Executive Summary

STRATEGIC OVERVIEW

• Micro businesses with no employees, or between one and nine employees, accounted for 94.6% of all UK businesses in 2001, 29% of employment and 21.2% of turnover.
• Approximately 3.1 million people were self-employed in 2002, according to Social Trends 33, 2003. An additional 1.35 million people have some income, or losses, from self-employment. Self-employed men outnumber women by nearly three to one. The proportion of self-employed in the working population has fallen since 1987.
• Around 20% of the UK's self-employed work in the construction industry. Between 13% and 14% are involved in diverse business activities, around 7% work in recreation, culture and sport, and a further 7% in health and social work.
• Nearly three-quarters of the self-employed had a self-employment income of less than £15,000 in 2000/2001. NatWest is fully aware of the problem of low income in self-employment and hopes its business managers will help customers to develop their businesses and increase their profits.
• In December 2001, the Competition Commission reported on banking services for business and accused the banks of failing to offer good value competitive services to small businesses. The banks have responded with improvements to their services for business and now cater much better for micro businesses.

Key Financial Services

• Approximately 1.5 million people use personal bank accounts for their business activities, and fewer than half of new entrepreneurs open a business account for their start-up enterprise.
• 52% of self-employed men and 70% of self-employed women were not in a pension scheme in 2000/2001.
• Self-certified and flexible mortgages and offset accounts have revolutionised the capacity of the self-employed to borrow for their home and business. Designated business loans and grants are hard to obtain, especially for new small businesses. Government support is targeted on disadvantaged geographical areas.
• Employer's liability, professional liability and other protection insurances are high-cost because of rising litigation costs. Liability cover is often prohibitively expensive for the self-employed in risky occupations such as roofing and scaffolding. Critical illness cover is costly because of medical advances resulting in rising longevity. Lack of affordable insurance is a significant barrier to the creation and expansion of micro businesses.
• Invoice finance, which involves factoring or invoice discounting, has few customers among micro businesses but offers good potential for improving cash flow for businesses turning over at least £50,000.

Company Developments

• Abbey National offers free banking for small businesses. Alliance & Leicester's Commercial Bank also offers a free banking account. Barclays' Clearlybusiness service offers useful information and support to new businesses. Bank of Scotland's Smartfinance is a relevant offset product that cuts the costs of borrowing. HSBC relies on brand scale and reputation and on accessibility to sell moderately priced business banking. Lloyds TSB offers tiered customisation of business bank accounts. NatWest has the strongest brand in small business banking, but is facing stiff competition from the innovative smaller banks, notably Alliance & Leicester and Bank of Scotland.
• Insurers' products for small businesses tend to lack the degree of brand power possessed by the major banks. Selling insurance products through financial advisers and banks tends to weaken brand identity. Norwich Union's new 'Self employed' suite of policies signals the company's intention to cater comprehensively for micro businesses.

Promotion

• Royal Bank of Scotland's NatWest remains the largest advertiser of banking services to business generally and small business in particular.
• HSBC, Bank of Scotland and Abbey National are the other leading advertisers to business.
• The newly self-employed are not an important focus for banks' advertising, or for advertising by other financial-services organisations.

International perspective

• Business owners in the UK have fewer problems with late payment than in many other parts of the world, and are relatively optimistic about future investment and turnover.

PEST Analysis

• Budget help for enterprise is focused on companies, not on unincorporated micro businesses.
• Late payment legislation and invoice factoring can be used to help improve cash flow.
• Debt levels among employees threaten to restrict new voluntary self-employment, because continuity of income is essential for debt repayments. 'Push' factors into self-employment such as redundancy —leading to involuntary self-employment — are likely to assume greater importance.
• Lack of national broadband coverage restricts the creation of new businesses in rural areas, especially those needing to use IT.

Consumer Dynamics

• The percentage of those surveyed who were in self-employment has barely changed since 2000.
• Only a small minority of respondents feel they are in secure permanent employment — and feelings of insecurity have risen sharply since 2000.
• Despite the apparent increase in insecure employment, far fewer respondents in 2003 than in 2000 intend to become self-employed in the coming 5 years.
• Banks emerge from the survey reasonably well. Few respondents say banks are unsympathetic to the self-employed in financial difficulties, or that they do not give sufficient support to new small businesses, or that they expect new businesses to become profitable too quickly. Conversely, few regard banks as keen to support new businesses and even fewer agree that there is a good range of financial services for the self-employed.
• The main messages from the survey are a growing sense of insecurity in work, alongside a declining interest in self-employment. The two trends may be linked, in that starting a business and becoming self-employed is a step towards instability, a step that may be too far for people who already feel insecure. If the numbers of those intending to become self-employed are falling as fast as Key Note's survey suggests, banks will have less reason to provide services to small businesses and their proprietors. Banks' keenness to increase consumer lending may, in fact, reduce the number of new customers for small-business services.

The Future

• 'Push' factors leading to self-employment will probably assume greater importance. These factors include redundancy and a need to augment pensions. Reluctant entrepreneurs will need sound, low-cost business advice.
• Women who are self-employed are less likely to employ staff or to aim for growth than self-employed men. Women require encouragement and support to launch into self-employment.
• There is still enormous scope for the sale of new business bank accounts, but confidence in pensions will remain low. Expensive insurance, especially for employer's and public liability policies and for professional indemnity cover, is a barrier to self-employment in higher-risk occupations.
• Pace-setting companies include Alliance & Leicester, Bank of Scotland, Lloyds TSB, NatWest, and Norwich Union.
• Direct marketing to the self-employed is difficult because they are so widely dispersed, and the numbers of self-employed are constantly changing. Tightly focused advertising in media that serves occupations with high levels of self-employment, such as construction and management consultancy, is an option, but the best marketing aid is a strong, reliable, respected and highly visible brand.
• Lobbying government on behalf of the self-employed and their micro businesses builds customers' gratitude and supports other brand-building efforts.