SMALL BUSINESS UPDATE
David Stokes Matthew James
Small Business Update
OVERVIEW OF PRESENTATION
1. SME trends
2. SME performance
3. London’s dynamic economy
4. SME finance
Small Business Update
SECTION 1
SME Trends
NEW BUSINESS STARTS
Q2 confirms an upward trend in start ups
– 108,000 in Q2, up 12% on same period last year
– Reflects easing of fears of recession
Workspace regions:
– London
18,600
– South East
17,700
– Comprises 33.6% of all starts in Q2
SME Trends
BUSINESS CLOSURES
113,000 stopped trading in Q2
– 9% lower than Q1
– Reflects easing of fears of recession
Mainstream stock fell by 42,000 to 2.657m
– year-on-year fall of 1.6%
SME Trends
CHANGES IN STARTS BY SECTOR
2002/2003 % change
Catering & Hotels - 45
Production - 29
Retail + 3
Motor Trades + 10
Transport + 10
Wholesale + 10
Business & Professional services + 16
Leisure & Personal services + 30
Property & Finance + 32
Construction + 42
Government & Community + 47
TOTAL + 10
SME Trends
VAT BUSINESS STOCK
During 2002:
– 175,800 registrations, up 0.7% on 2001 – 176,000 de-registrations, up 5.3% on 2001
– largest number of registrations in London – 33,500 (-0.9%) – second largest in the South East – 28,500 (0.0%)
– London was the only UK region to see a fall in registrations
SME Trends
LONDON VAT REGISTRATIONS
Only 7 London boroughs saw an increase in VAT registrations in 2002
10.5 9.8 6.7 5.6 3.4 2.8 1.5 0 5 10 15 20 Hillingdon Richmond upon Thames Enfield Waltham Forest Lambeth Harrow Croydon % c h an g e o n 2 00 1
SME Trends
LONDON VAT DE-REGISTRATIONS
28 of the 33 London Boroughs saw a rise in VAT de-registrations
31.8 28.2 18.1 17.3 16.3 14.5 14.4 14.3 14.2 13.9 0 10 20 30 40
Richmond upon Thames Hounslow Hammersmith & Fulham Bromley Greenwich Southwark Westminster Lewisham Croydon Havering % c h an g e o n 2 00 1
SME Trends
BUSINESS SURVIVAL RATES
67.5
South East
1998
London
60.3
1998
64.0
1998
64.5
1997
63.4
1996
62.7
1995
59.7
1994
59.8
1993
3 yr survival %
Start year
SME Trends
SME EMPLOYMENT GROWTH
2002 saw movement into Workspace target market of 1-20 employees
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 1999 2000 2001 2002 No employees 1-20 employees 1.13m - up 6% on previous year
SME Trends
LIQUIDATIONS & BANKRUPTCIES
South East
London
UK
Year
7,106
4,391
36,637
2003 *
7,947
5,490
43,458
2002
7,075
5,087
40,532
2001
7,640
4,697
40,847
2000
SME Trends
CONCLUSIONS
Pattern of Q2 & Q3 looks generally positive
– increase in start-ups & decrease in closures – increase in start-ups in majority of sectors
– minimal change in VAT registrations in London & SE – business survival rates on the increase
Small Business Update
SECTION 2
Business Performance
‘TWO SPEED’ ECONOMY
1. Strong downturn in manufacturing
2. Renaissance for services
– worse position since Q4 2001–
turnover at best level since Q4 1999“The Q3 results are mixed… the manufacturing sectors overall position remains disappointingly weak… and in spite of the Q3 upturn, recovery prospects in the service sector remain highly uncertain”.
