Chapter 3. Zein-layered clays bio-hybrids
3.4 Concluding remarks
special attention being paid to the small-firms sector.
Specifically, action has been taken in three directions.
Equity and loan capital
The flow of equity and loan capital has been aug-mented to enable an individual who wishes to exploit an idea or to expand his business to do so. The Department of Trade and Industry introduced a new Enterprise Fund in 1998 designed to provide flexible support for those SMEs with growth potential. The fund had £100m to spend in 200203 on the first three items listed below.
Small Firms Loan Guarantee Scheme
This was introduced in June 1981 as a pilot scheme for three years. It was intended to cover situations where potential borrowers were unable to provide sufficient collateral, or where the banks considered the risk went beyond their normal criteria for lending.
From April 2003 the scheme was made available to UK companies with an annual turnover of more than
£3m (non-manufacturing) and £5m (manufacturing).
The government encourages ‘authorized’ financial institutions such as the main UK banks to lend to small firms by guaranteeing 75% of each loan up to
£100,000 for new companies and £250,000 for estab-lished businesses, with the loans being guaranteed for between two and 10 years. In return for the guarantee, the borrower pays the Department an extra interest premium of 2% per year on the out-standing balance of all new loans. Some £204m was spent on the scheme in 200203 and since its inception in 1981 a total of £3bn has been spent on guaranteeing some 80,000 individual loans.
Regional Venture Capital Funds
These are public–private partnerships, receiving government financial help from the DTI’s Enterprise Fund. These partnerships are aimed at encouraging equity venture capital investment by the private sector in small firms across the English regions. The govern-ment intends to invest up to £80m in the nine Regional Venture Capital Funds (RVCFs) during the 2000–03 period and this will, it is hoped, encourage up to £187m from private sector investors.
High Technology Fund
During 1999–2000 the Enterprise Fund began working in partnership with a private firm, Westport
Private Equity Ltd, to raise finance for the creation of a further fund of up to £125m to invest in existing UK high technology venture capital funds. The aim of this
‘fund of funds’ is to stimulate companies in the early stages of high technology development which, by definition, are likely to be SMEs. By 2003, almost
£35m of the fund had been invested in 69 companies working in areas such as pharmaceuticals, communi-cations, internet technologies and bio-sciences.
Phoenix Fund
The DTI established a Phoenix Fund in 2000 to help tackle social exclusion by encouraging entrepreneur-ship in disadvantaged areas of the UK and supporting those groups under-represented in business owner-ship. For example, the Phoenix Fund includes a Development Fund which is designed to help support business projects in ethnic minority communities, providing grants and loan guarantees to Community Development Finance Institutions (CDFIs) which in turn use such resources to help promote enterprise amongst disadvantaged groups not able to obtain finance from conventional sources. The Development Fund also supports a national network of volunteer mentors to help pre- and early stage business start-ups. Between 2000 and 2003 the Development Fund had supported 96 projects at a total cost of £30m, while the Community Development Finance Insti-tutions initiative had allocated £26m to 42 individual projects.
The Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) was intro-duced in January 1994 and is the successor to the former Business Expansion Scheme (BES) which had been operating since 1983. The BES had become expensive to run and only a fraction of the funds had actually found their way to small manufacturing companies. Much of the equity investment had been placed in private rented properties which gave ‘safe’
returns, rather than being invested in the more dynamic but risky manufacturing sector.
The EIS was introduced to encourage equity investment in small (and therefore ‘high risk’) unquoted companies. It also sought to encourage
‘business angels’ (outside investors with some busi-ness background who might contribute both capital and management expertise) to invest in such com-panies. The scheme was modified in 1998 and offers income tax relief at 20% on annual investments of up
to £150,000 a year in the ordinary shares (equity) of companies which qualify. A person who was pre-viously unconnected with the company can also become a paid director and qualify for tax relief.
Gains made on the sale of equities held for the full three years are exempt from capital gains tax. Also, any losses experienced when selling the shares after this period can be set off against income tax. To qualify for the EIS, companies must have carried on an approved trade wholly or mainly in the UK for a period of three years after the date of issue of shares, but they need not be resident or incorporated in the UK.
