Fixating on the availability of bank lending to small businesses will not solve the UK’s economic problems, but the current environment is ripe with opportunities for investors and entrepreneurs, according to Deborah Meaden, one of the UK’s most high-profile investors
Meaden says that she has invested more money during the downturn, as increasing conservatism within the banking sector means that more companies are willing to accept alternative sources of financing.
“I risk my cash on businesses, and I’m actually doing really well at the moment because banks are failing to lend these businesses the cash, and I’m picking businesses up where I’m thinking, actually, in the past they wouldn’t have given away equity, they’d have got traditional funding. Right now they have to look at taking on equity partners,” Meaden said.
The star of the BBC’s Dragon’s Den is fronting an initiative, Local Business Accelerators, which will give 1,500 small enterprises free advertising in local newspapers.
Times have been tough for small businesses, and with Bank of England figures showing on Thursday that bank lending to the segment contracted in the last quarter, many have blamed a failure in the financial system. Meaden disagrees that the blame can be placed entirely on bankers.
“It would be very easy to sit here and say ‘banks need to lend more money’,” she told the Huffington Post UK. “I don’t say that. Banks need to lend cash to the right businesses. They must not lend cash to bad businesses.”
Before the recession, banks were not properly assessing risks and were “too free with the cash”, she said. However, in cutting back on their risk they have stopped lending to innovative businesses.
“They were lending to some crazy businesses that I was looking at and thinking ‘that’s loopy’,” Meaden said. “But they’ve gone the other way now, and there’s a set of rules that they won’t lend outside of, and the truth is that most entrepreneurs … push the envelope.”
More concerning is that funds are being actively withdrawn from fundamentally good businesses, Meaden said.
“Covenants are being changed. I’ve got a business I’m involved in and suddenly their factoring arrangements are changed. They’re doing fine, and suddenly the bank is clawing cash back for no apparent reason.”
The vilification of banks only makes them less willing to lend, according to Meaden.
“Looking for who to blame is causing the banks to behave in this extremely cautious fashion, because they are frightened to death of getting it wrong. Actually, we kind of all shared in that, we were all part of it. I don’t remember anyone saying ‘oh, I’m not selling my house for that much money because it isn’t really worth it, it’s just the market going crazy’,” she said.
“A lot of people benefited from what was going on. This will be an unpopular position, but it is true, people are saying ‘terrible bankers’, but the bankers made most of us a lot wealthier. Unfortunately, we are now paying for it on a level that I don’t think any of us understood.”
Returning to basic, good business practices is Meaden’s prescription for solving the problems of the UK’s small enterprises.
“There were a lot of businesses out there that were surviving because times were buoyant, not because they were fundamentally good businesses,” she said. “They shouldn’t be revived. We need good, healthy businesses.”
Nevertheless, Meaden does believe that there are initiatives that could help push investment in small businesses. She is a supporter of the government’s Equity Investment Scheme (EIS), which gives venture capitalists a 30 per cent tax break, saying:
“A taxation structure that rewarded people to do something slightly riskier pushes the decision on investment back to business people and not people who are removed from business. You wouldn’t invest because of the EIS, but it would tip you over the edge if you were thinking: ‘is it worth taking that risk?’”