissioned by Zurich Insurance, which found that the emerging ‘capital-lite’ generation of small business owners and entrepreneurs, along with a lack of succession planning from current owners, presents a potential significant risk to small business formation - and the long-term growth and competitiveness of the broader UK economy.

Of those small business owners aged over 60, nearly two-thirds (64%) say that they do not have a clear succession plan for transferring ownership and control of the business, meaning that UK SMEs may be significantly under-prepared for the retirement of their owners.

Furthermore, over half (56%) of respondents acknowledge that SME owners wait too long before thinking about succession planning - a situation compounded by poor pension provision. With relatively low annuity rates and a rising state pension age many small businesses owners cannot afford to retire and in many cases feel they are better off carrying on. Later retirement can be very beneficial in terms of the level of business experience, but it is also a reflection of difficult economic conditions for both older and younger generations.

Coupled with later retirement, an emerging generation of potential ‘capital-lite’ entrepreneurs and small business owners who may struggle to start or acquire and invest in a small business. 29% of current small business owners are worried there will be a limited number of buyers for their business, while 18% are concerned that the next generation has insufficient available capital.

These concerns are not unwarranted at a time when Baby-boomers’ offspring are perhaps the most indebted the UK has ever seen. Young Britons face average student debts of £53,000 (tuition and living expenses), according to the Push university guide, and are becoming increasingly reliant on credit while also having low levels of personal savings – something echoed by the US Consumer Financial Protection Bureau which recently warned of an emerging US student debt crisis with “discrete impacts on small business formation”. Furthermore, lower disposable incomes will also likely impact access to finance for future prospective entrepreneurs and small business owners.

This lack of personal capital, accompanied by a tough lending environment, is reflected in the fact that UK home ownership recently reached its lowest level since the mid-1980s. Even though figures on Friday showed a welcome increase in first-time mortgage lending, these figures are still well below normal levels. Without an asset to borrow against or the personal capital to start, grow and manage a business, the next generation of would-be small business owners are greatly disadvantaged – and may ultimately be discouraged from the risk-taking required to start a business.

The danger is that without new, younger business owners injecting fresh ideas into firms and the greater small business landscape, the necessary, natural regeneration of the SME sector may be delayed. At a time when the SME sector is becoming increasingly competitive through globalisation and changing dramatically due to new technologies and the Internet, this may present a significant long-term risk and “growth penalty” on the UK economy.

We must address the complex, longer-term generational and financing issues in the small business landscape just as much as making strong headway in boosting the current business climate for investors and entrepreneurs. Getting this balance right is the only way will we achieve longer term stability and a highly competitive and resilient SME sector.

This was posted in Bdaily's Members' News section by Richard Coleman .