COMMENT: Scotland’s new businesses need funding

Saatchi: plea to slash corporation tax. Picture: Getty

WE HAVE lift-off! If the health of an economy is measured by the rate of new business formation, then Scotland is enjoying one of its strongest upturns on record, writes Bill Jamieson

Last week, Business Gateway, the national business advice service, revealed that it received the highest number of inquiries for business support in the year ending March 2014. The number of inquiries from existing businesses, at 8,786, was the highest on record, an increase of almost 21 per cent on the same period the year before. Inquiries from start-up businesses grew by 13 per cent to 48,280, again the highest figure yet recorded.

During the year, Business Gateway supported 10,153 people starting a business, up 5.5 per cent from the previous year. And the number of inquiries received directly into Business Gateway’s network of local offices across Scotland soared by almost two-thirds (63 per cent).

This followed on the heels of figures from Entrepreneurial Spark last month showing more than 27,000 businesses were formed in Scotland last year, up 9 per cent on 2012. This is the highest number of company incorporations since records began in 1997. There were 2,661 new company incorporations in March this year alone, up 10 per cent on the same period in 2013. If the growth trajectory continues at this rate, there will be more than 47,000 new businesses created in Scotland this year.

Jim Duffy, founder of Entrepreneurial Spark, says: “Coming out of a recession, a new industrial revolution is starting in Scotland. So many people who didn’t think they were capable of turning their hand to entrepreneurship are now doing it.”

These are, by any standards, highly encouraging figures. And they cover a period when recovery was only slowly taking hold after a deep recession and when overall bank lending to business continued to decline.

But there are caveats. Scotland’s business base, measured as firms per 10,000 population, still lags that of the UK. A strong inquiry rate does not automatically translate into business start-ups. And our biggest problem is, as it has long been, the need to lift our business survival rate and the numbers of start-ups maturing into successful and sustainable businesses.

According to Office of National Statistics (ONS) figures, for businesses started in Scotland in 2009, the national three-year survival rate is just over 60 per cent (Business Gateway claims a higher survival rate of 81 per cent for businesses that came through its doors for advice and assistance).

Hugh Lightbody, chief officer at the Business Gateway National Unit, says: “It’s about growing sustainable businesses over the long term and the research we have indicates that those who do engage with us have a greater survival rate than those that don’t.”

This plays directly to concerns raised in a joint paper this month from the Royal Society of Edinburgh, Scottish Financial Enterprise and the Institute of Chartered Accountants of Scotland. Scotland’s investment infrastructure, it notes, “is relatively good at supporting promising businesses in the start-up and early stages. However, such businesses can find it difficult to attract the funding they need to progress and convert their early successes into substantial growth.

“One of the key challenges for these companies is in going from business angel investment to subsequent larger-scale sources of funding, such as venture capital, which operates under a significantly different criteria.”

The relationships between commercial banks and smaller companies have changed fundamentally since the financial crisis of 2008. Banking regulations have introduced more stringent risk criteria for lending. In many cases, these have reduced access for small companies to conventional overdraft or term lending arrangements, limiting the options to debtor or lease finance arrangements where these are viable.

This has had a significant effect on the capitalisation of early-stage companies. “Whereas ten years ago many could be financed by equity and debt in roughly equal proportions, the bank lending element has diminished for companies without asset backing or external guarantees. Growth aspirations have increasingly had to be funded from other sources; in many cases equity investment.”

Scotland is well-served in terms of access to seed capital, notably from its strong business angel community supported by public sector ­ co-investment from the Scottish Investment Bank. But the business angel community, adds the report, does not have the capacity regularly to make investments at the multi-million pound level required to fund growth beyond the seed and early stages, and VC investment is relevant and appropriate to only a tiny proportion of companies. “There are signs that the so-called ‘funding escalator’ is struggling.”

Its recommendations include co-investment funding between pension funds and the private sector on a similar model to the UK government’s Enterprise Capital funds. Such a model, it says, would help promote the establishment of small venture funds or provide them with access to capital.

It also suggests the development of a “Super Co-Fund” modelled on the Scottish Co-Investment Fund, inviting institutional investors to match the combined angel plus public sector co-investment on an agreed ratio.

All sound as far as it goes, though it is a pale shadow of the recommendations of Lord Saatchi, chairman of the Centre for Policy Studies, last week, that corporation tax is abolished for small companies, and Capital Gains Tax is also abolished for investors in small companies.

It’s worth remembering, Lord Saatchi argues, that the average UK company has five employees. “The Policy, as I call it, would therefore abolish corporation tax for 90 per cent of UK companies, reduce the deficit faster than predicted by the Office for Budget Responsibility, expand employment faster than it predicts, increase competition, challenge cartel capitalism and let millions of people grow tall.”

Fighting words. Can Scotland match them? «