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Speech by Garry Carter, Institute of Certified Bookkeepers to the Enterprise First Europe
Brussels, 5 March 2012
Distinguished Members of the European Parliament, friends of Enterprise First Europe, Ladies and Gentlemen.
I am delighted to open this dinner-debate this evening, hosted by Enterprise First Europe, on the theme: tackling administrative complexities of setting up a small business and running a small business - a highly topical issue at present as we seek to emerge from the financial crisis and place SMEs at the centre of economic growth.
But before doing so, I wish to thank Vicky Ford MEP for helping us host this event, and warmly welcome the other British Conservative members of the European Parliament, who take a keen interest in SME policy development.
Allow me introduce myself: Garry Carter of the Institute of Certified Bookkeepers, a professional body with more than 150,000 members and students in 101 countries worldwide, and secondly, as a Director - along with David Doyle here - of The Genesis Initiative - a British cross-parliamentary party and small business owner's advocacy body - launched a decade ago to cultivate dialogue on small business policy development.
I am often asked what is the difference between a bookkeeper and an accountant. The stock answer is about £100 per hour. the real difference is that bookkeepers deal with the day-to-day financial transactions of the business and ensuring that the business owners and managers know the true financial state of the business. Accountants do not normally have the same regular close working relationship with their clients. This is especially so in the micro and small business sectors.
My message today is that small businesses - in these unstable economic times - are finding it harder than ever to get off the ground and face insurmountable challenges in securing finance throughout their business life cycle.
The EU's response to the worst financial crisis since the Great Depression has been to shore up banks' capital. Basel III's risk agenda has adversely affected the ability of SMEs to access finance though Banks, which have traditionally been the main source of debt financing. Since many of our high-street banks in Frankfurt, London, Paris, Madrid and, yes, in Brussels, struggle to re-capitalise and strengthen their Balance Sheets, SMEs complain that that credit is either unavailable or too expensive. At a meeting I chaired last week at the Bank of England several firms complained that lending has changed: Well run businesses with good credit histories have been forced to convert their overdrafts to loans. Several, particularly from the engineering sector, reported that they were finding it impossible to finance working capital to service new contracts, even when these were from sovereign states and were part of bigger contracts held by major, multi-national companies.
In addition, for those young people across Europe - already shell-shocked by deep-rooted unemployment -who are seeking to plunge into the world of entrepreneurship, the fact is that there is little encouragement out there; national governments are simply not moving fast enough to make start-ups administratively easier, less costly and more compelling.
Bookkeepers across Europe - being close to local communities - are the first to identify these key indicators in their SME client base.
So you may be surprised to hear that I believe that much of the blame lies not with the lenders but with the borrowers. Many small firms are not geared up for growth and do not properly understand how to approach lenders or, having secured finance, do not understand that the debt must be repaid on time - But more of this later
The recent European Commission's study shows that some 85% of new jobs in the EU are created by SMEs. So the message should surely be getting through to national policy-makers: simply put, reducing administrative burdens and gaining access to finance, especially at the crucial set-up stage, has to be the policy focus.
Let us start with the challenges of access to finance
This is not a new phenomenon.
We have known for years that one of the most critical areas holding back entrepreneurship in Europe is the chronic under-capitalisation of SMEs. The result is businesses either failing - 40% in the first 5 years of operation - or being unable to grow into big businesses. In Europe, four years after their creation, SMEs remain, on average, one-fifth smaller than equivalent small businesses in the US. In other words, fewer entities actually grow into being large firms.
A central factor here is the need to provide new forms of non-debt financing, especially in the early SME start-up phase. This is particularly important for firms relying on innovation and research to guarantee their future growth and stability.
I applaud the Commission's initiatives to develop and facilitate SME Guarantee Facility with microcredit guarantees of up to EUR 25,000; and, of course, the virtues of the EU Competitiveness and Innovative Framework Programme, enabling by 2012 some 200,000 SMEs to gain access to finance through guarantee schemes.
The problem remains,however, that along with venture capital initiatives, much of this money is typically destined for innovative businesses and those identified as having potential for fast-growth.
But not every small company has the potential to be innovative; many compete in the services sector offering vanilla-flavoured, but essential, localised services. If these are to simply grow, expand and employ people, a radical change in the EU's financial infrastructure is needed.
The plight of the micro-enterprises - representing a significant 91.5% of all SMEs in Europe - has been lost in the high-level EU debates and at national level too. Possibly the reason - and an unjustifiable one in my view - is that micros traditionally have greater difficulties raising finance because they often have shorter trading records, less robust finances and a higher failure rate.