Venture Capital Trusts
The Venture Capital Trust (VCT) was introduced by the Finance Act 1995 to encourage individuals to invest in smaller, unlisted trading companies. By January 2003 a total of 50 VCTs had invested over
£1bn in small companies since the inception of the scheme. Basically the VCT invests in a range of trading companies whose assets must not exceed
£10m, i.e. it invests in relatively small companies.
VCTs are exempt from corporation tax on any capital gains arising on the disposal of their investments.
Individuals who invest, i.e. buy shares, in a VCT are exempt from income tax on their dividends from ordinary shares and are also exempt from capital gains tax when they dispose of their shares.
Alternative Investment Market (AIM)
The Unlisted Securities Market (USM) was intro-duced in November 1981 to enable small and medium-sized firms to acquire venture capital on the London Stock Exchange. Its attractiveness declined in the early 1990s partly because the Stock Exchange rules regarding a full listing had been relaxed in response to changes in European Union directives.
This meant that the advantages to companies of being on the USM rather than on the Official Stock Exchange List had been eroded. The USM ceased trading in December 1996.
The demand for a replacement market to the USM was evident in the early 1990s with the growth of trading under Rule 4.2 of the London Stock Exchange. This rule permitted member firms to deal in specific securities which were neither listed nor quoted on the USM. It had been formulated to provide an occasional dealing facility in unquoted companies for members of the Stock Exchange. The
main benefit of trading under Rule 4.2 was that trading rules were less stringent than under the full listing or the USM.
In June 1995 the Alternative Investment Market was opened to meet the demand for a low-cost and accessible investment market for small and growing companies. Its trading rules are less demanding than those for the full listing and the old USM but are on a more formal basis than trading under Rule 4.2. For example, the cost of a full listing is often high because companies need to appoint mandatory ‘sponsors’
who check whether the listing rules have been followed. In the new market, the responsibility for the accuracy of the documents rests on the company directors alone. The new market would, in addition, be accessible to companies raising small amounts of capital and those with few shareholders. Investors in AIM companies benefit from the same tax breaks as apply to unquoted companies, including inheritance tax relief, capital gains tax relief and relief under the Enterprise Investments Scheme and Venture Capital Trusts. Further, there would be no minimum or maximum limits set on the size of the company joining the market, nor on the size of the issue. In brief, the Alternative Investment Market operates under rules which depend more on companies them-selves disclosing the basic information rather than on their having to fulfil the strict suitability criteria for a full listing. The hope is that the market will be attractive to small companies, providing the finance and flexibility they need.
By November 2003, there were 693 companies trading on the AIM with a total of £5bn having been raised since 1995. Companies on the AIM include Peel Hotels, Majestic Wine and Ask Central (restaurants) and Aberdeen Football Club. By the late 1990s some observers began to point out that the cost of an AIM float could be as high as £250,000, not too far short of the cost of a full listing. The result has been that many very small firms are beginning to use the Ofex market, leaving AIM for those companies looking to raise £2m or more.
Tax allowances and grants
In order to help small businesses, tax allowances have been modified, and grants offered.
Corporation tax
Corporation tax has been made more generous for small firms over the last few years. For example, the
corporation tax for ‘very small companies’ with less than £10,000 taxable profits was brought down from 10% in 1996 to zero in 2003, while the corporation tax rate fell from 24% to 19% for ‘small’ companies and from 33% to 30% for ‘large’ companies over the same period. SMEs were also entitled to an additional deduction from taxable income of 50% of their current spending on certain research and develop-ment activities while also receiving a first-year tax relief of 40% on investment in plant and machinery.
Enterprise Grants (EG)
This is a scheme for firms employing fewer than 250 people in the new Enterprise Grant areas of England (pp. 201–2) introduced in November 1999 with some
£52m committed to the EG scheme over the period 2000–03. Under this scheme, companies investing up to £500,000 may apply for a once-and-for-all grant of 15% of the fixed costs up to a maximum of £75,000.
