Roadmap for Small Business Growth

A response to ‘The Small Business Cities Burden Index’

From the London Region of the Federation of Small BusinessesOctober 2013

Roadmap for Small Business Growth

A response to ‘The Small Business Cities Burden Index’

From the London Region of the Federation of Small Businesses

October 2013

2 Roadmap for Small Business Growth: October 2013

“With the population of London set to reach an all-time high of 8.7 million people by 2020 we are going to need another 450,000 jobs and 400,000 homes to meet the demands of 2020 living in the capital.”

Roadmap for Small Business Growth: October 2013 3

London is a front-rank global city and, according to many indices, the leading international financial centre. But recent years have seen a host of other cities – particularly in Asia – grow in both size and economic clout. The Federation of Small Businesses (FSB) and London First have co-commissioned the Small Business Cities Burden Index to measure London against its European and International competitors.

The purpose of the analysis is to gain an overall perspective on where London is positioned at a specific moment and to carry out a similar study in three years time to see how the capital is faring then. The Small Business Cities Burden Index, which amalgamates performance across

six areas of policy measurement, saw London doing relatively poorly, as the seventh worst of the 24 cities covered by the Index.

This underperformance in comparison with our greatest competitors, which is largely due to high business costs, leaves us ill equipped to meet what the Mayor estimates to be the population and infrastructure needs to fulfil his 2020 Vision. Most notably, with the population of London set to reach an all-time high of 8.7 million people by 2020 we are going to need another 450,000 jobs and 400,000 homes to meet the demands of 2020 living in the capital.1 But that might be enough merely to cope with the demand – what London needs to be is a city that can meet not only the societal challenges but also the enterprise and competitiveness challenges. In this global race it is imperative that London does not fall behind.

This response focuses on three key areas that pose constant challenges to micro and small businesses across the capital: Cost base (targeted on premises and employment), Infrastructure and Access to Finance.

1 The Mayor of London, 2020 Vision: The Greatest City on Earth: Ambitions for London, June 2013

4 Roadmap for Small Business Growth: October 2013

employment costs continue to weigh more heavily on businesses in London than on those in our international counterparts.

The current rating system is a blunt tool for maintaining the Government’s income even when everyone else’s is shrinking. It takes no account of ability to pay, or changes in economic conditions. It is based on rental values but adjusts its valuation assumptions only every five years. Its treatment of empty property is tantamount to a tax on no income, and it continues to use Retail Price Index for annual tax increases because it is normally above the Government’s official measure of inflation, Comsumer Price Index. The FSB wants to see a level playing field for all businesses. Three recommendations that would immediately benefit London’s small businesses concern business rates:

A full review of the business rates model. The current system is simply not fit for purpose. It is crippling the London economy and is driving firms out of business or out of London.

A freeze in business rates for 2014/15.

Pinch point 1: Cost burden

London’s disappointing performance was largely due to its costs burden. The high cost of both living and office occupancy has pushed London into second place on the Costs Burden Index. A recent FSB report showed that a net balance of 65 per cent of small businesses in London say that their costs have increased in Quarter 2 of 2013 compared with the same quarter in 2012. 2

It is clear that London needs to deal with the perennial problem of essential and affordable housing and business premises. We need an accelerated pro-gramme of residential and office space in the capital that will not only lead to a surge in the number of properties, boost-ing job creation in construction firms, but will also drive supply up, making prop-erties more affordable so people can live closer to their place of work.

FSB surveying shows that property costs are one of the main barriers to economic growth.3 The research conducted by Volterra confirms this view. It shows that the cost of premises (rents and rates) and

What are the pinch points?

2 FSB London Small Business Index, Q2 2013

3 FSB London Small Business Index, December 2012

Roadmap for Small Business Growth: October 2013 5

The Government has encouraged local authorities to freeze council tax – if it is serious about supporting small businesses, it should do the same for small firms and freeze business rates.

