European Small Business Act
Comments from ACCA
(Submitted as an online questionnaire)
March 2008
GENERAL QUESTION
What are the most important problems that European SMEs are facing and which prevent their growth? How to tackle them? (optional)
European SMEs are a heterogeneous group with many different needs and difficulties. This makes it difficult to characterise their problems definitively. However, it is clear that there are three main areas within which small businesses face difficulties. These are regulation, access to finance and the provision of effective business support.
With regard to regulation it remains clear that the needs of small businesses are not fully understood by policymakers. This is particularly true when looking at the disproportionate impact of regulation on small businesses; this impact is not simply due to economies of scale but also has an impact on management time and advisory services and greater opportunity costs. An OECD survey of 11 countries showed that certain regulations can cost small firms up to five times more per employee than larger firms. By working closer with small businesses and their advisers, policymakers will be in the position to get a better understanding of the regulatory needs of small businesses. Mechanisms to improve the regulatory environment for SMEs include improving the understanding of the impact of regulatory change on small businesses, the consideration of exemptions or a phased introduction of regulations for small companies and the provision of clear and reliable guidance. Ultimately all regulations seek to change behaviour and officials should strive to change behaviour and meet defined outcomes with the lightest possible touch.
In relation to access to finance, it is clear that the vast majority of SMEs are generally able to access the finance they need to fund their business, usually debt finance from Banks. Whilst there may be problems with regard to personal collateral, research suggests that generally this market seems to work. However, it remains the case that firms with certain characteristics do find it harder to access the finance they require, or that they are discouraged from applying for this finance. The groups that tend to struggle are; female entrepreneurs, ethnic minority entrepreneurs, high growth businesses and business with a reliance on knowledge based assets. The difficulties these groups face therefore need to be addressed by different policy mechanisms.
The success of high-growth small businesses and high technology small businesses are critical to the region's ability to maintain and strengthen its economy. Evidence suggests that high growth firms, with turnovers of between £250,000 and £5 million suffer from a finance gap; they struggle to get either equity finance or debt finance. This gap prevents growing SMEs from accessing the finance they need to create additional wealth and employment.
Support for enterprise and small businesses represents a substantial part of many countries public spending. In the UK for instance it equates to £7 billion per annum. However, there is often concern that this significant spending is not delivering value for money. Governments and institutions offering business support must be clear about the objectives they are seeking to achieve. They must offer robust evidence that they are acting in areas of market failure; precious Government resources are wasted when they act in spheres adequately served by the private sector. In the UK it has been estimated that approximately one third of business support budget is lost in administrative costs, which raises the question whether it represents good value for money. Governments and institutions should consider delivering schemes through whoever is best equipped to meet the needs of SMEs and this may include using existing private sector organisations. Finally Government and institutions should make an independent and effective evaluation of the success of the programmes and adequately respond to scheme's shortcomings.
The following list of policy areas has been developed to get more specific feedback on a number of issues. However, it does not prejudge the structure of the future “Small Business Act” for Europe, nor is it exhaustive.
1. BETTER REGULATION FOR THE BENEFIT OF SMES
The Commission has an ambitious strategy for better regulation and has set the target of reducing administrative burdens arising from EU legislation by 25% by 2012. However, SMEs still bear a disproportionate regulatory and administrative burden in comparison to larger businesses. In this context:
1.1 Is the current EU SME definition an obstacle to targeting support for SME growth in the right way? (optional)
No
We support UEAPME's position that constant upgrading of the SME threshold causes the definition and associated policies to lose focus
1.2 In addition to the systematic application of the subsidiarity and proportionality principles in legislation (see question 6.2), could differentiation regarding the way legislation is elaborated and applied according to the size of the company be useful (e.g. lower fees, fewer reporting requirements, thresholds or longer transition periods)? (optiona l)
Useful
Differentiation on the basis of business size is beneficial provided that the laws that are identified in this context are carefully selected. Some proposals for reducing administrative burdens (for example those contained in the European Commission's proposals for simplifying the business environment in the areas of company law, accounting and audit published last year) did not in our view take into account the associated benefits of the procedures from which they were proposing to exempt small firms. Therefore wider and long term consideration ought to be given to all implications of any such exemptions.
