Red tape and the SME

Liz Fisher finds that SMEs feel they're being bogged down with too much paperwork

The past two years have been a rocky time for all businesses. The attack on the World Trade Center marked the beginning of an economic downturn across the developed world but other events, such as the SARS outbreak and, in the UK, the foot-and-mouth outbreak, conspired to create even more uncertain economic conditions. The tourism industry, of course, suffered terribly. Even so, economists and governments have been keen to label the time an 'economic downturn' rather than a full-blown recession.

Irrespective of the label, there is plenty of evidence that many larger companies have suffered as a result of the business climate. But have the conditions also affected smaller businesses?

The evidence is contradictory. A survey by American Express Small Business Services, carried out in September 2003, found that more than half of the UK's small businesses were concerned about the possibility of a prolonged downturn in the economy over the next 12 months. But in the same month another survey by the Bank of Scotland suggested that the vast majority of owner-managers were optimistic about the future of their business. The owner-managers questioned said that their businesses were doing well and that continuing low interest rates and stable inflation were the key factors underlying their optimism. More than three-quarters of those questioned said that they believed that their business would be better off (or at least remain on an even keel) by the end of 2003, and a quarter were planning to recruit more staff. Only 23% of those questioned said that their business was worse off compared with this time last year. 'The majority of small businesses remain very positive about their own business' ability to ride any downturn,' said Tom Abraham, managing director of sales and customer relationships for BoS Business Banking at the launch of the survey.

Chris Lane, a partner with small business specialist adviser Kingston Smith, agreed. 'The business conditions are fairly tough at the moment, partly because organisations of all sizes have delayed investment decisions because of the Gulf War and so on, and that has a knock-on effect,' he said, 'but I wouldn't say that small businesses are having a particularly hard time.' There is a deal of uncertainty about the future, he added, and business had slowed down in many sectors as usual over the long hot summer. 'Even so, we are seeing quite a bit of optimism coming through.' Some businesses are even thriving. 'One of my clients sells sunglasses and has had an outstanding summer, and I know of many pubs and restaurants that did very well during the hot weather,' said Lane.

Even so, smaller businesses have a number of deep-rooted concerns, particularly about the increasing amount of legislation that they are having to tackle. The American Express survey revealed that 73% of small businesses were spending more time on administration and paperwork than they would like and 37% said that they were spending up to five additional hours a week on administration. Over a third said they were spending up to 10 hours a week - or 20% of the entire working week - dealing with paperwork. Over half of those questioned said that red tape was the biggest hindrance to an enterprise culture in the UK.

The amount of bureaucracy and legislation that small businesses have to tackle remains a serious concern for the sector. And small business advisers say that red tape is more than merely inconvenient. Increasingly stringent employment legislation, that has swung the pendulum of power towards employees rather than employers, is a particular bugbear. 'Everyone moans about the employment rules,' said Chris Lane, 'and we have seen a greater incidence of staff suing their former employers for things like wrongful dismissal.'

High insurance

Insurance costs, too, are a cause for concern. Nick Hood, senior London partner with insolvency and corporate recovery practitioner Begbies Traynor, has warned that rising employers' liability costs for small and medium sized companies are causing serious problems for some SMEs. The Office of Fair Trading said in June that employers' liability insurance rose by an average of 50% during 2002 and some companies have complained that their premiums have risen by as much as 700% over 12 months. One small private company, Betws Colliery in West Wales, warned earlier in the summer that it may have to close because it can no longer afford its business insurance premiums.

Hood warned that many small businesses could go bust as a result of the increases in their premiums. Hood cites one example of a construction firm that has seen its premiums increase from £30,000 in 2001 to £140,000 in 2003. 'We think that the insurance sector is beginning to ration the amount of cover it puts up and that means that the smaller businesses are the ones that suffer,' he said. 'Large companies have the resources and the time available to demonstrate to their insurance companies that they have risk management controls in place. It's extremely difficult for a small manufacturing company, say, to show that it is able to manage risk.' Those businesses operating in 'risky' areas - such as construction, food processing and toy manufacturing and importing - and those with a poor insurance record are particularly vulnerable.

The extent of the problem is as yet unclear, but there is anecdotal evidence from one insurance broker that up to 2,000 smaller businesses have failed to renew their employers' liability insurance in the past year. 'Companies are not permitted to operate without insurance, which suggests that they have closed down,' said Hood.

Even so, Begbies Traynor has seen fewer small company liquidations than it did during the recession of the 1990s. 'I do think that UK Ltd, as opposed to UK Plc, is suffering. It has a nasty background infection that was caused by everything from the employers' liability insurance problem to the rise in National Insurance rates, to the knock-on effect of 11 September,' said Hood. 'It is quite surprising that there are not more failures.' The explanation, he added, lies in the fact that banks and companies advisers are able to spot companies in trouble much earlier on. 'At the lowest point of the last recession around one in six businesses were going under. At the moment it's more like one in 31. Banks have become very good at recognising problems earlier and there are many more tools available, such as specialist funders, to help companies in trouble.'

In an ideal world, of course, smaller businesses would not need such specialist help. Small business organisations hope that their message on red tape is continuing to be heard by the Government. In the meantime, there is a renewed sense of hope that the worst of the downturn is over, as the stock market begins to rise again. Optimism among larger companies and consumers can be infectious - perhaps that will be enough to restore an across-the-board confidence in the SME sector.

Liz Fisher is a freelance journalist specialising in business and accounting issues.