access to finance
On 11 November 2010, Venture Finance hosted a panel of corporate finance experts from banking, private equity and government, as well as the professional services and advisory sectors. Their task was to address how the finance industry can help Britain’s small and medium-sized companies access the funds they need not only to survive and thrive but also to help sustain the UK’s economic recovery
The recovery has been stronger than expected in 2010, and yet lending to SMEs remains subdued. In the opening ThinkTank session, our panel discussed the issues affecting access to finance in the current financial climate
Our ThinkTank panel gathered against a backdrop of cautious economic optimism. Official figures point to stronger than expected growth in the second and third quarters of 2010, clear retrospective evidence of a continuing recovery. Looking ahead, however, cuts in public spending and an imminent rise in VAT will only serve to rattle the economy.
As ThinkTank chairman Professor Nigel Waite pointed out, the coalition government’s strategy to shrink the state extended beyond the immediate requirement to reduce Britain’s public sector deficit. “A great deal has been said about the need to rebalance the economy away from growth and demand, which is driven by government spending on one hand and debt-fuelled consumer consumption on the other,” said Professor Waite. “What is now in favour is growth based on business expansion and increasing our presence in export markets.”
If the private sector is to maintain the momentum of Britain’s recovery, then it is essential that small and medium-sized businesses (SMEs), generally recognised as the bedrock of the economy, can access the funds they need to not only cover their working capital requirements but also invest for future growth. Thus, the panel began their discussion by taking a detailed look at the availability of funds to that all-important SME sector.
Availability of finance
Headline figures suggest that SMEs are not well served at present. According to the British Bankers’ Association, lending to non-financial businesses fell 5.6% in September, compared with the same period a year earlier. Meanwhile, Venture Finance’s own annual Credit Check survey suggested that businesses are continuing to struggle for finance. Sixty percent of the accountants polled in the study said finance was barely available to SMEs, while 48% said unsecured company loans were completely unavailable.
These numbers beg some interesting questions. Are banks lending less because they can’t lend or because they won’t lend? Or is it a case of recession-hit businesses being reluctant to step-up their operations? Evidence suggests that demand for finance is currently subdued, at least in some quarters.
As Allan Laing, Chief Executive of Pentagon Chemicals (Holdings) Ltd, observed, businesses that have survived the recession aren’t particularly inclined to intensify their operations at a time of continuing uncertainty. “I think that many SMEs are very cautious now about rebuilding and reinvesting in capital for new projects,” he said. Kate Sharp, CEO of the Asset Based Finance Association, agreed. “Some companies are not utilising available funds,” she said. “They are just waiting and seeing.”
According to Jamie Young, Director of Feist Hedgethorne, a provider of part-time finance directors, the effects of the recession are still being felt. “I’m finding business pretty flat at the moment,” he said. “Across my client-base, no one is in any particular financial trouble. But neither are they making outstanding profits and generating enough cash to invest in the future growth of the business.”
The ThinkTank panel stressed that the recovery simply cannot be taken for granted, as the prospect of a double-dip recession continues to affect plans for borrowing and investment.
Unfulfilled demand
If the panel acknowledged that lower borrowing was to some degree due to lower demand from businesses, there was also an agreement that many businesses were struggling to access the funding they required to take advantage of the UK’s possible return to sustained growth.
David Brockhurst, a senior manager in KPMG’s Mid-Market Debt Advisory Group, argued that banks, which had been criticised for lending too freely before the financial crisis, were another example of natural caution. It would be wrong, he said, to blame them for reserving finance. David went on to identify the human aspect that also serves to reduce the prospect of liquidity. “Corporate centre managers are under all sorts of pressure that they may not have been under before, and are asked a lot of questions about their customer-base to which they may not have any immediate answers,” he said. Without access to such information, it is harder for financiers to make lending decisions, a factor that business owners may not always recognise.
Peter Ewen, Managing Director of Venture Finance, pointed out that trends in the banking industry had reduced contact between financiers and their clients. “As fees have been driven down it is much more difficult for traditional financial institutions to understand their clients as well as they did previously, simply because they have less people to do so,” he said. “They have to be more efficient because prices have been dropped. I do hope that we see a return to a focus on customer value as well as shareholder value,” he added.
The government’s role
The panel’s discussion on the availability of finance inevitably led to an assessment of the government’s recently extended flagship lending scheme, the Enterprise Finance Guarantee. Oliver Woolley of the British Business Angels Association expressed concern that the scheme was proving “elusive” to small firms. Peter Ewen said, “We are a supporter of the EFG, but my real feeling is that the government could have been more generous with it.” He acknowledged the scheme had flaws, specifically those rules that effectively set the guarantee available to lenders at a much lower rate than the headline 75%. “It’s actually less than advertised,” said Peter. However, as he pointed out, “If you are going to lend sensibly, you shouldn’t need a 75% guarantee.”
Other sources of finance
As a specialist in private equity/angel finance, Oliver Woolley stressed that businesses should look beyond debt funding in certain circumstances. “In fairness, for a lot of them [banks], it’s not appropriate to lend to a company where risk capital or equity capital is actually more suitable. And I don’t believe anyone thinks banks should be lending and replacing risk capital that should be replaced by equity,” he said.
KPMG’s David Brockhurst pointed out the advantages of Invoice and Asset Based Lending. “The way that you fund a business through invoice finance means that you focus on your cash receipts very carefully versus your invoicing,” he said.
As the morning session of the ThinkTank event drew to a close, participants were pointing to a certain disconnect between businesses and financiers, a disconnect that would have to be addressed in order to help create a sustainable recovery. In the following session, the panel looked at how such funding issues could be resolved.
Read Part Two: SME Challenges
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