Government should increase the qualifying range for business rate relief for firms in London, which face much higher property costs than the rest of the country. The ceiling threshold for small business rate relief should be raised from £12,000 to at least £19,000 in London. The corresponding lower threshold for 100 per cent exemption should also be modified from £6,000 to £8,500 in London.

Migrant workersMigrants and visitors are hugely important to London and the UK economy. To the jobs market they bring investment, entrepreneurial

flair and specific skills, which often cannot be delivered by local training. And international students matter too. Education is one of our most successful export areas. The Department for Business, Innovation and Skills estimated that, in 2008–09, education exports were worth roughly £15bn. Yet there is now a perception that the UK is not a welcoming place for students; hardly surprising given government initiatives such as an increasingly rigorous application system and fewer post-study working opportunities. While the Office for National Statistics estimates that 246,000 migrants arrived to study in the year to September 2011, the number fell to 190,000 in 2012. As Britain drops back, competitors such as Australia and the US are aggressively marketing themselves to international students who want to study in English-speaking countries.

“Migrants and visitors are hugely important to London and the UK economy. To the jobs market they bring investment, entrepreneurial flair and specific skills, which often cannot be delivered by local training.”

6 Roadmap for Small Business Growth: October 2013

Pinch point 2: Infrastructure impediments

The Roads Taskforce Report4 showed that 80 per cent of all trips made by people and 90 per cent of all goods moved in London every day are on roads. A well-functioning road, tube and train network is critical for business success. Congestion in London damages the competitiveness of businesses in the city, and has now risen back to pre-congestion-charge levels.

The relaxation on night-time deliveries during the Olympics proved beneficial to larger businesses by freeing up road space during the working day, thereby easing congestion.5 Using NISA as an example, during the three-week Games period over 430 ambient and 1,140 chilled deliveries were made to customers in twilight or night-time slots, achieving a 99 per cent delivery service.6

The FSB and London First call for night-time deliveries to be enabled across all London boroughs, to help create a lasting legacy for business operations by reducing congestion levels in London.

InvestmentWe support the extra capital investment announcement within the recent Comprehensive Spending Review, which will go towards building a transport network that will meet London’s population challenges.

For London to meet the needs of an increasing population it is vitally important that further investment is made in tackling congestion on our roads, through measures such as a further Thames river crossing and also the upgrading of the tube network and a Crossrail project that is delivered on time. Furthermore, the collective buy-in at central government and mayoral level with regard to ‘Crossrail 2’ is welcome. This project will clearly benefit Londoners, which is why a quick feasibility study needs to be administered effectively, to enable the project to open as close to 2030 as possible.

However, it is vitally important that the revenue reduction in TfL’s budget should not lead to an increase in the fares paid by Londoners, which would have drastic ramifications for businesses and their employees.

4 Roads Task Force, The Vision and direction for London’s streets and roads, July 2013

5 Transport for London, http://tinyurl.com/4fj4jv 6 NISA Corporate Retail, http://tinyurl.com/cr4tqar

“Around 70 per cent of small businesses in London say the limited availability of parking has a negative impact on their trade.”

Roadmap for Small Business Growth: October 2013 7

ParkingAround 70 per cent of small businesses in London say the limited availability of parking has a negative impact on their trade.7

Many boroughs are relying on poli-cies, strategies and an evidence base dating from 2006 or earlier, which are completely inappropriate in the current economic climate. In particular, few of them make adequate recognition of the challenges facing the high street – which is why we urge councils to update their policies, strategies and evidence base.

We encourage councils to concentrate on measures to boost footfall on our high streets, in particular reduced-rate or free parking to stimulate trade, utilising best practice across the boroughs and Transport for London.

AviationAccess to high-quality international air travel is vital for business in the capital. International links have always been one of London’s greatest assets, and adequate airport runway capacity is critical to the competitive position of London in a glob-al economy. However, current capacity is insufficient to meet the forecast demand.

If London is to remain globally competitive, new runway capacity in the city and the South East is required to provide a growing range of direct long-haul flights to business centres and cities with booming economies.

We continue to make the case that all options should be considered, taking into consideration both business needs and environmental concerns – but a cross-party approach is needed sooner rather than later to ensure that London does not fall further behind our interna-tional competitors.