1.3a Do you consider that directly applicable EU-level legislation in certain areas creates a disproportionate and unnecessary administrative burden on SMEs? (optional)
No
1.3b Would excluding SMEs from such direct application of EU legislation be a solution? (optional)
No
1.4 Would the introduction of common commencement dates for all SME-relevant legislation coming into force and/or publication of an annual legislation statement be useful for SMEs? (optional)
Not useful at all
This practice is already applied in the UK and has been well received by the SME community. However, the common commencement dates work effectively only at the national level and for this reason ACCA believes that they should remain as national initiatives.
1.5 Do you think additional focused measures to alleviate the administrative burden on SMEs would be useful? (optional)
YES
We believe that the pursuit of simplification of EU legislation needs to focus, primarily, on problems which are capable of being resolved at the EU level. Many of the concerns and complaints about red tape which emanate from EU businesses relate, however, to national administrative practices, and are not necessarily the result of the requirements of EU legislation. Accordingly, responses to domestic administrative problems are best made at the national level and EU has a clear role in encouraging such initiatives.
1.6 Would you suggest any other obstacles or additional issues to address? (optional)
Research work by ACCA shows that SMEs are most concerned about the quantity of regulation, regulatory change and regulatory complexity and these issues should be at the top of the European Agenda. Ensuring that regulations and other rules are suitable for SMEs requires substantial consideration and activity at the very start of policy making. Officials should use robust methodologies to assess the potential impact of their proposals; they should consider not simply the policy costs but also the cost of change, any advisory costs and costs for specific sizes of industry – remembering that all regulations have a disproportionate burden on SMEs.
Officials should also remember that regulation is not a means in itself; regulation is a method to achieve a desired behavioural change. Regulation is at its best when organisations are able to change their behaviour with the minimum of confusion, the maximum amount of simplicity and high degree of confidence. Accurate impact assessment, simpler, clearer guidance and common commencement dates can all help to improve the situation for the smallest of entities.
2. PUTTING SMEs AT THE FOREFRONT OF SOCIETY
Ensuring full recognition by society of the role of entrepreneurs
An important remaining obstacle to more competitiveness and growth in Europe has been identified in the lack of entrepreneurship and in particular in the ability of small businesses to grow. EU SMEs' role in society as a major source of employment, of economic growth and innovation needs to be better understood and recognised. Surveys which show that 45 % of Europeans would like to become their own boss compared with 61 % in the US prove that more needs to be done to encourage entrepreneurship as a career choice. In this context:
2.1 Do you see a need for additional measures in the Member States or at EU level to stimulate entrepreneurship through education? (optional)
Yes
2.2 Is entrepreneurship sufficiently reflected in school curricula? (optional)
Don't know
2.3 Do you see a need for the media to take a stronger role in fighting negative stereotypes towards entrepreneurship? (optional)
Need
2.4 Would you suggest any other obstacles or additional issues to address? (optional)
Ensuring that the next generation of European citizens have the skills and desire to become the entrepreneurs of tomorrow is vitally important to the future economic health and wealth of the region. The whole education system should support the development of the awareness and skills necessary for the adoption of an entrepreneurial mindset. However, the innovative entrepreneurial mindset must be underpinned by knowledge of the ‘basic' including an increasing focus on financial literacy. Schools and other educational institutions should be encouraged to foster greater links with entrepreneurs and private sector institutions providing more opportunities for school children to be inspired and develop an appetite for the world of entrepreneurship and business.
More practically, despite recent improvements, including the implementation of the Services Directive by the end of 2009 which obliges Member States to simplify and streamline their procedures and formalities, setting up a new business or transferring an existing one may still be too complicated. EU SMEs need in particular the knowledge and core competences that are essential for the successful transfer of business ownership. It is also important to tackle the problem of bankruptcy and the stigma that it generates and to give a second chance to entrepreneurs who fail non-fraudulently. In this context:
2.5 Would it make a significant difference to further reduce the time and costs for registering a company? (optional)
Yes
2.6 Do you think it would be useful to propose additional measures to facilitate business transfer and tackle bankruptcy? (optional)
Very useful
2.7 Would you suggest any other obstacles or additional issues to address? (optional)
Approximately one third of business closures are due to the lack of an appropriate successor or a failure to transfer the business. With the changing demographics in Europe it seems that this proportion will only increase. Helping business-owners to plan their succession, through the adequate fiscal system and tailored business support and general awareness raising is vital to prevent unnecessary closures and encourage job creation.
