SBIR and Venture Capital

• Federal Aid Sought for Equity-Backed Companies
  

As Funding Ebbs, Venture Capitalists Push for Start-Ups to Have Access to Traditional Small-Business Programs

By KELLY K. SPORS

APRIL 21, 2009, 9:59 A.M. ET

With equity investments in new companies drying up, venture capitalists and angel investors are pushing the federal government to give them financial relief and access to small-business programs traditionally reserved for noninvestor-backed businesses.

The investors' ideas include allowing venture-backed companies to compete for federal research-and-development money reserved for small businesses, creating government-sponsored seed funds to help investors make early-stage equity investments in start-ups and providing new tax credits to equity investors.

But some businesses that traditionally have been served by Small Business Administration programs and loans fear that providing more government aid to equity-backed companies will divert attention from those that really need help.

Equity investors point to President Obama's appointment of Maine venture capitalist Karen Gordon Mills as SBA administrator as a sign that he backs bolstering the agency's support for early-stage investing. At her April 1 confirmation hearing, Ms. Mills signaled she wanted to serve both traditional small businesses and those in the emerging "knowledge economy," such as clean technology and life sciences start-ups.

SBA spokesman Jonathan Swain says Ms. Mills, confirmed on April 2, hasn't yet laid out her agenda for the agency. But he says President Obama appointed her to the job partly because of her background in equity financing and experience with high-growth small businesses. "I think certainly she's going to look and make sure the SBA is working as effectively as possible to help small businesses, and that includes high-impact small businesses," he says.

At a hearing late last month of a subcommittee of the House Small Business Committee, several leaders of venture-capital firms and angel-investor networks testified that the economy had severely hurt their ability to fund small companies in recent months. "Equity investment not only spurs small-business growth but also sparks the development of new products and industries," said Rep. Jason Altmire (D, Pa.).

U.S. venture-capital investments fell 61% in the first quarter, according to a new PricewaterhouseCoopers report. Angel investing dollars fell 26% in 2008, according to the Center for Venture Research at the University of New Hampshire.

"There needs to be a balance" when handling the financial needs of "Main Street businesses and innovation entrepreneurs, and I think the SBA is capable of serving both," says Rich Bendis, chief executive and president of Innovation America, a Philadelphia-based nonprofit that works with investor groups.

In December, Innovation America and the National Association of Seed and Venture Funds pitched to members of the Obama transition team a plan to create a government-funded $1 billion seed fund that would shore up angel-investing groups and regional early-stage equity investment programs, which provide equity investments to start-ups. He says the new administration seemed receptive to the idea, but hasn't moved forward on the proposal.

Michael Gurau, president of CEI Community Ventures, a Portland, Maine, venture-capital fund on whose board Karen Mills served, says he would like to see the SBA put more emphasis on equity investments, such as increasing funding for the federal SBIC program, which aims to bolster venture-capital funding for start-ups. Proponents of increasing federal assistance for small, equity-backed companies say it is high-growth start-ups that create the most jobs. According to the National Venture Capital Association, venture-capital firms account for only 0.2% of all financing, but 10% of all U.S. workers are employed by a company that was once venture-backed. The association is pushing Congress to pass legislation allowing venture-backed companies to compete for contracts through the Small Business Innovation Research program, or SBIR, which requires that federal agencies give 2.5% of their research-and-development budgets to small, independently run businesses. Venture-backed companies don't generally qualify for the program now.

Many small-business owners served by the SBA or other programs aren't pleased with the prospect of competing with venture-backed companies for government programs. Karl Kiefer, president and owner of Invocon Inc., a Conroe, Texas, maker of high-tech electronics with 25 employees that has won about $9 million in SBIR contracts since 1991, says competing for SBIR contracts with venture-backed firms could hurt firms like his.

Venture capitalists "can create a competitive posture that would squash us like an ant," Mr. Kiefer says.

Huawei Technologies: A Chinese Trail Blazer in Africa

A perfect combination of Chinese ideology and Western business practices?

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Huawei Technologies: A Chinese Trail Blazer in Africa
Published : April 20, 2009 in Knowledge@Wharton

Walk into a bookstore in Beijing and you will find shelves filled with books about Huawei Technologies. As one of China's fledging multinational companies and a major force in the international telecommunications equipment industry, Huawei is rewriting the rules of competition in a global industry. Moreover, it is the first non-state-owned Chinese company to successfully expand its operations internationally, some observers say, and it has become a model for other Chinese companies and a source of national pride.

Despite the challenges facing the global economy and the telecommunications industry, Huawei achieved contract sales of $16 billion, representing a 45% year-over-year increase, with approximately 72% of its revenues coming from international markets. In less than a decade, Huawei has penetrated almost every market around the world, investing heavily in its business and technology product lines, which includes fixed networks, mobile networks, data communications, optical networks, software and services, and terminals.

According to an industry insider, Huawei segments the telecom equipment industry into three major categories: Internet switches, fixed line networks and wireless networks. "Huawei is currently the number three global company in wireless networks and number two in fixed line and switches," says founder and CEO Ren Zhenfei. "But Huawei's goal is to become number one in all three segments." Its competitors include both well-known European and American companies, such as Alcatel-Lucent, Cisco Systems, Nokia Siemens Networks and Ericsson Telephone Co., as well as lower-cost Chinese competitors such as ZTE Corp.

Huawei currently serves 270 operators in about 100 countries, including 35 of the world's top 50 telecommunications companies. As of March 2007, Huawei had more than 83,000 employees worldwide, of whom 43% are engaged in R&D. The company reports that it dedicates at least 10% of its revenues to R&D and is now the fourth largest patent applicant worldwide, with more than 20,000 applications filed by 2007. Last year, Huawei won 45% of all new Universal Mobile Telecommunications System and High Speed Packet Access contracts, making it the top supplier in this area. Huawei is also now one of the top three suppliers in the global GSM market; by the end of 2007, it had shipped base stations with total capacity of 700,000 carrier frequencies, serving more than 300 million GSM users worldwide. (GSM is currently the most popular second-generation standard for mobile phones.)

It is hard to understand Huawei's success without considering its humble origins and distinctive corporate culture. In 1988, Ren, a former People's Liberation Army (PLA) officer, founded the company as a third-party reseller of telecom devices in Shenzhen, China. Five years later, Huawei achieved its first breakthrough when it launched its C&C08 digital telephone switch, which had the largest switching capacity in China at the time. By initially deploying in small cities and rural areas, the company gradually gained market share and made its way into the mainstream market. From 1996 to 1998, Huawei experienced exponential growth, coinciding with the boom in China's telecommunications industry. After winning its first overseas contract in 1996 with Hong Kong's Hutchison-Whampoa, Huawei expanded to Russia and Africa. In Africa, Huawei began operations in 1998, starting in Kenya, and has now become the largest CDMA product provider in the region. During the same year, Huawei hired IBM consultants to gain expertise in management strategies in a concerted effort to learn industry best practices.

First, the Countryside

As a follower of Mao's thought, Ren has drawn much inspiration from the PLA's military strategy -- reflected in Huawei's business strategy, organization and corporate culture. For example, Huawei has relied on a well-known Maoist strategy of first focusing on seizing the countryside, then encircling and conquering cities. Huawei followed this strategy, achieving its first breakthrough in 1993 when it aggressively marketed its digital telephone switches in smaller towns before expanding all over China. Later, Huawei utilized this same strategy by first targeting the underserved markets of Russia and Africa before moving into Europe.