For such enterprises, we need to move beyond the over-dependency in Europe on debt financing. Take the US experience. Some 80% of enterprise financing comes from the capital markets, whereas EU SMEs rely on debt financing to the extent of more than 60%. I recommend that EIB be encouraged to extend its policy on financing and support not just for innovative SMEs, but also for serious entrepreneurs at the early stage, micro-firm cycle.
However, at a meeting of UEAPME held here in Brussels two weeks ago, which David Doyle and I attended, there were presentations about the imaginative funding and guarantee packages that are available though COSME and Horizon 2020. In many ways these two initiatives seem to offer hope to many businesses, as they are available to businesses not traditionally recognised as IT or rapid-growth and can even be used to fund progression. But when challenged by me to explain why so much of the combined fund remained un-used, we were told that only 11% of submissions receive funding. Why? Because the proposals were badly thought out, unrealistic and often not viable.
So once again we reach the obvious conclusion that much of the problem lies not with the lenders but with the borrowers or, more likely, their advisers.
It is surely at this critical pre-submission stage that the work of the bookkeeper is most vital.
Tax regimes across Europe also play a role in this debate.
They still represent a major impediment to young, promising entrepreneurs, in even thinking about setting up a small company, let alone expanding.
Part of the problem could be alleviated by removing the disincentive of taxing higher profits that could be re-invested in the company, because the tax regime is daunting. Who would want to create a business with no potential to grow, both in terms of market presence and future income?
On the BBC politics programme only yesterday, London Mayor Boris Johnson called for government to take measures to encourage small businesses to set up and to grow, including the introduction of National Insurance holidays.
Tax charges are also cited in surveys of inter-generational family-run businesses as being a huge burden. But this is another debate to be had.
Baroness Thatcher, when leading arguably the most entrepreneur-encouraging government in UK history, made the statement that if every small business employed just one more person, the unemployment problem would be solved. A good point but, alas, impractical for many small businesses. What I think has to be remembered is that for the majority of the EU's micro business, employing only one person, this would in effect represent not just adding one person to their workforce but Doubling it. In my organisation, the ICB, we have more than 3,000 such micro businesses, many of whom are trying to take that huge step. But it isn't easy and the National Insurance and tax systems across the EU are not geared up to encourage employment of more than ten people.
I am encouraged that EU Governments are increasingly aware of this large and important sector. The UK government has created an All Party Parliamentary Group on Micro Businesses and I am delighted that next week I shall chair a breakfast discussion in the House of Commons at which Anne-Marie Morris MP, who is co chair of the Group, will discuss the role of micro enterprises in the economy and debate what actions should be taken to encourage them. The audience will comprise representatives of more than fifty professional bodies and trade organisations operating within the sector.
My second point is that creating a new business in Europe continues to be cumbersome and entrepreneurs face insurmountable administrative hurdles and complications in getting started.
The EU has set a target of making it possible in all Member States to start a business in 3 days at a cost of no more than €100. We are far from this ambition. Registration costs across the EU continue to be high - averaging 7 days and a cost of EUR 400.
My proposal is that we seek inspiration from SME-friendly initiatives outside of Europe.
You will not be surprised to learn that countries which foster fast-growing companies tend to have the administrative set-up systems in place that make it easy to get off the ground in the first place. So again, no surprises when I tell you that the highest rates of entrepreneurial activity are recorded in the US, South Korea, Australia and Israel.
In the US, a prospective entrepreneur can have his business incorporated and have a welfare ID number in the space of one hour. Singapore boasts of a compelling on-line business set-up procedure that enables entrepreneurs to be in business in the same day via the Internet ! Obviously any such facilities must be mindful of the risk of these instant companies being used as money laundering gateways but we ignore this at our peril. We are, after all, in a competitive global market.
The point, surely, is that governments have it within their capability to identify growing companies, from VAT returns or PAYE records, for example. These businesses must be nurtured. All businesses should be encouraged, or even compelled, to keep proper financial records. Lack of financial records and thus cash flow, is still one of the main reasons for business failure. The recent decision to relax the reporting structures for micro enterprises, whilst being encouraged, cannot be the catalyst of a sudden drop in standards and even higher numbers of businesses failing. Nor can it be used as yet another excuse by the banks for not lending.
In conclusion, the key to cultivating the right start-up culture is, I believe, through streamlined processes at national level - using Singapore or South Korea as a benchmark; by identifying at an early stage businesses with growth potential; by making funds more readily-available to the micro-enterprise and not just to innovative firms; and by demanding that micro and small businesses maintain better financial controls.
