How to Kick Start Growth
The UK economy shrank in the last quarter of 2010, taking the whole country by surprise. More optimistic analysts are attributing this to severe weather conditions and the VAT rise and indeed, as we move through 2011, businesses will start thinking about and noticing opportunities for growth.
Central to capitalising on this increasing confidence is being able to access a dependable supply of finance. Our recent Thinktank decided that a new approach is required from financiers and SMEs if they are to meet their growth objectives this year.
Venture Finance published the Thinktank’s ideas in our Financing Britain’s Growth report that boils down to four main points:
1. Do not take the recovery for granted…
The latest figures show that business insolvencies fell by 18 per cent in 2010 (Source: Experian). This is great news for the private sector, but businesses need to remain cautious of the economic hurdles that await them in 2011. As well as a recent blip in the economy, we are yet to feel the full repercussions of the Government’s Comprehensive Spending Review and the VAT rise.
In addition to this, HMRC’s Time To Pay (TTP) scheme provided a lifeline for many SMEs during the recent economic storm. However, as Kate Sharp, CEO of the Asset Based Finance Association (ABFA) pointed out, deferred tax payments of this nature can store up problems for the future. The taxman will clearly not wait forever.
2. …but have the confidence to grow
Panellist Allan Laing, Chief Executive of manufacturer Pentagon Chemicals (Holdings) Ltd, observed that SMEs are very cautious now about seeking and investing capital in new projects. Kate Sharp supported this view in saying that some companies are not utilising available funds.
In the recession, businesses adopted a defensive formation as their survival instincts kicked in. Now, many are recognising opportunities for growth, from the acquisition of weakened competitors to attacking export markets. Having the confidence to invest in these projects is not only crucial for economic recovery, but also provides a significant first mover advantage opportunity for those businesses that get it right.
3. Push for the best possible payment terms
Allan Laing pinpointed customer uncertainty, specifically second guessing what their biggest customers will want to do next, as one of two major issues currently affecting his business. The second major issue was cashflow management, in particular the credit terms stipulated by customers.
Businesses need to consider what is acceptable to them, and negotiate better terms and conditions with their customers where possible. Also, be realistic – a late payment can be just as, if not more, disruptive than a timely long-term payment.
4. but consider the wider menu of finance options available
A key theme that emerged during the Thinktank was increasing demand from SMEs for finance that is reliable, but also responsive to any change in market conditions or business focus.
On the one hand, SMEs must take stock of the changed finance environment: the traditional ways of financing growth are no longer available in many cases and may not be appropriate to today’s business needs. In our last Credit Check survey, two thirds (60%) of accountants said traditional bank finance is still barely available to UK SMEs, whilst almost a third (30%) also believe that business angels are less accessible.
When asked about the best finance for SME growth, over half of accountants (53%) recommend iInvoice fFinance – with 85% stating that it was either available or readily available to eligible businesses. Accountants also highly recommend Invoice and Asset Based Lending, Venture Capital and Private Equity as other options for sustainable growth finance.
The final piece of the puzzle is lenders themselves who need to take a more common sense approach to lending moving forward. A competitive drive to cut prices and the restructuring of the banking industry created distance between financiers and clients that affected service quality. Our independent research shows that SMEs’ priorities have changed, and that reliability now trumps price as the key driver in successful lending relationships.
Common sense lending requires a deeper understanding of businesses and a focus on long-term relationships. Assurances of reliability and consistency of service can also help restore business confidence that may have been lost during the recession. This new approach to lending will be necessary to get cash moving again and further encourage the green shoots of UK economic recovery.