Military culture is also epitomized in Huawei's rigidly hierarchical organization, where emphasis is placed on hierarchical management rather than on individual employees, who are viewed as easily replaceable foot soldiers. Like that of many other East Asian firms, Huawei's corporate culture relies heavily on rhetoric and propaganda. The introductory article of Huawei's basic law reads: "Love for our homeland, fellow citizens, work and life is the source of our cohesion; responsibility, creativity, respect and solidarity represent our company's quintessential culture."
Other aspects of Huawei's culture are characteristically Chinese. Resilience and hard work, qualities valued in traditional Chinese culture, are emphasized at Huawei as a way to gain competitive advantage. Another classic East Asian trait, putting the group before the individual, can also be seen. Huawei expects its employees to place their personal lives second in order to serve their company loyally. Its approach to business, referred to as "the way of the wolf," is characterized by reliance on instinct, extreme resilience and employees' willingness to cooperate and sacrifice themselves for the sake of the pack.

Huawei's strong identity, however, has not prevented the company from adopting Western tactics. In the mid 1990s, most Huawei managers were sanguine about the prospects of the firm. However, Ren was aware that Huawei had severe growth limitations, mainly due to the lack of organizational expertise and the absence of a viable long-term strategy. He set out to change the company into a solutions provider. By 2000, when the communications industry slowdown was noticeable, Huawei was already in the midst of a restructuring process that gave the firm its competitive edge against local rivals.

According to an industry insider, "Ren recognized that the best way to overcome Huawei's limitations was to learn from leading Western companies." Thus, from 1998 to 2003, the company hired IBM for management consulting services, modeling itself after the American company. Under IBM's guidance, Huawei significantly transformed its management and product development structure. Ren prioritized R&D and supply chain management by adopting IBM's Integrated Product Development (IPD) and Integrated Supply Chain (ISC). After discovering Huawei's return on investment in R&D was one-sixth that of IBM, Ren stipulated mastery of IBM's IPD methodology. Furthermore, Huawei adopted ISC since supply-chain performance was far below potential. According to The World of Huawei, Huawei's on-time delivery rate in 1999 was only 50%, compared with 94% for competitors; annual inventory turnover was 3.6%, compared with 9.4% for competitors. Adopting ISC entailed winning over suppliers and partners, many of whom had little appetite for Western management practices.

While working with Huawei, IBM was completing its own strategic change from a hardware vendor to an IT solutions provider. Ren drew from IBM's experience, also realizing that the future of Huawei was not in manufacturing what others invented, but in creating excellence in both research and service. This strategy, which may be conventional for leading Western firms, is unusual in China. Although Huawei management possessed vision before hiring IBM, it was through the experience, insight and methodologies gained from working with IBM that Huawei managed to adopt new management practices and become a global player.

Nowhere is Huawei's presence and strategy more evident than in Africa, a continent it entered for the first time in 1998, where it successfully dispelled the "made in China" image of low cost and low quality. Beginning in the 1990s, Huawei shifted its role from a manufacturer to that a complete solutions provider. Today, Huawei creates some of the most sophisticated telecommunications equipment in the world and, according to the company, is "not making it cheaper -- it's making it better." Armed with its combination of a corporate culture marked by Communist roots and leading Western business practices, Huawei has executed a strategy composed of superior pricing, customer service and brand awareness to penetrate and dominate the African market, one in which few multinationals have been successful. Huawei has established a reputation as the preferred low-cost, yet high-quality mobile network builder. Its sales in Africa had topped $2 billion across 40 countries by 2006.

According to the former head of Huawei's operations in West Africa, Wilson Yang, Huawei's profit margins in Africa can be up to 10 times greater than those it realizes in China. Huawei manages to achieve tremendous margins while still pricing itself only 5%-15% lower than its major international competitors, Ericsson and Nokia. Furthermore, Huawei is cautious not to price itself too low so that it will not be seen as yet another low-cost Chinese provider. In contrast, Huawei's main Chinese competitor in Africa, ZTE, consistently prices 30%-40% below European competitors and, consequently, its products are perceived as being of inferior quality.

Huawei's pricing methodology can also be traced back to its experience with IBM, a company that helped Huawei learn the importance of turning R&D into cash and of approaching product development from both technical and business angles to ensure investment returns. This represented the transition for Huawei from a low-cost volume competitor to a value-added leading enterprise.

Learning from the Master

Another factor behind its African success is its attention to superior customer service. In 2000-2001, Huawei faced a confluence of challenges: IT investment dried up, profit margins shrank and the market faced oversupply, leading profit growth to evaporate. IBM consultants stressed increasing profits through better supply-chain management, stronger R&D and more integrated corporate structure. However, Huawei was also learning a key strength of IBM: unparalleled service. Ren appreciated the value of this concept under looming adversity. Unmatched attention and commitment to service eventually came to dominate the firm's global strategy.
Indeed, superior service was a distinguishing feature of Huawei's business model in Africa and its core competitive advantage. Yang explains how this aspect of Huawei's business model ultimately led to global growth: "Three years into its Africa experiment, Huawei still had only 20 employees on the ground and very few contracts. However, our existing clients noticed the unparalleled responsiveness of management and personnel. We brought a Chinese attitude to both work ethic and relationship building in Africa. The result was that clients soon realized they could rely on Huawei 24 hours a day, seven days a week. We emphasized close relationships to foster that reliability and soon began to realize collateral benefits. All of a sudden, our reputation for superior service and higher quality gained us introductions to decision makers in new markets, faster network building and advanced notification of competitive bids. This enhanced Huawei's ability to price safely below the competition."

Huawei is also using its business in Africa as a training ground for establishing itself as a global brand through three distinct channels: policy, local investment and marketing. Huawei leverages its resources and products to connect with developmental policy throughout Africa. . In May 2007, at a forum held in conjunction with the 2007 annual meeting of the African Development Bank Group (ADBG), Huawei set out a vision for Africa that is centered on "'bridging the digital divide and enriching the lives of Africans." Huawei prides itself on giving back to the African community; one of the ways it does this is through donating educational communications equipment to schools.

Huawei has begun to establish regional training centers in African countries such as Nigeria, Kenya, Egypt, Tunisia, Angola and Guinea. By August 2004, Huawei had invested more than $10 million dollars into its Nigerian training center. Recently, Huawei opened a new training facility in South Africa, its fifth training center on the continent. There is a sixth center currently being built in Angola. The company now provides training for up to 2,000 people annually. Such local investments by Huawei help bolster the local economy with job creation and localized management while improving the company's image in the eyes of local consumers, businesses and potential partners.

Huawei is asserting its brand potential in Africa by means of smart marketing strategies and "going green," including optional use or solar and wind energy. It actively promotes its GSM base stations as among the most eco-friendly in the business, claiming that it cuts energy usage by 47% compared to regular towers. By the end of 2007, Huawei reported that it had deployed more than 100,000 green base stations, which saved 570 million kilowatt-hours, or 170,000 tons of coal.

