Comment: New thinking is needed for small business in the Budget

We have learnt many lessons since Covid-19 came to our shores, not least the importance of cherishing time with family and friends and the need to support one another as we battle the pandemic.

Awful stories have been told daily by the media of the shattered dreams and businesses of our local dry cleaners, pubs, restaurants and many others. We come across this first-hand when we bump into local business owners as we walk down the street, go into empty shops or watch them sadly locking up their premises after another day of poor trading.

No one could have expected this pandemic. The government has provided money to try to keep firms alive and supplement lost wages. But we must learn to be more prepared.

In this year’s Budget, we need an innovative approach for these small and medium firms to be better able to survive the next crisis. Remember, these are the businesses that in good times pay the wages of one million of our citizens. As the long-term recovery agenda will be set in the National Recovery Plan, it must put SME resilience at its heart.

We now know that companies need better savings and reserves to survive big shocks. They have to act to protect themselves better too.

At SME Recovery Ireland, an umbrella group representing small business, we have called for an SME rainy-day fund, operating like an SSIA (special savings incentive account) for SMEs, to help increased micro and small businesses savings.

The government also has a role to play. It should establish a fund with money put aside in advance so it is available to help businesses when another shock outside of their control hits. The question of another shock hitting the SME sector is not a matter of if, but when.

These local and small businesses are at the core of our social fabric. They employ more than one million people across our country, far more than their more celebrated foreign direct investment cousins, and not just in larger urban areas. They typically buy local, employ our kids for their summer holidays and put their hands in their pockets when the local charity comes knocking.

And most of their owners, despite perceptions, are not rich. Many survive from year to year and try to pull out a salary to feed themselves and their family. Their business is likely to be their pension. If it falls apart, they have nothing but unpaid bills.

These business owners are like so many of other households across the country where people working for a salary know what it is like to make ends meet, month to month, and to be terrified when there is a strange noise coming from the car in case it breaks down and there is no money to fix it to get to work.

We’ve talked for years about the equity gap in our SMEs. Now we have proof that these firms tend not to have enough savings to cope with big hits to cashflow. We also know the government did not put aside enough money from business taxes during good times to give extra help when it was needed.

The time for tinkering is over. It is time to do something big enough to fix the problem before it comes back to harm us and these businesses again.

During the last crisis, I co-chaired a high-level expert group for the European Council where we identified the need for greater sources of equity for SMEs in Europe. In our report, accepted by the Central Bank governors and EU finance ministers, we concluded that “for companies to grow, other forms of equity need to be available”.

“This is also particularly important where recent years of low growth or recession bound economies have depleted the working capital of businesses,” we said.

Now, we are in a situation where firms need equity just to survive. The recovery plan to accompany Budget 2021 should have a specific focus on building up the resilience of firms.

It is time for new thinking. We will all benefit. And there are some really important measures that need to be put in place, some of which are listed below.

SME state agency: The government should establish a state agency with specific responsibility for the SME sector. Small businesses need a dedicated champion to understand and solve their problems within government, whether it is red tape, procurement, funding or education issues.

SME rainy-day fund: Small businesses should be incentivised to set aside 1 per cent of their revenue on an annual basis as a rainy-day fund. This should be matched or part-matched by the government. Each SME’s rainy-day fund would be held by a third-party bank or manager to be kept safe until needed. Our banks could be asked to commit to provide capital and charge lower interest rates for firms which have built up this fund.

National SME resilience fund: The government should set money aside to be accessed by viable SMEs that fall victim to a force majeure. It could be administered by the National Treasury Management Agency and funded from windfall corporation taxes or EU funds like those for Brexit shocks.

National Training Fund: Funding should be provided for local enterprise offices to develop training schemes for better financial literacy among firms and business owners.

Simplified R&D credit: There should be a simplified tax credit for innovation. This is critical as firms need to change their business models, access new markets or develop new products.

In his pre-budget letter to Paschal Donohoe, the Minister for Finance, Gabriel Makhlouf, the governor of the Central Bank, said there needed to be “a continued focus on building resilience to future shocks, such as the ongoing impact of the UK's withdrawal from the EU, the looming challenges of international tax reform, climate change and, in the longer-term, demographic change”.

We are dealing with the impact of Covid-19 now, but we also need to prepare with bold steps as the challenges ahead are daunting.

John Moran is chair of SME Recovery Ireland. The group‘s full budget submission is available at smerecovery.ie