Helping SMEs acquire the skills they need
Skills and competencies are key for SMEs and in particular for the craft sector. However SMEs are often negatively affected by shortages of skilled labour and do not benefit from the possibilities offered by cross-border mobility to enhance their skills potential. They suffer in particular from limited exploitation of information and communication technologies (ICT): they lack the necessary skills to use the new technologies and have difficulties coping with a plethora of business processes and ICT systems. In this context:
2.8 Do EU education systems deliver the necessary basic skills needed by entrepreneurs? (optional)
No
2.10 Do you see the need for cross-border mobility programmes for entrepreneurs and apprentices? (optional)
Not much need
2.11 Would the development of a programme to foster the e-skills of entrepreneurs at EU level be useful? (optional)
Useful
2.12 Would you suggest any other obstacles or additional issues to address? (optional)
The issue of small firms' skills remains difficult to address, as many programmes seek to impose large firm solutions on small firms. This approach is rarely effective. More steps must be taken to recognise informal training, which is preferred by small firms. Recent research from the UK shows that o ver 90% of business owners prefer learning from their own experiences and almost 50% reported learning from other business owners as most beneficial. It is also important to note that around half of the business enterprise community would be happy to use discussions with an accountant, solicitor or bank manager to help identify areas for improvement in their business abilities. Therefore any strategy aimed at addressing skills and competencies in SMEs will require the development of a sophisticated and well evidenced approach to segmenting this market.
3. FACILITATING SMES' ACCESS TO MARKETS
Supporting SMEs to go beyond their local markest and better use the Single Market
The Single Market guarantees access for enterprises to a wide common market operating according to a common set of rules. However, it is clear that SMEs do not use the potential that the Single Market offers. Only 8% of them report export activities. To tackle this issue, the European Commission will propose a “European Private Company” statute. But SMEs also lack information on business opportunities and applicable rules in another Member State. They also face difficulties when complying with taxation rules and when participating in, and benefiting from, European standardisation which helps to allow them to do business abroad and to innovate. In this context:
3.2 Do you see a need to increase the participation of SMEs and their representative organisations in standardisation and improve the dissemination of standards? (optional)
Need
3.3 Do you see a need for improving the situation of SMEs in the area of direct and indirect taxation; if yes, which measures would be the most significant? In particular, should VAT rules be further reviewed? (optional)
The simplification of cross-border indirect taxation issues and the provision of a single point of information would greatly help small businesses seeking to trade across Europe. There also remains a strong case for the introduction of a reduced rate of VAT on labour intensive services.
3.4 Which additional measures would you suggest to help SMEs to better use the potential of the Single Market including the EEA and Candidate Countries? (optional)
A harmonised legal and financial reporting systems
Facilitating SMEs' access to public procurement
The public procurement market in the EU is estimated to be worth around 16% of EU GDP, which represents a huge market. Some 42% of the value of public procurement contracts above the thresholds of the EU Directives already goes to SMEs. The Commission is convinced that while reserving procurement quotas for SMEs is not necessary, practical difficulties should be addressed to further improve SMEs' performance in public procurement. In this context:
3.5 Do you see a need to improve SMEs' access to public procurement? (optional)
Yes
3.6 Would increased transparency of EU procurement opportunities below the thresholds make a difference (e.g. through a voluntary database disseminating procurement opportunities, central databases in the Member States or a broader use of electronic platforms)? (optional)
Yes
3.7 Would you suggest any other obstacles or additional issues to address? (optional)
Governments should be encouraged to offer contracts in a manageable size for SMEs to compete for. The level of bureaucracy to register to bid for public sector contracts acts as a disincentive to SMEs and this bureaucracy should therefore be simplified.
Encouraging SMEs to tap opportunities outside the Single Market
Fast-growing markets both in the EU neighbourhood and beyond also present an untapped potential for many European SMEs. But they are not easy to access for SMEs. Complex regulatory and legal environments, linguistic and cultural barriers, lack of knowledge of potential market and difficulties in identifying the right partners need to be overcome. In this context:
3.8 In general, how can SMEs be helped to go global? Which countries/areas should be given priority? (optional)
Adequate trade policies are of high importance for SMEs in the EU that wish to go global. Currently, only 8% of EU SMEs are involved in export. This shows there is a clear need to promote the access of EU SMEs to third-country markets. Like all firms SMEs need good market access conditions in order to succeed in foreign markets. SMEs also require the provision of information and qualified advice about going international, in particular, tailor-made first-hand information on fast-growing markets.