Huawei Technologies has built a world-class enterprise, reaped tremendous profits in Africa over the last 10 years and is contributing to growth in Africa. In China, domestic media have heralded Huawei's success as a model for other Chinese companies trying to transform themselves from domestic entities into global players. Huawei has already profitably penetrated the European market, winning major contracts and servicing prominent clients such as Vodafone and Telefónica. As Huawei leads the way for home-grown Chinese corporations, the challenges its leaders face going forward include maintaining its growth and transferring the lessons learned in Africa to Europe and North and South America, all of which represent both enormous profit potential and new strategic challenges.

UK Trade Credit Insurance 'Top-Up' Scheme

From UK Budget09:

In line with the Government’s objective of providing targeted support to address specific challenges that business are facing, the Government announces a ‘top-up’ trade credit insurance scheme to help UK businesses maintain their finances. Under this scheme, the Government will offer to ‘top-up’ private sector trade credit insurance provision for six months. The scheme will be available to the 14,000 businesses that already use trade credit insurance and will mitigate against disruption to the supply chain and cashflow of the 250,000 companies they do business with, if their trade credit limits are reduced.

14,000 companies of all sizes currently buy trade credit insurance against supplies to over 250,000 UK businesses as a guarantee that their bills will be paid. Suppliers who experience reductions in credit limits may choose to stop future deliveries or refuse to extend credit, adding to pressures on firms potentially already facing difficulties and tending to reduce the level of trade.
From May 2009 until end December 2009, suppliers will be able to purchase six-months’ ‘top-up’ insurance from the Government if credit limits on their UK customers are reduced, backdated to 1 April 2009, providing another alternative to the abrupt disruption of supply and cashflow, and giving time for the businesses affected to adjust to changing circumstances.
The Government has worked collaboratively with the private sector insurers, who will provide this product on the Government’s behalf, to design a scheme that is well targeted and protects taxpayers’ interests. Therefore, the amount available to each supplier if a company’s credit limit is reduced will be that which either restores cover to the original amount, doubles the amount the company is able to obtain from the private sector, or £1 million, whichever is the lower.
The aggregate level of insurance provided under the scheme will be capped at £5 billion, and companies from all sectors of industry and from all stages of the UK supply chain will benefit from the increased certainty that this scheme provides.

SBIR Developments

An SBIR potpourri: Politics, Russ to the rescue and a Phase III bonanza?

Steven S. Clark

March 18, 2009

http://wistechnology.com/articles/5738/

A recent Biotech Takes column covered how the political battle over making venture-backed biotech companies eligible for Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) program funding derailed passage of the SBIR reauthorization bill last year. Some of the political machinations that went into last year's non-decision are becoming clear and may be resurrected again in the current congress, 

A continuing resolution is needed very soon in order to extend the life of the SBIR/STTR program beyond March 20. But, the word from Washington insiders is that the House wants a very short continuing resolution (perhaps only a couple of months), while the Senate wants a longer continuation.  The House wants the short time line so it can rush through a reauthorization bill with limited debate and amendments. Sadly, this is reminiscent of last year's fiasco when the House Small Business Committee, chaired by Nydia Velázquez (D-NY), prevented any testimony from small business interests, which strongly opposed letting venture capital-backed biotechs apply for program funding. It appears that Ms Velázquez again wants to suspend committee rules in order to ram her favored reauthorization bill through the committee. Last year, the Senate drafted a compromise version of the SBIR/STTR reauthorization that was acceptable to both venture capital and small business interests, yet, for some reason, Ms Velázquez wants to return to the bill the House approved and that was strongly opposed by the small business lobby and that was not supported by the Senate.The House and Senate will most likely pass another continuing resolution but battle over its length.   

Politics at HHS 

In the recently passed American Recovery and Reinvestment Act of 2009, the National Institutes of Health (NIH) received a whopping infusion of $8.2 billion of stimulus money, on top of a 3.2 percent budget increase in the Omnibus Appropriations Act that President Obama just signed. Thus, the act's munificence represents a 27 percent boost over institute's base budget. But, it seems that the Department of Health and Human Services (HHS) and NIH do not want biotech companies to share in this windfall. The reinvestment act bill specifically directs the institute to exclude SBIR/STTR research from the stimulus money. Yet, neither the House nor the Senate recovery bills contained such exclusionary language, which means that it was inserted into the final bill by the House/Senate Conference Committee and was never voted on by either House. Furthermore, it recently was revealed that HHS resorted to a last-minute Machiavellian maneuver to get this exclusion inserted into the bill. 

The chairwoman of the Senate Committee on Small Business and Entrepreneurship (SBE), Mary Landrieu (D-LA), and ranking minority member Olympia Snowe (R-ME), sent a very strongly worded letter to Charles Johnson, the acting secretary of HHS, to express their concern over the SBIR exclusion in NIH's recovery money. The letter says that the SBE “…questions…the NIH's and Department of Health and Human Services' (HHS) commitment to small, high-tech firms and the success of the SBIR and STTR programs.” The Senators also reminded NIH that there remains a statutory obligation in the Small Business Act that requires NIH to allocate a total of 2.8 percent of its research funds to SBIR/STTR programs. So, it boils down to which contradictory legal obligation HHS and NIH will decide to follow.

The senators' letter concludes with this admonishment and instruction, “…we respectfully request that HHS specifically consult us when making legislative recommendations that affect these programs that are squarely within our Committee's jurisdiction.” Ouch!

HHS Antipathy to SBIR/STTR Funding

Over the past two congresses, NIH and HHS have been major opponents to yet another controversial SBIR proposal to increase the percent of SBIR/STTR allocations. This basically is a protectionist stand for academic research over “less pure” commercial oriented research. NIH doesn't believe that there are enough "high quality" SBIR proposals to warrant increased allocations. The Small Business Technology Council (SBTC) obtained some of the figures and calculations used by NIH, and claims NIH is using fuzzy math.

This is an odd stance by NIH and HHS since a study by the National Research Council (NRC) found that the SBIR program, “…is sound in concept and effective in practice”; was “stimulating technological innovation”; “linking universities to the public and private markets”; “increasing private sector commercialization of innovations” at an “impressive” rate; and “providing widely distributed support for innovation activity.” The study also concluded that the SBIR/STTR program was a boon to research universities as it promotes commercial development of university-based technologies. So, one wonders why HHS opposes expanding the SBIR/STTR programs.

Senator Russ to the rescue?

Senator Russ Feingold (D-WI), citing the NRC report, recently championed expanding the SBIR program by introducing the “Strengthening Our Economy Through Small Business Innovation Act of 2009” (S. 177). In a statement in the Congressional Record, Feingold opined that, “…it is essential that our (economic recovery) efforts not just be short term fixes—they must not only aim to create jobs and investment opportunities in the short term, they must be part of strategic efforts to strengthen our Nation's innovation capabilities and sustain long term economic development.... There is no better way to do this than by stimulating and supporting small business innovation,....”

Feingold's bill has three key provisions: First it would reauthorize the SBIR/STTR programs for 14 years to provide greater funding continuity and certainty for applicants and awardees. It also proposes to increase agency allocations for SBIR from 2.5 percent to 10 percent of their research and development budgets. Similarly, STTR allocations would increase from the current 0.3 percent to 1 percent. SBIR award limits would also increase from $100,000 to $300,000 for phase I awards and from $750,000 to $2.2 million for phase II. Finally, it also sets funding priorities for energy innovation, water safety, domestic security and transportation. Too bad about that, NIH.

