The Bank of England last week published its sixth annual report on Finance for Small Firms.
The report identifies some key themes that have emerged in the provision of finance to small firms since the last recession. While this report, like previous reports in this series, considers a range of issues faced by the small firms sector - addressing aspects of finance, public policy and business support - it is focused primarily on financing issues.
The current slowdown in economic growth, and expectations of below trend growth throughout 1999, have had a significant impact on business confidence in the small firms sector. While the sector as a whole appears more resilient than in previous economic cycles, it is important to note that many businesses are concentrated in more vulnerable sectors such as construction, business services and wholesale/retail.
The external environment is challenging for small firms not only because of the cyclical downturn but also as a result of changes caused by the introduction of the euro and the preparations required ahead of the Year 2000.
The key themes identified in this report are:
many small businesses are now more appropriately financed than they were in the early 1990s. Overall, the level of small firms indebtedness has fallen, while the range of types of finance used has increased; relationships between many small businesses and their finance providers, particularly the banks, have improved significantly since the early 1990s and continued to do so in 1998. There is now a more open, two-way exchange of information between the banks and their small business customers; the quality of the small business stock is generally higher now than in the late 1980s, when a combination of factors resulted in some non-viable small businesses being established. Since the last recession entrepreneurs have been better prepared when establishing new businesses.
Given these developments, small businesses should be somewhat less vulnerable to a downturn in the economy than in the last business cycle. This reduces the level of risk faced by finance providers, particularly the banks, in their exposure to this sector. Banks are, however, alert to the possible deterioration in the current climate.
Copies of the Finance for Small Firms are available from the Public Enquiries Group, Bank of England, EC2R 8AH
(Tel: 0171 601 4012; Fax no: 0171 601 5460).