Every householder knows that to get out of debt you need to spend less, earn more or do a bit of both. To grow your business you need capital and investment. The Project Merlin agreement with the big retail banks was supposed to wave a magic wand over bank borrowing and ensure lots of lending to small- and medium-sized business and curb the size of bonuses and executive pay. It has not been successful on either front. Such lending fell in every quarter of 2011. Small businesses say that they don’t trust the banks and fear that they will demand it all back if it rains.

If you can’t get a loan try for capital investment and get a spot on ‘Dragons’ Den’. Or go to one of the clubs where these business angels hang out. It is suggested that there are 4000-6000 angel investors in the UK. Alternatively, go to a private equity or venture capital firm but that market has been in serious decline and they have less to lend.

Perhaps the most famous private equity fund in the UK is 3i. This fund was originally set up in 1945 by the Bank of England and the major British banks with the long-term aim of providing funding for small- and medium-sized enterprises. At one time it was the largest provider of growth capital for unquoted companies in the UK. It became known as Investors In Industry hence the name 3i.

The rationale behind it was ‘that smaller businesses faced a gap in available corporate finance due to banks being unwilling to provide long-term capital and the companies being too small to raise capital from the public markets’. In 1987 the banks sold off their shares and in 1994 it was floated on the London Stock Exchange. Nowadays it has an international, not just a British, focus. But once upon a time almost every growing British business would have the words 3i written into its corporate history.

If can’t get a bank loan, you can’t get on Dragons’ Den or get venture capital what can you do? Find a new way by using the internet and getting lots of individual investors to contribute this is called ‘crowdfinancing’. Some films and rocks groups have done this. In 1999 the Professional Contractors Group was created online raising £100,000. In the United States, kickstarter.com has crowd-funded a diverse array of arts projects and hopes to soon provide more funding than their equivalent of the Arts Council. In November 2011 the US Congress passed a crowd-funding bill which has removed a great deal of financial regulation around share-ownership.

But if you speak to investors and advisers in Britain it is a different story. They complain that European legislation such as the ‘prospectus directive’ is too heavy with regulation and too great a bias towards consumer protection than to the ability to raise capital. As a result the number of IPOs (initial public offering – when shares are sold for the first time on the stock exchange) have declined partly because of such compliance and legal costs. It is not worth listing on the AIM market for under £50m. This where what is known as the ‘equity gap’ opens up in the UK. Using noted sources up to £10m can be raised. But how to jump from £10m to £50m? It is beyond crowdfunding and dragons. It is broken funding escalator. Some suggest it is the reason why no Facebooks or Googles have emerged in the UK.

There is also an anomaly that smaller investors know that spread-betting is tax-free but if you buy shares on the AIM market you have to pay as stamp duty. It doesn’t seem to be right, that investment is taxed but speculation isn’t.

For Britain to develop and become prosperous again we need to fix these broken escalators and learn from the past and innovate for the future. Instead of giving risk-adverse banks cheap credit, a state sponsored-style 3i or sovereign wealth fund is what is needed.

The use of the internet to democratise growth through schemes such as crowd-financing would be a plus. If I saw a local firm that is prospering and in need of funds, how easy is it for me at present to take out a small investment with them? At present, not very. We have community credit unions – perhaps we should have new media driven ‘crowd-financed’ community credit investment unions to allow us do this. It is time to innovate.