Funding small firms in Wales

Last Wednesday, I was ‘sensationally’ quoted in the Western Mail’s sister paper, the Daily Post, as calling the Assembly's development fund - Finance Wales - 'loan sharks' at an event in North Wales.

Actually, I never said those exact words and was, in any case, repeating a story from a businessman in South Wales whose firm was being charged over 15 per cent for a loan from Finance Wales and who had described the practice as a form of ‘loan sharking’.

I also recently discussed this issue with a North Wales entrepreneur whose business was being charged 17 per cent by Finance Wales for a loan as well as additional arrangement fees.

As a loan shark is defined in the Chambers Dictionary as "a person who lends money at an exorbitant rate of interest", perhaps it is not surprising that some entrepreneurs chose to describe their experiences in this way to me.

Indeed, since the story broke, I have had numerous individuals call me to say the situation has gotten out of hand and that small firms are refusing to go anywhere near Finance Wales except a very last resort for funding. This is causing major disruption to the work of support bodies and discouraging individuals from starting their own business.

Regardless of the sensationalist headline of the story itself, the message is very serious, especially given the Assembly’s new strategy to focus support away from new businesses. Many businesses and support bodies are concerned about the new terms and conditions announced by Finance Wales regarding their lending policy.

This means that micro loans of between £5,000 and £10,000 will attract an interest rate of 15%, nearly three times the official bank base rate and considerably higher than the previous amount charged by Finance Wales. For the macro loan fund for loans over £10,000, the interest rate applied will be dependent on an assessment of risk for each individual applicant. However, a note from passed to me from Finance Wales suggests that it is ‘unlikely’ a rate lower than 15% will be applied.

Contrast this with their previous policy, where loans were at 6 per cent over cost of funds but had an interest rebate of up to four per cent made to borrowers who repay in full and on time.

Many believe that such a funding regime flies against the logic of all research on entrepreneurial finance, which has shown that access to capital is the biggest single obstacle to individuals starting a business.

How can charging such high rates of interest encourage individuals to become entrepreneurially active in Wales, especially when we are constantly told that we need to move away from a grant culture towards a loan culture? When every penny is critical to the survival of a new business, how can paying higher rates of interest to a publicly funded body possibly help its future development?

With a new Minister for Economic Development who publicly stated support for start-ups in the Western Mail newspaper last month, surely it is time for the Assembly, which is the sole shareholder in Finance Wales, to re-examine the role of this organisation.

Don’t get me wrong, Finance Wales has helped to develop some key businesses in Wales since its inception and I was proud to be a director of the organisation for five years.

It has provided support to businesses that has enabled them to grow and create jobs in key sectors of the economy, most notably the creative industries sector. However, when a publicly funded body which was set up to support the development of the small firm sector begins to charge commercial rates of interest higher than most banks for small amounts of loan funding, it is time for our politicians to consider its role in the provision of financial support to the small business sector.

When it was established, the whole raison d'etre for Finance Wales was threefold, namely (a) to enhance capacity for Wales to grasp new competitive opportunities (b) increase the indigenous base of SMEs in Wales and (c) improve the survival rate of businesses.

If it has evolved away from that position towards a focus on growth firms, then that is perfectly acceptable. However, let the Assembly at least be honest about what it wants Finance Wales to achieve as part of an overall business support strategy.

Should Finance Wales continue to be a development fund, helping the majority of small businesses in Wales by offering loans at rates of interest that make it attractive to individuals to consider starting a business, as it was originally intended to be? If so, then it needs to drastically alter its interest rate policies immediately.

If not, then should it continue its evolution into a quasi-investment bank that uses public funds to support a select number of businesses? If this is the case, how then does the majority of our small firm sector get access to the type of funding it needs to grow and develop?

If Finance Wales no longer wishes to play this role, as the changes in interest rates suggest, and wishes to focus only on growth firms, then good luck to them. However, it is clear from talking to small businesses across Wales that there remains a shortage of finance to help support new start-ups and small businesses in Wales. Not every new business will become the next Admiral, but collectively, many of these new firms make as much of an impact as a whole year's worth of inward investors.

If it is good enough for the largest businesses to receive tens of millions of pounds of grant funding every year from the Assembly without having to repay a single penny, then it is only right that our small firms, especially new businesses, get a fair deal regarding the finance they require and at a fair interest rate.

If they do not, then any strategy that the Assembly Government develops to support a vibrant small firm community in Wales will be as useful as chocolate teapot.