We need a US model where banks only provide 20% of growth finance to SMEs, says former City heavyweight David Hitchcock
Original Article: http://www.walesonline.co.uk/business/business-news/need-model-banks-only-provide-10509333
16:58, 26 NOV 2015 UPDATED 17:19, 26 NOV 2015
BY SION BARRY
David Hitchcock tells Cardiff Breakfast Club that more sources of alternative finance are needed to support the growth of SMEs.
The growth potential of SMEs in the UK is being stifled by an over dependence on banks for growth finance, former City heavyweight David Hitchcock told a business audience.
Addressing a meeting of Cardiff Breakfast Club the former managing director of JP Morgan and now chair of precision engineering firm Cyrus-RW Group, said that the UK needed to move quickly to a US model where SMEs are only reliant on banks for 20% of growth finance and where the market for alternative sources of finance is far more mature.
Ebbw Vale-born Mr Hitchcock, who is currently funding raising for up to £40m in an Enterprise Investment Scheme structured fund – through his investment company Cyru sInvestment Management – to provide growth finance to UK precision engineering firms, said that more stringent regulations on capital reserves meant it was “not the fault” of the banks that they were not able to lend more to SMEs.
He said the current funding gap for SMEs seeking growth finance was, in his view, higher than the UK Government’s estimated figure of £1bn a year.
Mr Hitchcock said: “SMES are half of the UK economy which are going to go nowhere else, like say to Lithuania in a hissy fit [reference to large corporates].
“The private sector has to grow as without it we will not have an economy. And it is also important from a social point of view that our children have private sector employment.
“If SMEs with five or more employees employed just one extra person we would have zero unemployment.”
He said many firms that were unable to secure finance were just stagnating.
Mr Hitchcock added:“If you have secured capital you are a winner, if not you are a loser. And as an SME you need fast access to capital. If you are a zombie company you can survive, but you will not grow. But it is of no benefit if the private sector in our communities are hanging on by their finger nails.
“Banks still provide 80% of funding to SMEs in the UK and Europe.
“In the US it is only 20%. So the story over the new few years is that we need banks to only be 20%. It works in the US and it should work here as we have similar economies.”
Mr Hitchcock said that while the “friendly bank manager in Cardiff” might want to lend to an SME, they didn’t really have the autonomy to do so as mandates on lending were calculated centrally.
However, he said while peer-to-peer lending, like online crowdfunding websites, had grown significantly he warned there were “sharks” operating in a sector where some people, often with no previous investment experience, were making investment decisions by just watching a fund raising video. “They don’t really have a clue what they do,” he added.
He said UK Government tax incentive investment schemes such as EIS had the scope to support, unlike tax avoidance film schemes, to back more SMEs, and in turn, create well paid jobs and businesses that pay corporation taxes.
On his decision to leave the City and invest in and create engineering jobs in Wales he said: “I had something of an epiphany. I am from Ebbw Vale and have not forgotten that… so you have to give something back.
“We train, have apprentices and pay our staff very well. We export to Germany which means we have some of the finest engineers in the world in Wales and we are paying corporate tax.”
Cardiff Breakfast Club is sponsored by the Western Mail, Lloyds Banking Group, Blake Morgan and Cardiff Business Council.
The next meeting of Cardiff Breakfast Club is on December 10th when chief executive of property development company Rightacres Property, which is behind the Central Square regeneration scheme, Paul McCarthy will be the speaker.
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