SMEs in crisis: Boris must incentivise private wealth to fire up the economy

Boris is back. With a bang. The most striking note of the Prime Minister’s No 10 doorstep speech on Monday was his nod to the shop keepers, the entrepreneurs and the wealth creators who will “fire up the engines” of the broken economy.

For a Prime Minister who has sometimes given the impression that he does not always appreciate the work of business, this was on the money.

About time too. But words are not enough. If the Prime Minster is serious about putting faith in Britain’s 5.6 million SMEs to be the ones that lead us out of this crisis, then first he has to help save them from going bust.

The most effective way to do this will be to harness the billions of private capital and savings that are also in the deep freeze, and use more innovative ways of injecting equity as well as debt into these struggling businesses.

Time is running out. At the current pace, more than a third of all the UK’s small companies could be out of business within a few weeks as they run out of cash flow.

The Chancellor’s decision earlier today to provide government guarantees for micro-loans of up £50,000 is a step in the right direction, and one which will be appreciated by thousands of businesses if they can access the bounce-back loans in time. It shows too that the government is listening to those on the ground to find out what is happening.

But there is so much more to be done. The tales of woe multiply by the day, and range across the economy from dentists to vets to opticians who are struggling to save their companies. According to the British Dental Association, a fifth of the country’s 2,000 dentists predict they will run out of money by the end of the month.

Like architects, opticians and vets, most dentists are set up as self-employed private companies and they will not be eligible for the government’s job retention scheme because they earn over £50,000 a year.

Nor are they able to get the government’s relief on business rates because they are excluded from the scheme launched to save the high street. They now fear they will not be able to claim against insurance because of business interruption either.

Yet these professional service companies, along with the UK’s other small companies, are part of the bedrock of the economy and one of the biggest employers. They are also finding it almost impossible to obtain loans under the government’s Coronavirus Business Interruption Scheme because many will not be able to show they can return to profit over the next few months, such is the devastation the virus has wrecked on their businesses.

Take the example of a dentist friend. She and her practise partner recently opened a new surgery, investing many tens of thousands of pounds of their own and family money into the business. The practice, which employs around four other people who are now furloughed, opened a month before lockdown.

Their new dentistry business is losing money, so the partners are not eligible even for the smallest CBILS loan. They cannot show categorically that they will be profitable over the next year – although the nation’s teeth are going to need a lot of fixing over the next few months.

The Prime Minister and his colleagues will have to be inventive to aid these companies.

Here are three measures that Johnson could fix immediately to mobilise billions of pounds of investment for the economy which could help my dentist friend – and tens of thousands of others like her – rescue their companies. Or as Boris put it, the engines of the economy.

First, there is more than £60 billion invested in cash ISAs and earning next to nothing with interest rates at rock bottom.

In normal times, cash ISAs are attractive vehicles and simple to run: investors pay into an account with after-tax income and the account is exempt from income tax and capital gains. They are guaranteed up to £85,000, just as bank deposits are guaranteed.

This money is sitting in the ISA account, earning nothing for the saver, in fact not doing anything for anyone.

So here’s the brilliant idea floating in the City and which the Treasury should study. Cash ISA managers should be allowed to take up CIBIL loans that are 100 per cent guaranteed by the government, a policy which Rishi Sunak, the Chancellor, is understood to be close to confirming after pressure from business.

If these CIBIL loans were backed up to 100 per cent, they could be offered to investors with interest of around 6%. Many small businesses which are not able to get the vanilla CIBIL loans for whatever reason are bound to snap them up, and at more favourable rates than traditional commercial loans.

At present, Cash ISAs are distributed on line through bank and building societies and financial advisers. To help process the loans more quickly, they should also be allowed to be distributed through the Innovative Finance ISAs and on P2P platforms.

Such a change would need the FinTech community to be brought into the CBIL loan scheme and approved by the British Business Bank. Funding Circle is already on the list.

My second suggestion is for the government to raise tax incentives for investors for start-ups and early-stage companies. Since the start of this lockdown, the Enterprise Investment Scheme Association estimates that the flow of money has crashed by almost 60%, equal to about £500m.

Over the last few decades high net worth individuals and other investors have ploughed up to £20 billion into 27,000 companies because of attractive tax incentive schemes such as the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme.

If there were a time that the country needed the wealthy to invest it is now. The Treasury should look at temporarily raising the income tax relief credit to 50% for EIS and on investments up to £5m, and up and 70% for SEIS and increase the investment threshold to £250,000. and to £5 million on the EIS.

The Prime Minister must show he understands the nature of the problem, and the solution – which is more private enterprise. He must put his instinct for big spending on infrastructure projects and an interventionist state (other than the NHS)  on hold. It is not the right approach to help repair the country’s engine. Quite the reverse.

What Johnson must realise is that firing up the economy again means creating the most innovative, dynamic and flexible environment to help SMEs get through our current crisis and power on afterwards. Helping persuade the country’s wealthiest to do their bit – even if it means cutting taxes and raising incentives – might go against the grain of the Boris approach pre-crisis.

Ironically, the economic freedom to start and run their own businesses is what some of the Red Wall voters were attracted to in choosing the Conservatives over Corbynism at the election last year. We are not talking about creating a Singapore-on-Sea style zero-tax zone but from Southend to Scarborough, from Stranraer to Sherborne, across the land it is small companies who will get the economy motoring again if they survive. They need more help now.