The bill, which currently has no co-sponsors, was referred to the Senate Committee on Small Business and Entrepreneurship.

A Phase III Bonanza?

Obviously, the whole idea behind the stimulus bill is to quickly infuse capital into the economy, but the federal agencies that are to spread the act's largesse are constrained by Federal Acquisition Regulations that require, except under special circumstances, that federal government contracts be issued only after a "fair and open competition." Of course it takes time and effort for each agency to draft and issue requests for proposals and then to collect and evaluate applications before new contracts and grants can be issued. Agency procurement officers would love to bypass the competition requirement and just issue contracts. 

Well, there just might be a “special circumstances” solution that would allow them to do this. A recent article on the SBIR Coach blog, points out that Jere Glover, executive director of the Small Business Technology Council (SBTC), an arm of the National Small Business Association (NSBA), has raised a simple strategy to directly leverage SBIR Phase I and II awards directly into Phase III contracts without going through the usual competition process. It turns out that once you have a Phase I or II SBIR (or STTR) award, all subsequent government contracts (or grants) for work that "derives from, extends, or logically concludes" the work supported by the award are “sole source justified.” This means that if you currently have an SBIR or STTR grant that is related to a program or RFP at any Federal agency, you can call the procurement officer who's responsible for issuing stimulus contracts for that program and claim that you have a "sole source justification" to do the work. If s/he agrees, then the contract can be immediately issued to you, styled as a Phase III SBIR, without the need for competition.Furthermore, it is not necessary to first have a Phase II award since all you need to do is make a case for “sole source justification.” This is a way to jump from a phase I SBIR directly to phase III. At lease one such Phase III contract was issued to a business that had a Department of Defense Phase I SBIR for some work that applied the same technology that the DOT sought. 

Of course, you do need to have something of value to offer and there needs to be a match with agency needs and your capabilities. You can find information on Federal grants and contracts on the recovery.gov web site and in the stimulus bill itself. Additional information and updates on all of this will be placed on the on the SBTC website, but the most informative information will be found in the "Members Center" section, so you might consider joining the SBTC and help support its advocacy programs.

America's Recovery Capital Program

An emergency loan program for small businesses which US has announced since Feb but has yet to implement. It essentially provides 100%-guaranteed, interest-free loans to small businesses for them to pay up their previous loans and interests on these loans (which are relatively high and causing many businesses to be struggling with the payments). This eases the financial difficulties of debt-laden but viable businesses especially. Interesting program, which I've been keeping up with:

1. SBA readies emergency biz loans
Agency has 15 days to create guidelines for $255 million emergency lending initiative approved by Congress.
By Stacy Cowley, small business editor
Last Updated: February 19, 2009: 5:30 PM ET

NEW YORK (CNNMoney.com) -- Small businesses owners struggling to keep up with their bills may see some relief from a new $255 million emergency loan program authorized this week as part of the economic recovery bill.
Congress is pushing for the money to start flowing fast: It gave the Small Business Administration just 15 days to issue guidelines for the brand-new program.
Called the Business Stabilization Program, the initiative will offer loans of up to $35,000 that are essentially interest-free. The loans will only be available to companies that already have bank-issued business loans - Congress wants the new loans to be used to make interest payments and pay down principal on existing debt.
The loans can be used to make payments for up to six months, and no repayment on them will be due for a year. Businesses must fully repay their stabilization loan within five years.
The loans won't be coming directly from the SBA. Instead, the agency will offer a 100% guarantee - something it has never done before - to banks that issue the loans. If the business owner defaults, the SBA will pay off the debt.
The SBA will also fully subsidize the interest on the loans for their entire duration, making them low-cost for business owners and largely risk-free for banks.
Entrepreneurs ready to race out and apply for a loan will need to be patient a bit longer, though. Faced with a tight deadline to create an entirely new program, the SBA is still working out the details.
"We want to get everything in the bill in place as quickly as we can," said SBA spokesman Mike Stamler. "We're doing the best we can."
The SBA hasn't started discussions with banks about how the program will work, but lenders expressed cautious optimism that it will help strapped small businesses.
"We have plenty of customers that would be interested in that type of loan," said Michael Downes, chief lending officer of Unity Bancorp (UNTY) in Clinton, N.J. "We just have to guard against throwing good money after bad."
This new programs is one of the ones Congress wants action on the quickest. It gave the SBA less than three weeks to issue emergency regulations for it.
For the stabilization loans, Congress allocated $255 million to fund the program through September 2010. Since that amount covers only the costs and subsides of the program, it can be used to fund several billion in total loan volume; the SBA is still working out the formulas to calculate how far the cash will stretch.
Only banks already certified to participate in the SBA's loan guarantee programs will be eligible to make stabilization loans. But the agency expects the loans themselves to be available to any small business customer at participating banks, regardless of whether or not the customer's existing loan was actually made through the SBA's guarantee program. (To find out whether your bank is an SBA lender, click here and go to the SBA's resource page for your geographic area.)
As the SBA pulls together its guidelines, lenders and business owners are eager to tap the new line of capital.
"One of the reasons that we were proactive in getting involved in the SBA was because we saw the economy beginning to weaken," said One Georgia Bank's Lewis. "Any time the economy weakens, it's going to be the small businesses that will lead the country out of an economic spiral."

2. Emergency biz loans: What qualifies
The SBA's forthcoming loan-relief program can't be used to pay down existing SBA loans -- but past borrowers will still be eligible for help with other debts.
By Stacy Cowley, CNNMoney.com small business editor
Last Updated: March 20, 2009: 4:49 PM ET