One way to stimulate tourism in London is to focus on Air Passenger Duty (APD) and the rules established by ‘Schengen’. Current rates can add more than £170 to the cost of a return flight to the UK – a serious deterrent to inbound tourists. For example, last year a family of four visiting from India or China had to pay £568 in APD to fly to the UK compared with just over £200 to visit all 25 countries in the EU’s ‘Schengen Area’.8 When APD was restructured in 2008, the rationale given was that it would help reduce C02 emissions. However, with the inclusion of the aviation sector in the European Emissions Trading Scheme, a strong case can be made for a significant reduction in APD.

7 FSB, http://tinyurl.com/ckk3vhw

8 Tourism Alliance Figures

8 Roadmap for Small Business Growth: October 2013

We would like to see what additional measures the Government and the Greater London Authority can take to increase the range of non-banking channels. These should provide additional competition for the banking sector once they have achieved a sufficient scale. These models could also help introduce a dynamic element into the sector, as new entrants bring their innovative ‘disruptive’ business models into the market, offering greater choice and flexibility for the small business sector.

The Mayor of London recently launched two schemes to stimulate the equity-led market in the capital. The first is a £22 million co-funded scheme focused on investment within the capital (part financed through the European Regional Development Fund.10 The second scheme, launched in May, was a £40million package administered via the London Enterprise Panel,11 which is targeted at the four strategic areas outlined in the ‘London Enterprise Jobs and Growth Plan’. The largest portion – £25 million – will be used to create a scheme to raise equity or loan finance for small and medium-sized businesses.

These two schemes will provide an alternative course for small businesses; however, they are not a silver bullet for the majority. The GLA must work closely with the Government to develop a clear plan for the Business Bank to improve competition in the banking sector and to advise small firms in London about alternative providers of finance.

Pinch point 3: Lack of access to finance

Recent data from the British Bankers Association9 shows that small businesses in London obtained a smaller proportion of lending than the size of the sector should merit. London had a 21 per cent share of borrowing by small and medium-sized enterprises but generated 29 per cent of the country’s SME turnover. The number of small firms being refused ‘traditional’ forms of finance in London has remained consistent at around 40–50 per cent over the last three years.

There is a suite of non-bank financing alternatives available to small businesses. These currently provide a low level of finance for small businesses in the UK, but none yet have the capacity to seriously challenge traditional banking sources. Many are innovative, reflecting the wealth of financial expertise that the UK has in abundance. Given this position of strength, these alternatives ought to flourish as the financial services industry (which is vital to London’s future prosperity) spots new opportunities.

Alternative sources of finance include:• Community development finance

institutions

• Business-to-business credit

• Peer-to-peer lending

• Business angels and small business private equity

• Asset finance and leasing

9 British Bankers Association Research, http://tinyurl.com/moa6fgr

10 Mayor’s Office, http://tinyurl.com/lagdzax

11 Mayor’s Office, http://tinyurl.com/kgphw55

“Recent data from the British Bankers Association shows that small businesses in London obtained a smaller proportion of lending than the size of the sector should merit.“

© Federation of Small Businesses 2013

Federation of Small BusinessesLondon Regional Office2 Catherine Place, London SW1E 6HFWebsite www.fsb.org.uk/London Twitter: @FSBLondon

This report can be downloaded from the FSB website: www.fsb.org.uk/london

All rights reserved. If any part of this publication is reproduced, stored in a retrievalsystem or transmitted in any form or by any means, electronic, mechanical, photocopying,recording or otherwise, it must be authorised by the Federation of Small Businesses(FSB). While every effort has been made to ensure the accuracy of the facts and datacontained in the publication, no responsibility can be accepted by the FSB for errors oromissions or their consequences. Articles that appear in the report are written in generalterms only. They are not intended to be a comprehensive statement of the issues raisedand should not be relied upon for any specific proposes. Readers should seek appropriateprofessional advice regarding the application to their specific circumstance of the issuesraised in any article.