– David Kerr, Economic Advisor to BCC
Business Performance
SME SALES
Balance of firms reporting an increase in sales fell in Q2
+9% from +15% in the previous quarter
+13% expected sales to rise in the coming quarter
By turnover:
< £50,000 -16%
500k - £1mn +11%
£1mn > +28%
Business Performance
EMPLOYMENT
Balance of year-on-year employment fell
–4.7% from +2.7% in the previous quarter 61% said employment same as 1 year ago
–8% expected to employ more in the coming quarter (compared with –14% in previous quarter)
Business Performance
BUSINESS OUTPUT
Rise in business output across the Capital Sectors that saw a rise business performance
50% of finance firms 37% of retailers
30% service sector companies
BUT, a balance of –9% in manufacturing
“Manufacturing is vital for maintaining a balance in an economy that might otherwise be too heavily dependent on finance and business services”
– Colin Stanbridge, LCC Chief Exec. Source: London Chamber of Commerce (LCC), Monthly Survey, Oct 2003
Business Performance
SME PROFIT
Rise in the balance of businesses seeing profit
+5% reported an increase in profits over the last 3 months
Rise in the balance of businesses expecting profit
Q1 → + 9%
Q2 → + 18%
Q3 → + 30%
Business Performance
INVESTMENT INTENTIONS
Investment intentions remain weak:
Buildings -24%
Machinery -17%
Training & re-training -4%
Product innovation & processes +1%
63% cited uncertainty about demand as the reason for lack of investment
Business Performance
PROBLEMS FACED BY SMEs
The most reported problems facing SMEs in Q3:
– General economic climate 20%
– Regulation & paperwork 14%
– Cashflow/Debtors 9%
– Competition from big business 9%
Business Performance
LONDON FORECAST
“A year of two halves”
- Anthony Hilton, City Editor at ES speaking at London Enterprise 2003
-
A troubled first half, improvement in the second
-
Natwest anticipates growth of 1.6% in 2003 & 3.0% in 2004
Business Performance
CONCLUSIONS
Q2 & Q3 have seen slow recovery characterised by:
– development of ‘two speed economy’ – increase in sales amongst large firms
– improvement in business performance across London – increase in firms achieving and expecting profit
– unwillingness to invest in business
Small Business Update
SECTION 3
London Economy
SUCCESSFUL ECONOMY
– London GDP, 28% above UK and EU average, very close to US – entire workforce generates £138bn, 18% of UK total
– London grown faster than the UK, but is more volatile
0 50 100 150 GDP per capita United States Greater London United Kingdom EU Average
London Economy
DRIVERS OF THE ECONOMY
London’s economy is driven by a range of modern, high value-added services
Non-industrial sector in London is business services
– business services is largest sector at 32% – most productive sector is finance
– public sector is smaller in London than other parts of the UK
“manufacturing is the principal transmission belt for shocks to the UK economy and the service-led character of London’s economy serves as a stabilising influence”
- ‘London’s Economy Tomorrow’, GLA Economics Source: Strategy Unit – London Analytical Report
London Economy
LONDON’S INTERLOCKING CLUSTERS
Similar firms derive a range of benefits from clustering together:
– access to deep labour pools – interactions with similar firms – intelligence sharing
– better customer attraction
Source: Strategy Unit – London Analytical Report
Firms also benefit from being near clusters of other business types:
– financial institutions require lawyers & accountants
– Technology benefits from academia
Interdependencies between sectors are crucial to their success
London Economy
LONDON PROJECTIONS
“The key factor in London’s continued economic strength is its flexibility – a competitive business environment, a flexible labour market, and market optimistic financial regulation”.
London Economy
FACTORS AFFECTING GROWTH
London Economy
POPULATION GROWTH
At end of 2001, population of 7.17m (Census 2001)
2016 projections:
–
High 8.1m– Central 7.9m – Low 7.6m
Growing migrant population
– Over 300,000 of London’s employed residents arrived within the last 5 years.
London Economy
POPULATION GROWTH
London Economy
CONCLUSIONS
Largely successful – fast growth but volatile, characterised by:
“continued economic growth depends on an effective response to both local and global factors”
– high-value added service industries
– a growing migrant population – sets of interdependent clusters
SME Finance
USEFUL LINKS
Barclays Small Business Survey (www.business.barclays.co.uk)
Small Business Service (www.sbs.gov.uk/)
British Chambers of Commerce (www.britishchambers.org.uk/)
Strategy Unit (www.strategy.gov.uk/)
Bank of England (www.bankofengland.co.uk/)
British Venture Capital Assoc. (www.bvca.co.uk/)
SME Finance
TCS PROGRAMME - AIM
ONE “To develop Workspace’s knowledge of the small business sector and the various segments within it, and to develop a marketing strategy to broaden the services on offer and improve Workspace’s competitive position.”
TWO “The TCS Programme will strategically impact on the Group’s
performance by building a permanent infrastructure that can regularly gather market intelligence on its customer base of small businesses and develop a marketing strategy including the development of new products and services. Marketing initiatives will improve occupancy rates by tailoring products and services to owner-manager needs and preferences.”
