A few days ago, the Government unveiled a £20 billion loan guarantee scheme for small businesses. Since then, there has been a suggestion that a new bank might be set up to make loans to “high risk” businesses.

In our view, this is missing the point somewhat. It is not that small businesses have suddenly become bad risks – although the impact of the recession could easily jeopardise some (more of which later). The position is that banks have suddenly started not just lending less, but calling in existing loans (actually working capital) for businesses that are perfectly sound.

We need to remember that this entire credit crunch was not caused by businesses – and certainly not SMEs – but by the greed and lack of understanding of what they were doing by the banks themselves. In the search for ever bigger bonuses for traders and directors, increasing levels of debt were purchased as securitised debt which it was impossible to evaluate. There is also apparent uncertainty over whether the credit rating agencies were fully on the case (but we are not competent to comment on this) which would have made it more difficult for banks to assess risk.

Where we are now
Whatever the case, it is clear that small to medium sized businesses are very much the victims of this entire situation and that the government in the guise of Lord Mandelson, Alistair Darling and Gordon Brown are allowing the banks – many of which are not largely state owned – to get away with punishing, rather than helping, the victims.

I hate to say this, but protecting the interests of big business at the expense of everyone else is what one would expect of an ultra right-wing party, rather than the so-called left.

On the other hand, we desperately need a banking system, or the economy really will grind to a halt, so realistically, we understand that the sector must be protected. What is not so clear is why the individuals and structures (including regulators) that have failed us all should be kept in place, rather than swept away and replaced with people who actually know what they are doing.

The answer is probably the “old school tie” into which New Labour appears to have bought deeply. However conservative (with a small “c”) we many be, there is never an excuse for allowing sentiment over friendship and connection to take the place of sound good sense.

What if small businesses did have adequate working capital?
If adequate working capital was available to SMEs, and the cost is certainly affordable with base rate at 1.5% now, employment would be more secure, consumers would feel more confident and spending would therefore increase. As it is, businesses are having to lay off employees, thus deeply affecting confidence. This will cause the current downturn to spiral and cause the eventual recovery – there will be one – to occur later than need be.

The idea of a bank to lend just to SMEs has appeal, but not if it looks at them as high risk. Small businesses are the powerhouse of the economy. People running them put their own financial security and intellectual capital at risk; they are actually generally a better risk than some other borrowers. Let’s ensure that they are able to do what they are best at, making money and helping the economy to grow.

If you are wondering what to do, about your investments and retirement planning, contact Robert Bruce Associates for individual assistance.