NEW YORK (CNNMoney.com) -- The Small Business Administration is still drawing up guidelines for its forthcoming emergency loans program, a stopgap measure intended to shore up small businesses struggling to keep up with payments on existing debt. But the agency this week confirmed an unexpected twist: Businesses with current loans backed by the SBA won't be able to use the new loans to cover payments on their existing SBA debt.
The upcoming program, tentatively dubbed the "America's Recovery Capital" (ARC) loan program, is a measure mandated by last month's stimulus bill. The bill requires the SBA to create a new "business stabilization" program to back loans of up to $35,000 to small businesses "experiencing immediate financial hardship." The loans are intended to be used to make interest and principal payments on a "qualifying small business loan" for up to six months.
In several announcements this week, SBA officials said that SBA-backed loans made before the stimulus bill's passage on Feb. 17 won't be eligible for ARC loan relief. The reason: The American Recovery and Reinvestment Act, the stimulus bill, forbids it. A provision Congress wrote into the bill explicitly prevents the new stabilization loans from being used to pay down SBA-backed loans made before the bill's enactment.
A staffer with the House Small Business Committee said that restriction was mandated by the Congressional Budget Office to comply with pay-as-you-go prohibitions against increasing the federal deficit through new direct-spending measures.
A representative from CBO was not immediately available for comment.
Still, both the House Committee and the SBA emphasized that businesses with existing SBA-backed loans can still apply for the new ARC loans. The only catch is that they'll have to use their new loans to pay down debt other than their SBA loan.
"Private loans made for any legitimate business purpose -- including credit card debts, bank loans and real-estate loans -- would be eligible for the program," the House Committee staffer said. "The Committee is also pushing the SBA to work with borrowers on loan modification and forbearance to provide relief to small business borrowers who have SBA-backed loans."
Talk back: Have you had trouble getting a loan?
The new ARC loans will be offered on extremely compelling terms for both business owners and lenders. The loans will come directly from banks, but the SBA will offer the banks a 100% guarantee on the loans -- something the agency has never done before. If the business owner defaults, the SBA will repay the bank for the full value of the loan.
The SBA will also fully subsidize the interest on the loans, making them essentially cost free for business owners. No payment on the loans will be due for a year, and businesses will have up to 5 years to fully repay them.
The SBA is still creating the guidelines for the new ARC loans program and doesn't yet know when the funds will be available.
"The details have not been worked out yet," SBA spokesman Michael Stamler said earlier this week. "It a very complex undertaking, but we are hurrying as fast as we can, consistent with making sure we have a thoughtful, effective program in place."
Congress allocated $255 million in the stimulus bill to fund the ARC program. That money will be used to pay for the program's loan guarantees and interest subsidies, so the actual lending volume it will support will be higher. The SBA is still working out the formulas to calculate how far the ARC funding will stretch.
It's also still determining what businesses will qualify for aid. The ARC loans will come directly from banks, and in a Web presentation this week, an SBA official said that only "viable" small businesses will be eligible.
That's an important caveat for a program that offers banks complete immunity against loans going bad. The SBA is already trying to cope with soaring default rates for its traditional loan programs, which only ensure banks against losses on a portion of their losses on qualified small business loans.
"A 'viable' small business is a business that has a demonstrated earnings history and proven record for success that may just need a little extra help to get through a short-term downturn," Eric Zarnikow, the SBA's associate administrator for capital access, said during the presentation. "We will be issuing additional guidance to lenders when the ARC program is released."
While many aspects of the program remain nebulous, small business advocates say it can't arrive soon enough.
"This stimulus, while small, will clearly help many existing small business borrowers to weather the storm," said Edward Tuvin, a former SBA lender who is now managing director of factoring firm Creative Capital Associates in Silver Spring, Md."It sounds like a good plan, but where is it, and why is it so difficult to put it into action?" asked Martin, the owner of Nu Wray Inn, a bed & breakfast in Burnsville, N.C.
Martin, who asked not to have his last name used because he's currently consulting part-time for a bank, has been hit hard by rising operating costs at the same time as sales dry up. To buy Nu Wray Inn three years ago, he took out a private bank loan, one not backed by the SBA. That loan is currently at a 10% interest rate, and the bank has turned down Martin's requests for a modification. "I'm taking money from my other job to make those payments. If it wasn't for that, my business would be bankrupt," Martin said. The SBA's ARC program could help his business -- if it gets moving in time."It frustrates me a lot to see banks and auto makers and these other companies getting a quick response, and small business as a whole getting a very slow response," he said. "The inn I run has been operating since 1833. If I go out of business, that's a hardship to my local community. I'm right in the middle of the town square."

3. Audit: Small biz stimulus relief months behind schedule
The hotly awaited America's Recovery Capital emergency loans program is more than a month overdue, but the SBA says it will have guidelines out to banks within weeks.
By Stacy Cowley, CNNMoney.com small business editor
Last Updated: April 16, 2009: 7:23 PM ET

NEW YORK (CNNMoney.com) -- More than a month after President Barack Obama pledged "aggressive action" to help small businesses struggling to survive the recession, key government relief efforts are running behind schedule, an audit report released Thursday points out.
Plans from the Small Business Administration for an emergency lending program authorized in February's stimulus bill are nearly six weeks overdue, and new programs aimed at strengthening the secondary market for SBA loans won't be operational until June, three months after their deadline, according to a report from the Government Accountability Office.
Congress set extremely ambitious timetables for the new programs it laid out in the American Recovery and Reinvestment Act. The bill gave the SBA just 15 days to issue guidelines for a brand-new secondary market guarantee authority and for a "business stabilization" program that will back bank loans of up to $35,000 for small businesses struggling to make payments on existing debt. Congress also asked the GAO to report back in 60 days on the SBA's progress, but so far, there's little progress for the GAO to audit.
The SBA, whose new administrator, Karen Mills, took office less than two weeks ago, has two stimulus provisions up and running. On March 16, it began waiving fees for participation in its lending programs, and it increased to 90% the portion of qualifying small business loans that it will insure for banks against default. Those moves are intended to increase bank lending to small companies by making the loans safer and less expensive.
But the provision most eagerly awaited by small businesses, the new $35,000 stabilization loan program, is still on the drawing board. To explain to GAO the assortment of missed deadlines, SBA officials pointed to the complexity involved in creating entirely new programs very different from those the agency has previously overseen.
"SBA officials said that the array of requirements under [the Recovery Act] and associated rulemaking deadlines have placed a strain on the agency's existing staff and other resources," the GAO wrote in its report. "Similarly, officials from some trade groups representing lenders and broker-dealers expressed concerns that SBA lacked staffing necessary, particularly in the Office of Capital Access, to carry out [the] provisions."
There's hope on the horizon, though: An SBA spokesman says the emergency loans program will be up and running within weeks.
"I don't have a specific date, but it's weeks, not months," SBA Assistant Administrator Jonathan Swain said Thursday. "We know that there's a lot of interest in the program, and that it can be very helpful to a lot of small businesses around the country."
Dubbed "America's Recovery Capital" (ARC), the program will offer banks a 100% guarantee on money lent to "viable" small businesses struggling to make payments on existing debt, including credit cards, commercial mortgages and previous loans. Businesses will be able to borrow up to $35,000 and can use the money to make debt payments for up to six months. The SBA will fully subsidize the interest on the loans, making them essentially cost-free for borrowers.
Those extremely attractive terms have small business owners clamoring for details on how to apply. Mack Sullivan, founder and publisher of Due South Publishing in St. Simons Island, Ga., says he's been to his local SBA and his bank to press for information, but found no one with any knowledge of how the ARC program is progressing.
"The frustration is, where does it stand? When can we expect to learn more? I thought there was a deadline set by Barack Obama," he said. "It's one thing to not meet deadlines, but it's another to just go dark and leave everybody wondering."
Talk back: Could you use an ARC loan?
Founded six years ago, Due South Publishing produces local guide books that are distributed in hotels and tourist hot spots around St. Simons Island. The company is generally cash-flow positive, Sullivan said, but it hasn't been immune from the recession's effects. Sullivan has taken out home-equity loans and borrowed against credit cards to finance his four-person venture.
"A $35,000 loan would allow us to pay off some credit cards, not worry about our credit lines being cut, and ride through this economic downturn for another 12 months," Sullivan said. "As an entrepreneurial small business person, I wouldn't normally find myself waiting for something the government is doing, but these are such extraordinary times."
New business owner Erika Sanchez is also looking for the kind of immediate help the ARC loans are designed to provide. Sanchez and her husband opened a design and printing business, Pronto Graphic Designs, in Dallas in January. Sales have been surprisingly strong: Sanchez already has a client roster of about 40 local businesses and enough work that she'd like to hire an additional designer and expand her office space. Working capital is the obstacle.
"There's more equipment that we need to buy," she said. "We have a lot of work, and it's slowing us down that we don't have the machinery for it."
Congress is pushing for action as fast as possible from the SBA. "The single biggest challenge facing most small businesses right now is access to affordable credit, which is why it is vital that the SBA get these programs up and running immediately," Rep. Nydia Velázquez, D-N.Y., the chairwoman of the House Committee on Small Business, said in response to the GAO report. "With every day that goes by, more small businesses are being forced to close their doors."
The SBA is working "diligently and expeditiously" to implement all of the Recovery Act provisions, SBA Administrator Karen Mills said in a written response to the GAO's report.
"A number of these programs require sophisticated financial modeling and/or legal documentation, and present challenging policy or structural issues, and therefore require additional time to implement," Mills wrote.
While the GAO noted the SBA's blown deadlines, it included no criticism of the agency's efforts or recommendations for improvement.
"In this case we did not see clear criteria for making recommendations," report author William Shear, GAO director of financial markets and community investment, said in an interview after the report's release. For years the GAO has been issuing audits drawing attention to SBA staffing shortfalls and slipshod management of various programs the agency is tasked with overseeing.
"We think our major contribution here was to provide information to Congress and others on what the SBA's challenges are that have affected the agency's inability to meet the schedule Congress set," Shear said.