Our future frankly may depend on it. Thank you
Speech by Garry Carter, Secretary-General, Institute of Certified Bookkeepers to the Enterprise First Europe
Brussels, 5 March 2012 Prepared by Dr David P. Doyle
Distinguished Members of the European Parliament, friends of Enterprise First Europe, Ladies and Gentlemen.
I am delighted to open this dinner-debate this evening, hosted by Enterprise First Europe, on the theme: tackling administrative complexities of setting up a small business and running a small business - a highly topical issue at present as we seek to emerge from the financial crisis and place SMEs at the centre of economic growth.
But before doing so, I wish to thank Vicky Ford MEP for helping us host this event, and warmly welcome the other British Conservative members of the European Parliament, who take a keen interest in SME policy development.
Allow me introduce myself: Garry Carter, secretary-general of the Institute of Certified Bookkeepers, a professional body with more than 150,000 members and students in 101 countries worldwide, and secondly, as a Director - along with David Doyle here - of The Genesis Initiative - a British cross-parliamentary party and small business owner's advocacy body - launched a decade ago to cultivate dialogue on small business policy development.
I am often asked what is the difference between a bookkeeper and an accountant. The stock answer is about £100 per hour. the real difference is that bookkeepers deal with the day-to-day financial transactions of the business and ensuring that the business owners and managers know the true financial state of the business. Accountants do not normally have the same regular close working relationship with their clients. This is especially so in the micro and small business sectors.
My message today is that small businesses - in these unstable economic times - are finding it harder than ever to get off the ground and face insurmountable challenges in securing finance throughout their business life cycle.
The EU's response to the worst financial crisis since the Great Depression has been to shore up banks' capital. Basel III's risk agenda has adversely affected the ability of SMEs to access finance though Banks, which have traditionally been the main source of debt financing. Since many of our high-street banks in Frankfurt, London, Paris, Madrid and, yes, in Brussels, struggle to re-capitalise and strengthen their Balance Sheets, SMEs complain that that credit is either unavailable or too expensive. At a meeting I chaired last week at the Bank of England several firms complained that lending has changed: Well run businesses with good credit histories have been forced to convert their overdrafts to loans. Several, particularly from the engineering sector, reported that they were finding it impossible to finance working capital to service new contracts, even when these were from sovereign states and were part of bigger contracts held by major, multi-national companies.
In addition, for those young people across Europe - already shell-shocked by deep-rooted unemployment -who are seeking to plunge into the world of entrepreneurship, the fact is that there is little encouragement out there; national governments are simply not moving fast enough to make start-ups administratively easier, less costly and more compelling.
Bookkeepers across Europe - being close to local communities - are the first to identify these key indicators in their SME client base.
So you may be surprised to hear that I believe that much of the blame lies not with the lenders but with the borrowers. Many small firms are not geared up for growth and do not properly understand how to approach lenders or, having secured finance, do not understand that the debt must be repaid on time - But more of this later
The recent European Commission's study shows that some 85% of new jobs in the EU are created by SMEs. So the message should surely be getting through to national policy-makers: simply put, reducing administrative burdens and gaining access to finance, especially at the crucial set-up stage, has to be the policy focus.
Let us start with the challenges of access to finance:
This is not a new phenomenon.
We have known for years that one of the most critical areas holding back entrepreneurship in Europe is the chronic under-capitalisation of SMEs. The result is businesses either failing - 40% in the first 5 years of operation - or being unable to grow into big businesses. In Europe, four years after their creation, SMEs remain, on average, one-fifth smaller than equivalent small businesses in the US. In other words, fewer entities actually grow into being large firms.
A central factor here is the need to provide new forms of non-debt financing, especially in the early SME start-up phase. This is particularly important for firms relying on innovation and research to guarantee their future growth and stability.
I applaud the Commission's initiatives to develop and facilitate SME Guarantee Facility with microcredit guarantees of up to EUR 25,000; and, of course, the virtues of the EU Competitiveness and Innovative Framework Programme, enabling by 2012 some 200,000 SMEs to gain access to finance through guarantee schemes.
The problem remains,however, that along with venture capital initiatives, much of this money is typically destined for innovative businesses and those identified as having potential for fast-growth.
But not every small company has the potential to be innovative; many compete in the services sector offering vanilla-flavoured, but essential, localised services. If these are to simply grow, expand and employ people, a radical change in the EU's financial infrastructure is needed.
