The growing gets tough: Small firms are struggling to find backers, writes Nigel Cope (CORRECTED)

CORRECTION (PUBLISHED 23 NOVEMBER 1993) APPENDED TO THIS ARTICLE

HAMPSON Industries, a manufacturer of injection mouldings for car steering and suspension components, is a small business at a critical stage of its development.

It started manufacturing six years ago from its premises in Nantwich, Cheshire and now has a turnover of pounds 1.2m and 17 staff. But the business, which has had a good recession, is bursting at the seams.

It needs more space to expand and has three patented products. But the move, the new products and the jobs they would create are being held up by a familiar small business problem: the company can't find the funds.

'We're looking for a new factory and trying for a regional assistance grant,' says Ann Pinnington, finance director. 'But it takes so much time and effort. We are trying to keep the bank happy, but they need more detail by the minute and I'm sure they don't look at it half the time. We've got good engineers and good entrepreneurs in this country. What we need is some help.'

Hampson says its bank, Barclays, has been helpful. But the company, like so many smaller firms, is held back by red tape. The small business sector, which should be the engine of growth as the economy creaks out of recession, is being hamstrung by a system that helps the large but hampers the small.

There are some moves afoot to help. Anthony Nelson, financial secretary to the Treasury, will arrive in Bristol this morning as part of a tour of the regions to listen to the problems of smaller companies.

And small business organisations hope the Budget later this month will introduce measures that make it easier for companies to secure funding. But the fact remains that many of the initiatives designed to help the sector promise much but achieve little.

'The theory that there are loads of places for small businesses to go for funds is a myth,' says Steve Alambritas of the Federation of Small Businesses. 'Large organisations have more clout with the banks, can issue shares or go to the money markets or venture capitalists. For small companies there is no choice.'

The figures do not look good. Britain has a strong small business sector: 97 per cent of firms in the UK employ fewer than 20 people. However, not nearly enough of these grow sufficiently to create a sturdy medium-sized sector.

Smaller companies in Britain also rely too heavily on short-term bank finance. According to the Federation of Small Businesses, 80 per cent of small firms in the UK depend on the four big clearing banks for their funds, and more than half of borrowing is under overdraft arrangements. The comparable figure in Germany is just 14 per cent, and in France 31 per cent.

Such reliance on bank finance could be damaging. The standard argument is that many small businesses become stretched when recovery arrives, because they have run down stocks and reserves during recession. Banks may be reluctant to extend more credit to a company if there is no more collateral to give.

Banks are also criticised for being too remote. Small businesses say that when they go to see their bank managers, they often do not have sufficient authority over the account. The final decision is made by a regional business centre manager, whom the entrepreneur may never meet. The result is that the business feels it is being marked against a checklist as if it were a social security claimant.

Others have a different view. 'I have a lot of sympathy with the banks,' says Alex Korda, managing director of Korda & Co, the venture capitalists. 'Most small businesses don't keep banks informed. They don't try and build relationships and they tend to think that the bank is a source of venture capital, which it's not.'

But the gripes don't end with the banks. A recent survey by Levy Gee, the accountants, found that the recovery was being threatened by the reluctance of the venture capital industry to invest in small or struggling companies.

Since 1991, the number of venture capitalists has fallen by 15 per cent, and the proportion prepared to invest up to pounds 500,000 has dropped by 36 per cent.

But the figures here are even worse than they look. Many of the funds that do invest in smaller companies or start-ups have a regional bias. The British Steel fund, for example, only puts money into businesses located in traditional steel areas.

Even those without a geographical preference often have other restrictions. Korda & Co, which says its minimum investment is pounds 10,000, will only look at a company if the initial sum is a prelude to larger injections, and even then, the business must have an innovative technology.

'We certainly wouldn't be interested in putting in pounds 100,000 if that was going to be the end of it,' says Mr Korda. 'If a business is only going to be worth pounds 2m- pounds 3m then the upside is not big enough to justify seven years of hard work managing the company and living with it.'

Other options that might look like promising avenues often turn out to be dead-ends. The Business Expansion Scheme, launched in 1983, was hijacked by property ventures and is being wound up at the end of the year.

The Loan Guarantee Scheme, launched by the Government in 1981, has invested pounds 1bn in 35,700 businesses. This record is dismissed as 'appalling' by the Federation of Small Businesses, which compares the figures with those of the Kreditanstadt fur Wiederaufbau in Germany, which invested pounds 11bn in 1992 alone.

There are glimmers of light in the gloom. All members of the sector hope the Chancellor will offer some assistance to smaller companies in the Budget. Mr Nelson's provincial tour indicates some government interest in smaller firms, but the fact that his visits are not planned to finish until next spring indicates there is little sense of urgency.

High on the list of Budget options being pushed by the small business lobby are a decent replacement for the BES and tax relief on investments of up to pounds 250,000.

The first of these is a reference to the much-vaunted business angels - private investors willing to act as one- man venture capital funds and invest in growing businesses. The problem here is that such funding has no structure.

Venture Capital Report, based in Henley-on-Thames, has been acting as a marriage broker between growing companies and potential investors since 1978, but it still only has 516 names on its database. However, VCR has been attracting new angels at the rate of 20 a month since the summer. 'We would like to see a single network for business angels,' says Hamish Stevenson of VCR.

Some of the banks are responding to the pleas for a more personal service. Midland has been moving business managers back into branches since August last year, but so far there are only 208 managers in a network of 1,700 branches.

All this is not much help to Hampson Industries, which is about to try the venture capital route for the pounds 500,000 it needs to put its expansion plans into practice. 'Everything seems to take so much time,' says Ms Pinnington. 'There is no one agency that is an expert on everything. We spend far too much time filling in forms and fire-fighting.'

CORRECTION

In an article on small businesses on 15 November there was a reference to Hampson Industries, a company seeking funds for expansion. This should have read Hampton Industries of Nantwich, Cheshire.

(Photographs omitted)