Malaysia SME Blog

Check this out New Straits Times has a Malaysia SME blog Amazing!
Can somebody check out the Credit Bureau that they have just announced?

SME definition

Came across a pretty good article on Defining SMEs and some of the considerations. Perhaps one of us can do a powerpoint deck to summarise key findings here?Also good to check out all the other references as well.

Black Swans

The Reverse Black Swan, Part II

from BusinessWeek Online -- Economics Unbound by Michael Mandel, 20 Apr 09

In the Reverse Black Swan Part I, I drew three conclusions from Taleb's work.

1) Unexpected technological breakthroughs are possible. That's good

2) The timing and nature of the breakthroughs cannot be controlled. That's bad

3) Unexpected large bad events are possible as well. That's bad. In fact, we can get bad events which have as big an impact, in the negative direction, as the technological innovations.

These principles help frame a very important policy question: How can we design our economy and financial system to decrease the odds of the negative Black Swans wiping us out, while doing the most to maximize the positive Black Swans of technological change? Or to put it another way, what kind of regulation do we need?

Reading and thinking about Taleb leads me a different answer than I would have given 6 months ago. Yes, we need more regulation--but it should be 'regulation by simplification' rather than 'regulation by supervision'.

More Bad News for the Trade Bubble

I like what this article says : Either governance becomes more globalised or finance less globalised.

===============

More Bad News for the Trade Bubble

from BusinessWeek Online -- Economics Unbound by Michael Mandel, 16 Apr 09

I was readily favorite bloggers, Brad Setser, and he had this to say:

The FT – more than most – has recognized the challenges created by a global banking system and national regulation. A recent leader argued: “The current mismatch of globalised finance and national governance is unsustainable. Either governance becomes more globalised or finance less globalised.“

My guess is that finance will necessarily become a bit more national. The current crisis has shown than highly leveraged intermediaries require a government backstop, and for now there is no global taxpayer willing to bailout global banks that go bad.

Now, I'd argue with Brad about the FT--I've written about the importance of having a global central bank multiple times over the years. For example, back in 2006 I had a cover story "Can Anyone Steer This Economy?" where I wrote:

No matter which party you belong to, or which Big Idea or school of economic policy you subscribe to, one thing is clear: Globalization has overwhelmed Washington's ability to control the economy. Whether you're a Republican supply-side tax-cutter, a Wall Street deficit hawk of either party, or a Silicon Valley techie type, your preferred levers of economic policy just don't work as well as they once did.

and

a Big Big Idea--probably too big to even consider right now--would be the creation of global institutions for governing the world economy. History tells us that market economies are prone to financial crises, to which the only solution is a strong central bank. During the Asian financial crisis of the 1990s, for example, the Fed played that role.

But with the explosive growth of China and India, that sort of role for the Fed is no longer feasible, and no new institution has arisen to take its place. As former Treasury Secretary Robert E. Rubin, now a top official at Citigroup, recently said: "There's no policy mechanism for bringing together the countries that really matter in the global economy." The best solution would be some sort of global central bank with real powers--but that's not going to happen until there's a big enough financial crisis to truly scare people.

This was written in 2006. Is this crisis big enough to scare countries into a global central bank?

No. No. No. The U.S., utilizing its privileged position as the world currency, has one get out jail free card, which it is playing now. This crisis is more like to end the way that Brad says above--a retreat from the globalization of the financial system, which will mean a retreat from unbalanced trade (which requires massive cross border capital flows).

It's worth repeating that. You need to have a global financial system to support the cross-border capital flows that come along with unbalanced global trade. So if we don't have a global financial system...which we won't...we will inevitably end up with more balanced trade, by one way or another. Poof. Wave a big part of the trade bubble good bye.

SME Funding Options

Businesses abandoning the banks

Mike Symes - Tuesday 07.04.09, 11:12am

http://www.smebusinessnews.co.uk/businesses-abandoning-the-banks/216/

New research just published reveals a massive increase in credit refusal for businesses, driving owners to seek out alternative funding options.

The independent study of 1000 UK accountants has revealed that the number of business clients being refused finance by traditional lenders this year has almost tripled. Such a dramatic rise in the level of credit restrictions is stimulating renewed interest in alternative forms of finance.
 
Previous research in 2008 indicated that less than a fifth of accountant’s clients had been refused credit from traditional sources such as banks. However in just 12 months, the downturn has had a major impact with refusals rocketing to nearly two thirds (58 per cent).
 
Other key findings from the research include:
· Businesses in the North East are suffering the most with a reported 73 per cent of accountants’ clients having been refused credit this year, compared to 48 per cent in the South East
· Amongst the accountants surveyed, the recruitment industry (24 per cent) is seen to be suffering the most from financial difficulty, followed by construction/property (23 per cent). Retail Services are perceived to be the most stable
· Seventy-one per cent of accountants have seen an increase in clients suffering with bad debt, with over two thirds (70 per cent), believing services such as Bad Debt Protection are more important for business today than a year ago.

With banks proving less than supportive, this is a good time to considerindependent financing options such as invoice discounting.

UK Banks and SMEs in Tough Times

From The Sunday Times

March 29, 2009

Banks let 120 small businesses go under every day

The government claims its Enterprise Finance Guarantee scheme is working but small firms insist the banks are still applying it unfairly

Rachel Bridge

When Frank Stevens asked Barclays bank for a £500,000 loan to help pay for a new showroom at his boat business in Weymouth, the bank said yes — on condition that he first deposited the same amount, £500,000, at the bank.

Stevens — whose firm, Blue Water Horizons, is just yards from where the 2012 Olympics sailing events will take place and so hopes to benefit from the surge in visitors — was astounded by the bank’s response. He said: “I couldn’t believe it when they told me. If I had the money in the first place I wouldn’t need to go to the bank to borrow it.”