The plight of the micro-enterprises - representing a significant 91.5% of all SMEs in Europe - has been lost in the high-level EU debates and at national level too. Possibly the reason - and an unjustifiable one in my view - is that micros traditionally have greater difficulties raising finance because they often have shorter trading records, less robust finances and a higher failure rate
For such enterprises, we need to move beyond the over-dependency in Europe on debt financing. Take the US experience. Some 80% of enterprise financing comes from the capital markets, whereas EU SMEs rely on debt financing to the extent of more than 60%. I recommend that EIB be encouraged to extend its policy on financing and support not just for innovative SMEs, but also for serious entrepreneurs at the early stage, micro-firm cycle.
However, at a meeting of UEAPME held here in Brussels two weeks ago, which David Doyle and I attended, there were presentations about the imaginative funding and guarantee packages that are available though COSME and Horizon 2020. In many ways these two initiatives seem to offer hope to many businesses, as they are available to businesses not traditionally recognised as IT or rapid-growth and can even be used to fund progression. But when challenged by me to explain why so much of the combined fund remained un-used, we were told that only 11% of submissions receive funding. Why? Because the proposals were badly thought out, unrealistic and often not viable.
So once again we reach the obvious conclusion that much of the problem lies not with the lenders but with the borrowers or, more likely, their advisers.
It is surely at this critical pre-submission stage that the work of the bookkeeper is most vital.
Tax regimes across Europe also play a role in this debate.
They still represent a major impediment to young, promising entrepreneurs, in even thinking about setting up a small company, let alone expanding.
Part of the problem could be alleviated by removing the disincentive of taxing higher profits that could be re-invested in the company, because the tax regime is daunting. Who would want to create a business with no potential to grow, both in terms of market presence and future income?
On the BBC politics programme only yesterday, London Mayor Boris Johnson called for government to take measures to encourage small businesses to set up and to grow, including the introduction of National Insurance holidays.
Tax charges are also cited in surveys of inter-generational family-run businesses as being a huge burden. But this is another debate to be had.
Baroness Thatcher, when leading arguably the most entrepreneur-encouraging government in UK history, made the statement that if every small business employed just one more person, the unemployment problem would be solved. A good point but, alas, impractical for many small businesses. What I think has to be remembered is that for the majority of the EU's micro business, employing only one person, this would in effect represent not just adding one person to their workforce but Doubling it. In my organisation, the ICB, we have more than 3,000 such micro businesses, many of whom are trying to take that huge step. But it isn't easy and the National Insurance and tax systems across the EU are not geared up to encourage employment of more than ten people.
I am encouraged that EU Governments are increasingly aware of this large and important sector. The UK government has created an All Party Parliamentary Group on Micro Businesses and I am delighted that next week I shall chair a breakfast discussion in the House of Commons at which Anne-Marie Morris MP, who is co chair of the Group, will discuss the role of micro enterprises in the economy and debate what actions should be taken to encourage them. The audience will comprise representatives of more than fifty professional bodies and trade organisations operating within the sector.
My second point is that creating a new business in Europe continues to be cumbersome and entrepreneurs face insurmountable administrative hurdles and complications in getting started.
The EU has set a target of making it possible in all Member States to start a business in 3 days at a cost of no more than €100. We are far from this ambition. Registration costs across the EU continue to be high - averaging 7 days and a cost of EUR 400.
My proposal is that we seek inspiration from SME-friendly initiatives outside of Europe.
You will not be surprised to learn that countries which foster fast-growing companies tend to have the administrative set-up systems in place that make it easy to get off the ground in the first place. So again, no surprises when I tell you that the highest rates of entrepreneurial activity are recorded in the US, South Korea, Australia and Israel.
In the US, a prospective entrepreneur can have his business incorporated and have a welfare ID number in the space of one hour. Singapore boasts of a compelling on-line business set-up procedure that enables entrepreneurs to be in business in the same day via the Internet ! Obviously any such facilities must be mindful of the risk of these instant companies being used as money laundering gateways but we ignore this at our peril. We are, after all, in a competitive global market.
The point, surely, is that governments have it within their capability to identify growing companies, from VAT returns or PAYE records, for example. These businesses must be nurtured. All businesses should be encouraged, or even compelled, to keep proper financial records. Lack of financial records and thus cash flow, is still one of the main reasons for business failure. The recent decision to relax the reporting structures for micro enterprises, whilst being encouraged, cannot be the catalyst of a sudden drop in standards and even higher numbers of businesses failing. Nor can it be used as yet another excuse by the banks for not lending.
In conclusion, the key to cultivating the right start-up culture is, I believe, through streamlined processes at national level - using Singapore or South Korea as a benchmark; by identifying at an early stage businesses with growth potential; by making funds more readily-available to the micro-enterprise and not just to innovative firms; and by demanding that micro and small businesses maintain better financial controls.
Our future frankly may depend on it. Thank you.
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