Financing: Suddenly the big lenders are discovering small is beautiful: UK small businesses are geared for the upturn

SMALL businesses must feel a little like the Prodigal Son. Long ignored or belittled, they are now feted by everybody from the Governor of the Bank of England to large accountancy firms. As the Chartered Institute of Management Accountants said last week: 'The importance of small businesses to the economy is being recognised as never before.'

Banks and other advisers can claim they have always served the sector. But the growing realisation that large companies can no longer be relied on to provide most employment opportunities has helped to focus attention on the lower end.

Concentrating on such companies has not been easy, as the heavy criticism of banks by small business customers shows. Small firms often have different needs, expectations and indeed abilities from their counterparts in large organisations. Moreover, their lack of track record can make them a much riskier investment proposition.

Much of this was recognised by the Governor of the Bank of England, Eddie George, when he issued the findings of a six-month study of the issue last week. Having found faults on both sides, he called for an acceptance that banks have to charge high-risk customers more and suggested there should be less reliance on 'excessive' overdraft lending.

This view was naturally welcomed by bankers. For example, Jane Bradford, National Westminster's head of small business services, lauded the conciliatory tone, while pointing out that her organisation - for one - was shifting away from overdrafts. Term loans accounted for 52 per cent of loans by the largest lender to the small business sector, she said. This compared with Mr George's claim that overdrafts accounted for 56 per cent of UK small firm debt.

Although the Forum of Private Business has hailed Mr George's step in becoming a 'super ombudsman', the comments did not satisfy everybody.

Edmund Shew, an accountant serving small businesses in the North-west, said he approved of the Governor's intervention, but questioned his definition of a small business.

While Mr George suggested that firms with turnover of below pounds 10m qualified, he said the sort of businesses that he and others like him were advising were more likely to have annual sales of about pounds 100,000.

Ms Bradford acknowledged the point by saying that the small business sector could be segmented into sole traders, micro-businesses, growing companies and the like.

Nevertheless, she said, all types were likely to benefit from the steady growth forecast for the short and medium term. With property values unlikely to rise sharply, borrowers and lenders - who were being trained to be more aware of small business needs - were unlikely to be diverted by appreciation of assets. Instead, greater attention would be given to fundamental business abilities.

NatWest's caution over continental European prospects - which have an impact on the significant minority of small companies that export - is supported by a recent survey by Grant Thornton, the accountancy firm that specialises in owner-managed businesses.

Noting that UK firms were much more optimistic than their counterparts on the Continent, Michael Rogerson, partner in the London office, said: 'It is clear from these findings that UK smaller businesses are poised to climb out of recession.'

And there is no shortage of advice on how they can channel that optimism. While Price Waterhouse, the accountancy firm, sees some middle-market companies benefiting from its 'Surviving the Recovery' initiative, the Chartered Institute of Management Accountants recommends that small firms should - among other things - improve the quality of management, do simple things such as invoicing well, make more extensive use of factoring and invoice discounting, accept more rigorous banking arrangements as the price for more enlightened lending and be prepared to accept temporary dilution of ownership.

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