His experience is by no means unique. Happily for Stevens, the money he needed was to expand his already thriving business. For many other small firms, though, the money they seek will spell the difference between survival and disaster.

When the government unveiled its Enterprise Finance Guarantee (EFG) scheme a few months ago to help small firms that were facing temporary cash-flow problems, there were loud cheers from Britain’s small-business community.

With delayed payments from customers who owed money adding to the problems they were already experiencing in the face of declining sales, the promise of an instant injection of cash to tide them over a difficult patch was extremely appealing. With the government pledging to back £1.3 billion in loans and overdrafts with a 75% guarantee so as to encourage banks to lend, they thought they could at last begin to sleep more easily.

Sadly it hasn’t quite turned out that way. Britain’s high-street banks are still refusing to lend to small businesses and the consequences are proving catastrophic. About 120 small firms are going bust every day and thousands more are teetering on the brink of bankruptcy.

As a result 36,000 small firms are expected to close down this year, according to BDO Stoy Hayward, the business adviser, causing the loss of 150,000 jobs. And a large part of the blame, claim small firms, lies squarely with the banks, which are putting up every kind of obstacle to prevent small firms getting the financial help that they need.

Over the past few weeks The Sunday Times has received dozens of e-mails from small-business owners who have been refused a loan under the EFG scheme or who are struggling with the hurdles involved in accessing it. And this is just the tip of the iceberg.

Steve Hay at the accountancy firm 2020 said: “Every one of my clients who has applied for EFG has been knocked back. I haven’t heard of anybody getting a loan under this scheme. They get to a first meeting with the bank and that is as far as it gets. The banks have no interest in lending money.”

Indeed, anecdotal evidence suggests that many of the loans that are being made under the EFG scheme are not actually new funding at all, but merely a transfer of an existing loan or overdraft facility with a small top-up into the scheme.

The banks themselves are certainly not going out of their way to be helpful. Small businesses applying for funding say that getting a response of any kind can take several weeks, with letters going unanswered and their phone calls not returned.

David Hallett is managing director of Carrot Fitness, a health and fitness club in Stourbridge, West Midlands. He said: “We thought that the introduction of a new scheme would help, but it hasn’t made a blind bit of difference. The bank doesn’t return our calls and their attitude on the telephone is not at all helpful.”

Small-business organisations say firms, many of which have been with the same bank for years and know the manager personally, feel betrayed by the shift in attitude.

Stephen Alambritis at the Federation of Small Businesses (FSB) said: “Firms are feeling let down by a bank manager who wanted to know them for the past 10 years but now all of a sudden isn’t returning their phone calls.”

One of the biggest bones of contention is that even though the government has said that banks should not be taking small-business owners’ homes as security for a loan or overdraft made under the EFG scheme, in practice this is exactly what they are doing.

Huw Radley has been trying to negotiate an overdraft facility of £250,000 with Royal Bank of Scotland to support his business Solent Composite Systems, based near Portsmouth, which provides technology and manufacturing for the energy industry. Having initially been prepared to provide an overdraft backed by an unsupported personal guarantee, RBS is now demanding that he put up his home as security, something Radley is refusing to do.

He said: “Quite apart from the fact that we will never do it on that basis, this approach is specifically prohibited within the EFG scheme. However, no amount of discussion or argument will get RBS away from that stance, and of late we are barely on speaking terms as a result of their endless intransigence. We have been in business for five years, and until now have never had any need for any loans. I’m incredibly frustrated and angry.”

Aiden Kelly, who owns Pearce Security, a specialist manufacturing business in Gateshead, has also found himself facing demands from his bank to put his home up as security. He applied for a £100,000 loan under the EFG, of which £30,000 was to replace an existing unsuitable factoring agreement, to help him meet new orders. But he was told by his bank that he would be required to put up his home as security before it could proceed with his application.

Kelly said: “I am frustrated and angry, partly because what the government is saying and what the banks are saying is 100% contradictory. The government can say all it wants about helping small businesses, but if the banks don’t want to do it then they’re not going to. That is the problem.”

Banks are also demanding a whole new raft of personal details and information to support an application for funding that would never have been required in the past.

Roger Paine is the managing director of Video Meeting International, a small video-conferencing business based in Cheltenham. When he unsuccessfully applied for a £30,000 loan under the EFG, he discovered that the bank was more interested in looking at his personal circumstances than the business plan and cashflow projections he presented.

He said: “The banks are not basing their lending decisions on the viability of the business, the business expansion plans, cash-flow projections and current and previous trading history as they should be doing, and as the government states that they are, but on irrelevant personal credit information.

“Apparently this is a new procedure that all the banks are doing without letting businesses know at the beginning of the scheme. The EFG scheme is a complete and utter joke and a waste of time and doesn’t help small businesses that desperately need funding now — not in five weeks’ time. It is a complete load of government spin.”

Meanwhile, the government has made a difficult situation a hundred times worse, say small firms, by suspending the highly popular Small Firms Loan Guarantee (SFLG) scheme when the EFG was launched.

The SFLG scheme was run on similar lines to the EFG, but without the need for such stringent security requirements. And while it was privately loathed by the banks that had to administer it, it was much loved by small-business owners for whom it made a real difference and was seen as having played an important role in supporting small firms as they grew.

In the past the SFLG scheme — in which the government guaranteed 75% of loans made by the banks to small businesses of between £5,000 and £250,000 for up to 10 years — helped small businesses such as The Body Shop, Waterstone’s and Coffee Republic to expand and grow.

Suddenly axing it without warning has delivered a horrible double whammy to small firms, which had been expecting to be able to access it and benefit from it this year. For them the government’s actions have made their situation infinitely more precarious and brought the prospect of insolvency that much closer.

Hay at 2020 said that the loss of the SFLG had delivered a real body blow to many small businesses.

“The SFLG has been around for many years and it has always worked. It was a real shot in the arm for some firms. The rules were clear and there for all to see, and to suddenly stop that scheme and replace it with something else is absolutely crazy. All they needed to do was change the rules of the old scheme very slightly so the banks could lend more or to other businesses.

“There is no rhyme nor reason to it. A lot of small companies are really going to struggle this year without the SFLG. Instead of making it better, the government has actually made the situation 100% worse."

John Evans is director of JRE, based in the Midlands. He said that his firm had in the past received funding from the SFLG and paid it back in full, but he was refused help under the EFG scheme.

He said the provision of the EFG should be taken out of the hands of the high-street banks. “I suggest that we tell the banks to repay all public-

provided funds and set up the Post Office with the capability of putting these monies into the community by the provision of lending by mortgages and overdrafts with proper commercial rules,” he said. “They have the regional infrastructure and could occupy the redundant bank buildings.”

Small businesses are also angry that the government has failed to impose specific controls and conditions on the way the banks lend money under the EFG.

Alambritis at the FSB said that although the government had attempted to do the right thing by making £1.3 billion available for small firms, it had made a fundamental mistake by not putting more conditions in place as to how the banks should distribute it.

“The government had good intentions to bail out the banks in order to bail out small businesses, but what it should have done is been a bit smarter and paid the banks in instalments, pending evidence that they were passing on the money to small businesses.