The Small Business Service (SBS) administers the scheme, with advice from the Regional Development Agencies.
The Small Firms Merit Award for Research and Technology (SMART)
Under the SMART scheme individuals and inde-pendent small companies with fewer than 50 employ-ees can submit proposals for funding 75% of the total cost (up to £45,000) of feasibility studies into inno-vative technology. Larger independent businesses with fewer than 250 employees can apply for funding up to 30% of the total development cost of new products and processes. In 1999 there was a major expansion of the scheme to cover R & D and consultancy costs for smaller projects undertaken by individuals or ‘micro-enterprises’ with fewer than 10 employees. Such grants are available to those who want to develop simple low-cost prototypes of new products which involve technological advance andor novelty. The expenditure on such grants was £28m in 200203.
Other sources of advice and training for small firms
By 2003 there were a number of providers of advice, information and training for small firms.
Training and Enterprise Councils (TECs)
The network of 79 TECs in England and Wales were charged with the responsibility of taking forward the government’s strategy for training in the 1990s. These
independent companies are run by boards of directors led by private-sector business leaders and are con-tracted by the government both to provide the whole country with a skilled workforce and to support and coordinate local economic development. The TECs provide advice, counselling, training and consultancy facilities for small firms.
Chambers of Commerce
These also provide information and support services for small firms, while the Local Enterprise Agencies (LEAs) offer advice and counselling to new and expanding businesses and often work under contract to the local TEC. There are now over 150 LEAs throughout the UK.
Business Links
These were established in 1993 and form the final major source for the provision of core services which local small businesses may need. These are partner-ships between the TECs, Chambers of Commerce, LEAs and local authorities, and bring together the most important business development services in a single, accessible location. Business Link services are provided by Business Link Operators in 45 areas of England with a total of £162m spent on these services in 200203. Each Business Link Operator provides small and medium-sized firms with access to the most appropriate public, private or voluntary sector support in areas such as export, consultancy, inno-vation, design and business skills.
Small Business Service (SBS)
Established in April 2000, the SBS is designed to act as an effective voice for small firms in government. In this context, the SBS will influence the direction of government policy in three ways: first, by acting as a centre of expertise, by bringing knowledge about SMEs together, analysing it and disseminating it to those who can use such information; second, by acting as an innovator in order to develop new ideas and new approaches which better meet the needs of SMEs; and third, by acting as an engine of change by working with partners both within and outside government to help the small firm sector. In 200304 some £380m was allocated to the SBS with most of the expenditure being used for various business support and training initiatives.
All these training initiatives are absolutely essen-tial, since surveys in the early 1990s showed that
between 80% and 90% of small companies had no business training and received no formal preparation for company board responsibility. The continued need for such support was highlighted in a major study of 1,300 SMEs by the Centre for Business Research of Cambridge University (Cosh and Hughes 2000). This study found that less than half of all the firms investigated had formal structures for their management organization and less than half provided formal training within their companies.
Another useful survey of the problems facing UK SMEs involved a sample of around 1,000 small firms compiled by NatWestSBRT in their Quarterly Survey of Small Business (2000). Figure 4.1 shows that the three most important problems faced by UK SMEs over the last 16 years have involved low turnover, government regulations and cashflow pay-ments. Low turnover was identified by almost 45% of firms as the most important problem in the immediate aftermath of the economic slowdown of the early 1990s and is still cited as such by around 25% of SMEs. Cashflow payments problems are seen as the main source of concern by around 10% of UK SMEs with government regulations and paperwork cited as a problem by nearly 15% of respondents. Sometimes the source of this problem may be high interest rates on loans or the lack of demand in times of recession.
However, a persistent element would seem to involve late payments. For example, a recent survey by Grant Thornton (Bank of England 2002) found that the UK was as low as seventh in the EU league as regards
average payment periods. It had an average payment delay of 41 days, longer than countries such as Denmark (33 days), Norway (30 days) and Germany (31 days), but shorter than France (58 days) and Italy (78 days). It is interesting to note that the NatWestSBRT survey found a lack of skilled employees to be in fourth place as regards the most important problem faced by UK SMEs.