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WHEN you hear the word ‘start-up’ the image that tends to prevail is of a teenage entrepreneur coding billion-dollar apps from their bedroom, armed with nothing more than a laptop and a plentiful stock of energy drinks.
The success of technology hubs in cities such as London and Cambridge is welcome. But let’s not forget that – from Wensleydale cheese makers to local pubs – rural businesses in constituencies like mine have as much entrepreneurial spirit as those in our cities.
The result of that spirit is an army of British small and medium-sized enterprises (SMEs), spanning every corner of the country, that collectively generates more revenue than Brazil and employs three times as many people as McDonald’s, the NHS, and the People’s Liberation Army combined.
Yet, astonishing as the successes of our SMEs has been, research shows that while Britain is great at creating businesses, it struggles to scale them up. A big reason for that is loans are far too difficult to come by, meaning new businesses often don’t have the money they need to grow.
As the Budget approaches, Westminster needs to confront this problem with creativity. One idea that could make a real difference is to turn Britain’s savers into lenders. In a new report published by the Centre for Policy Studies, I’ve proposed creating a new exchange market that would allow small companies to sell debt (known as ‘retail bonds’) to ordinary savers who can then trade them just like shares.
The exchange would generate fresh capital for SMEs, while at the same time offering savers a place to put their money where it would earn an attractive rate of interest.
As things stand, the British lending market is heavily over-reliant on big banks. After the recession, these banks slashed lending to small business by 20 per cent, leaving many firms without the money they needed to invest in new equipment or develop new products.
But it doesn’t have to be this way.
Ninety per cent of UK business loans are issued by just four banks, but, in the US, that figure is just 25 per cent. By selling bonds instead, American SMEs can sidestep the banks and borrow from a much broader range of investors.
The UK already has a retail bond market. Known as the ORB, it was set up in 2011 and has attracted a number of big-name companies. By buying bonds, everyday savers can earn around six per cent interest by lending their money to companies like Barclays and Tesco – a much better return than a savings account.
The problem with ORB is that it is mainly geared towards large companies who want to borrow £100m at a time. For SMEs, ORBs costs and complexity put it out of reach.
Luckily, blueprints exist for doing a better job of helping SMEs to access the bond markets.
The first is the Alternative Investment Market, or AIM. AIM first came onto the scene in 1995 as a response to the fact that small but fast growing companies found it too difficult and expensive to issue shares on the London Stock Exchange’s Main Market.
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AIM streamlined red-tape, allowing SMEs to raise relatively small amounts of money by selling shares and helping household names like ASOS, Boohoo.com and Fevertree Drinks grow into multi-billion-pound businesses. What we need now is an AIM for bonds.
The second precedent comes from Europe, where a number of countries have already taken up the idea of an SME bond market. In Italy an exchange called ExtraMOT has seen hundreds of Italian SMEs raise almost €2bn in average issues of just €8m (considerably less than the £90 million average on ORB).
The Chancellor already has a strong record when it comes to backing British small business, and it’s no accident that the most recent Global Entrepreneurship Index ranked the UK above not only every other EU country, but also above the USA.
As he makes the finishing touches to his Budget, therefore, Philip Hammond should strongly consider the benefits that creating an AIM-style market for bonds could offer to both British entrepreneurs and British savers.
By providing tax reliefs for the new retail bond exchange (like they did for AIM) and allowing retail bonds to be included in ISAs, the Government could also help stimulate demand. By issuing more of its own debt as bonds aimed at normal people, it could help build a stronger culture of bond-buying.
After all, we live in a country where only 19 per cent of people own shares, compared to 55 per cent in the US. At a time when Jeremy Corbyn is questioning the very existence of capitalism, those of us who believe – as I do – that free enterprise is the best way to deliver prosperity should welcome the chance to offer more people a stake in the success story that is British business.
Rishi Sunak is the Member of Parliament for Richmond (Yorkshire) and the author of A New Era for Retail Bonds, published this month by the Centre for Policy Studies.