“The banks are hoodwinking the government by allowing their branch managers to turn people away. The frustration of small businesses is that the banks have been bailed out and helped, and so small businesses then had their expectations raised that it was their turn to be helped out by the banks, but that didn’t happen.”

Justin Hunt, who owns a small business doing commercial contracts for grounds maintenance in East Anglia, thinks the banks and the government could be doing a lot more to support small businesses.

He said: “Britain is not a business-friendly country. When push comes to shove, it is the individual who takes the risk — all of it and with absolutely no help from government or any banks.

“Help doesn’t have to be financial — it could be tax breaks or an easing of red tape, in particular health-and-safety bureaucracy or even bringing in legislation to force companies to pay their bills on time. I get fed up hearing idiots from the government who have never taken a risk in their life or even had a vaguely productive job, telling us how things should be done, or vacillating about how much the government is doing to help the small-business community that they always proclaim is the lifeblood of the economy. It’s nonsense and leaves me in despair.”

Hugh Scott, managing director of data-leakage-prevention firm ASL Security, which has 12 employees and an annual turnover of £1m, is also disillusioned with his bank.

He said: “I submitted a business plan to HSBC before Christmas 2008 and the local commercial manager came to see us and agreed a £50,000 overdraft. I offered a personal guarantee and a debenture on the company. This was all agreed and the security was taken in February. No sooner was the security in place, however, than HSBC changed its mind, blaming the EFG scheme, something it had never mentioned before and offered us only a £20,000 overdraft.

“On the back of the agreed facility, I took on two new salesmen. HSBC is unwinding the security and has refunded all charges, but what a waste of time and effort.”

Frank Stevens, meanwhile, who had hoped to build his new showroom and visitor facility at his Weymouth boat business in time for the Olympics, believes that the real problem is that local bank managers are no longer allowed to make lending decisions.

He has already obtained full planning permission for the new building and amassed a deposit of £250,000 to put towards the £750,000 cost — but without a £500,000 loan from the bank is not able to get started.

He said: “The banks are just doing everything in their power to bolster their balance sheets. I had a meeting with the regional director and he admitted that they were not interested in taking on any new business. I feel very frustrated because the problem with the banks is they are just taking a global view and they are not looking at individual cases. In our case we are sitting literally 300 yards from the site of the sailing Olympics. We might be a bubble that is doing extremely well, but the banks should take account of that.”

Small firms feel that the high-street banks are letting them down in other ways, too. A survey of small firms carried out by the UK200 Group, an association of independent professionals including lawyers and accountants, found that almost half of the respondents said their banks had imposed changes to overdrafts or loans, with 27% claiming that these changes had taken place without notice. Of those surveyed, 13.5% said they had had their overdraft or loan facilities removed altogether.

And a recent survey of 6,000 small businesses by the FSB found that 18% of those taking part said there had been an increase in bank fees compared with last year.

Most respondents said that the interest rate they were being charged on overdrafts and loans was being kept at between 5 and 10 percentage points above Bank rate. A third of the small firms surveyed said their bank was less helpful now than it had been before the credit crunch began.

Small-business organisations are now calling on the banks to act fast to prevent the terrible consequences of their continuing failure to lend.

Alambritis said that the expected loss of some 36,000 small businesses this year would be a tragedy for the whole country. “When small businesses close down they rarely reappear. So you lose that diversity and that choice for consumers.

“Big companies like car giants will close branches and factories and downscale and stop making a certain car. But a small business just closes down and the livelihood of the entrepreneur goes as well.”

Phil Orford, chief executive of the Forum of Private Business, added: “The consequence of small businesses not being able to access adequate finance from lenders is stark — a great many more could be forced to close. Cash must start flowing for the sake of small businesses and the economy as a whole. Time is of the essence.”

Lloyds gets too personal

Lynda Gauld owns public-affairs consultancy Bacchus in Edinburgh.

She contacted her bank, Lloyds TSB, to request a small increase of £3,000 in her business overdraft, only to be told that it would not be approved because she was overdrawn on her personal account with the same bank.

She said: “This was not an issue when I had the initial business overdraft and a business credit card agreed a year ago. We have a cash-flow blip just now and corporation tax due, but the bank wanted me to use the remaining funds in the business account to settle the personal account, or to take out a repayment loan to pay off the personal-account overdraft. I’m very annoyed.

“Instead of assisting a small company that is solvent and in good shape, with an additional £60,000 of contracts signed up and not yet started, with great prospects, we get our personal accounts raked over. My personal financial standing should not have any bearing on my business account, which is exemplary. I have banked with Lloyds TSB for 30 years but am so annoyed I am now in the process of moving my business account elsewhere.”

I’m disappointed and let down by the banks

John Potter owns three Area clothes shops in southern England selling ladies’ fashionwear and accessories, which between them generate a turnover of more than £1.5m. He applied for a loan under the Enterprise Finance Guarantee scheme from Barclays to get some additional working capital but was turned down.

He had been asked by the bank to provide valuations and details of existing mortgage commitments on the directors’ main homes, even though the government has expressly said that banks are not entitled to ask for security based on the owner’s main residence.

“I feel disappointed and let down by Barclays,” said Potter. “I also feel that they are not operating in the spirit of the scheme that was intended by the government. We are very happy to provide full personal guarantees because we believe in the business so much. But I am not happy about Barclays asking for mortgage security on my home, which is specifically excluded from the scheme.

“Clearly the scheme is not working. The government may have good intentions, but I think that the money that has been provided to the banks is just not getting through to small businesses.”

THE ENTERPRISE FINANCE GUARANTEE

THE Enterprise Finance Guarantee scheme was set up by the government this year with the aim of helping viable small businesses that were facing temporary cash-flow difficulties — because of late payments from creditors, for example.

The funding of £1.3 billion, which can be given in the form of loans or overdrafts, is 75% guaranteed by the government and is available to small businesses that have a turnover of up to £25m.

The loans, which are made by high-street banks, can vary in size from £1,000 to £1m and run for a period of up to 10 years.

The government has expressly stated that banks are not allowed to demand a family home as security. They are, though, entitled to ask for personal guarantees of up to 100% from the owners of the business.

Baroness Vadera, the minister for small business, said that the scheme — part of a package of funding measures announced by the government — had so far received eligible applications totalling £115m.

With applications running at a rate of £30m a week, the £1.3 billion should be distributed within the year, as planned.

WHAT FIRMS NEED: OUR MANIFESTO

A speedy response. High-street banks are taking six weeks and longer to respond to applications for funding under the Enterprise Finance Guarantee scheme. But small businesses often need the money quickly to pay wages at the end of the week or buy stock to fulfil orders. At the very least the banks should answer their letters and return their phone calls.

A firm commitment from the banks that they will stop demanding security over business owners’ homes, in line with the government’s recommendations.

Greater power to be given to local bank managers to make lending decisions instead of a faceless credit controller at head office. Branch managers know their local market and the businesses that are operating in it. Also, the ability to build a personal relationship between a business and the bank benefits both sides.

Proper advance notice that existing banking arrangements are about to be changed or new charges introduced.

A greater level of understanding from the banks about the challenges small businesses are facing today. Firms that may have been doing well only six months ago ould be struggling now through no fault of their own and they need practical help, not lectures or blame.