A good way of providing information would be through the setting up of efficient export tools or through the reform of the existing ones (i.e. Market Access Database). Efficient and user-friendly tools would offer SMEs tailor-made information about international markets.
3.9 Is there a need to establish European Business Centres in some fast-growing countries? (optional)
Yes
3.10 Do you see the need for new programmes supporting SMEs entering these markets, following the example of Gateway to Japan and the Executive Training Programme? (optional)
Yes
4. SUPPORTING SMEs' ACCESS TO FINANCE AND INNOVATION
Improving SMEs' access to finance at EU and national level
Getting a company off the ground or expanding it requires money and raising the right kind of finance can be a major difficulty for Europe's SMEs. On the one hand, risk aversion makes investors and banks shy away from financing start-up SMEs. On the other hand, SMEs would benefit from a better understanding of finance, and need effective support when accessing outside finance. The EU already provides support to SMEs which is available in different forms such as grants, loans and, in some cases, guarantees. Support is available either through the Competitiveness and Innovation framework Programme (CIP), or the Structural Funds (including the JEREMIE initiative). In addition to the many State aid instruments already available to support SMEs, the Commission is currently working on new State Aid rules to increase the possibilities to support SMEs and to simplify procedures (Block Exemption Regulation). In this context:
4.1 How could public policies and instruments to facilitate SMEs' access to finance be improved (e.g. awareness, procedures, cost, or better adequacy of products)? (optional)
The awareness of the existing funds is relatively amongst SMEs. Those that are aware of the various pots of money consider the system complex and opaque. Efforts should be made to simplify the application process and raise awareness of the available funds amongst SMEs.
There is also a need to address failures within the finance market. High-growth businesses and business with a high reliance on technology often fail to receive the finance they require to develop their businesses further. The provision of mezzanine finance funds for example would assist these firms. Mezzanine funds offer the opportunity for companies, based on their business valuation (which chiefly takes into account intangible assets and forward cash flows), to access high-interest debt finance that is convertible to equity in the event that certain targets are not met. This form of finance makes an important contribution to technology funding in the US, yet mezzanine debt for SMEs remains virtually unavailable in Europe.
4.3 What are the main obstacles for SMEs in accessing micro-credit (less than 25000 euros)? (optional)
The provision of low value debt finance and overdraft facilities is generally accessible for UK SMEs. However, there remain SMEs with certain characteristics that are more likely to have problems accessing this level of finance. These include female entrepreneurs, certain ethnic minority entrepreneurs and businesses in deprived areas. There exists a number of Government schemes to corrects these inequities, particularly those related to deprivation; however the level of success of these initiatives is open to question.
Ethnic-minority entrepreneurs need to be supported on disaggregated level. There is also some evidence that shows that these groups are discouraged from trying to access finance because of perceived discrimination or lack of understanding of the processes involved. Similarly female-owned business tend to be undercapitalised and have a higher propensity to use more expensive forms of finance, such as credit cards and again these issues need to be addressed using targeted policies. By developing these policies, the European Commission can not only help to promote equality and regeneration but also reap economic benefits by ensuring that these groups are able to participate in the economy to their full capacity.
Encouraging a knowledge-based economy
SMEs need to become more competitive through strengthening their innovation potential when developing new products and services or to find more efficient ways to deliver existing ones. New ideas need to be properly protected if their originator is not to lose out, and SMEs need to be aware of how to do so. In this context:
4.5 Is there a need to help SMEs deal with IPR protection, to improve awareness and provide support services for SMEs to protect their innovation? (optional)
Strong need
4.6 What are the most significant problems SMEs face in the use of patents? (optional)
In the modern knowledge economy the exploitation of invention and innovation are crucial to business success and patents are a crucial component of this activity. However, as ACCA's research work ‘Intangible assets and SMEs' showed, SMEs are often reluctant to utilise the protection offered. They are reluctant to engage for a variety of reasons, some of them rational and some less so. It is worth remembering that patents do not always allow a business to do something exclusively, but rather that they allow a business to stop a competitor replicating their own product or process. However, litigation is a complex and costly procedure and therefore not appropriate for SMEs with limited resources.
The process of applying for a patent is equally complicated and technical process which may act as a disclosure to competitors about the workings of a particular product. These nuanced issues experienced by SME owners ought to be considered as addressing these can be a vital success factor in awareness raising policies.