Why banks are not providing the right service for small businesses

James King, founder of venture capital firm Find Invest Grow (FIG), discusses the role of banks should play and why it needs to be easier to withdraw money from investments.

UK banks are still recovering from taking on too much risk and no one really benefits from a risky banking sector. When it comes to pre-revenue businesses, the bank manager is not the best option and other sources for equity finance such as venture capital firms and angel investors are, in my view, much more appropriate.

Running a company and managing finances is not easy for those with little experience. Entrepreneurs and start-ups need support with their finances and need to fully understand the array of products available to them such as factoring and invoice financing, which could make a huge difference to cash flow. This should be the banks’ role.

They need to focus less on giving generic business advice and more on finding exactly the right product for their customers. For example, a bank that advises business clients to move money between accounts to avoid overdraft charges, in my opinion, would provide more value than one that tries to teach its customers about online marketing strategies or PR.

For start-up businesses, getting a business bank account, debit card and online services set up is often a process that takes far too much time and can leave them exasperated and without access to the necessary facilities. It needs to be simpler and quicker which, of course, would be beneficial for the banks too.

Getting money out

The UK does a lot to encourage money going into start-ups. But that is only half of the equation. We need to encourage exits as well, making it easier for investors to realise money from investments. The US market is far more liquid, in part because of the culture, but also because of the availability of funds.

So, for example, if relief on capital gains tax (CGT) under EIS were made available after 18 months (rather than three years as it currently stands), it would give greater flexibility to investors by improving the pool of funds available and would prevent companies being artificially held back from exits by investors seeking a favourable CGT position.

In addition, the dilution effect that so often occurs when private equity or venture capital firms come onto the scene also needs to be decreased. We’d like to see the CGT relief on angel investments attributed to the shares rather than the individual. Making the CGT relief inheritable in this way will improve the secondary market for start-up equity by providing tax incentives for the purchase of existing shares rather than just the creation of new ones. It gives large-scale PE or VC investors an incentive to buy out the initial Angels’ EIS-qualifying shares rather than diluting them into oblivion. This in turn, would make investing in start-ups more attractive, bringing more capital to the market for them to access.

In the next article, I will look at the role our education system can play in helping nurture young entrepreneurs, equipping people with the right skills to succeed in business and bridging the gap between education and commerce.


James King

Founder & Director of New Model Venture Capital

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