SME Finance
INTELLIGENCE DATABASE
– User-friendly database of SME materials – Quarterly, annual & ad hoc reports
– Search function by keyword – Printable list of references
– Electronic catalogue of materials
WEST FOCUS
Kingston, Brunel, R Holloway, TVU, Westminster, St Georges, Roehampton
Knowledge & Resource Base Micros SMEs Corporates
Inventors and researchers Public and voluntary enterprises
Transfer mechanisms
KTP/TCS NTI Incubators Seed funds
Work based learning New mechanisms Public funds/s
Small Business Update
SECTION 4
SME Finance
SMEs & FINANCE
Source: Bank of England, ‘Finance For Small Firms 2003’
SMEs are not a homogenous group when it comes to finance
0 10 20 30 40 50 Overdraft facility Loan Commercial mortgage Leasing/HP Invoice finance Other Don't know
% SMEs using that finance % SMEs for which it is the largest source
SME Finance
BRIDGING THE GAP
More than 90% of finance accessed by SMES from banks, BUT… EQUITY GAP
– “the funding of high risk, high return propositions require small scale equity investments… (but) much venture capital investments are too large and Business Angel networks are under-developed”.
FINANCE GAP
– “mismatch between supply and demand…(caused by)… unwillingness on the part of suppliers of finance to supply it on the terms and conditions required by small business”.
SME Finance
DEBT FINANCE
– Generally from High St. banks in form of overdrafts and loans
– More than 90% of SMEs financed by debt finance in 2002
– Supply to SMEs is very concentrated
– In 2002:
total number of overdrafts unchanged, BUT…
term loans now account for 75% of debt finance to SMEs
SME Finance
DEBT FINANCE (2)
SME Finance
EQUITY FINANCE
– usually used where degree of risk and potential reward are high
– equity financed businesses are small in number but contribute
significantly to production
– distinct groups:
– Venture capital – Business Angels
– UK entrepreneurs cite independence as a motive, so take up equity
finance is relatively low.
SME Finance
EQUITY FINANCE (2)
– In 2002, 1500 companies financed in the UK
– companies financed at start-up down 13% – companies financed at expansion down 17%
– investment in computer related, software & leisure up
– investment in communications and internet down
– 61% of total UK investment in London & South East
– 44% of all companies invested in.
SME Finance
VENTURE CAPITAL
– Fund raising only £40m in 2002/3 compared with £400m in 2000/1
– difficulty raising money in the US, largest benefactor
– Difficulty for companies to meet fund requirements
– Bridges Fund made only 3 investments from 200 proposals – Regional VC funds made 21 investments from 700 proposals
SME Finance
BUSINESS ANGELS
– characterised by early stage, potential capital investments
– often brings skills above and beyond the investment
– NBAN est. 18k angels invest £500m in 3.5k companies annually
– 75% less than £50k, 40% less than £20k
– NBAN 15% drop in ‘viable investment opportunities’
– ‘unwilling entrepreneurs because of uncertain economic growth’ – low interest rates make debt finance more affordable
SME Finance
LEASING/HP & INVOICE FINANCING
– leasing down in 2002, HP up
– again, low interest rates making debt finance more affordable
– Invoice financing provides source of good working capital – used by larger SMEs, above Bank unsecured threshold – realised immediate value of invoices by selling at discount
– strong growth, up 14% to 32k in 2002
SME Finance
INVESTMENT READINESS
– means understanding the issues that affect investment, including:
– attitudes & interests of venture capitalists & investors – valuation methodologies and impact on business – the right investors for the business
– preparation of effective investor presentations – preparation of due diligence
SME Finance
GRANTS
– Government links with private investment
– Small Firms Loan Guarantee Scheme
– Government backed initiatives
– Enterprise Fund, Phoenix Fund, Capital Fund
– generally aimed at regeneration in deprived areas
– offers insurance against 75% of the value of the loan for those who have been refused a conventional loan
SME Finance
CONCLUSIONS
– access to finance not a key concern in 2002
– concerns over finance ‘gaps’
– current trend towards debt finance
– high take up of loans because of low interest rates – equity finance affected by economic doubt and control
– BUT, bank deposits are up; suggests evidence of ‘prudent policy’
