smart solutions
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
Towards the end of the ThinkTank session, the panel addressed the issue of providing finance that is not only reliable but also aligned with individual business needs
In the concluding debate, the discussion turned to SMEs’ financing requirements. According to Venture’s Credit Check survey, lack of working capital is currently affecting the ability of businesses to trade successfully. Thirty-two percent of accountants questioned in the survey said clients were turning away businesses because they lacked the working capital required to fulfil orders. Elsewhere, many SMEs are seeking funding to finance organic and acquisitive growth. Thus, matching finance provision with the requirements of SMEs was a key theme of the ThinkTank discussions, with participants stressing the need for funding streams that suit the unique circumstances of each business.
According to Kate Sharp, the time was right for financiers and businesses to take a long, hard look at the financial solutions on offer with a view to assessing their suitability for any given set of circumstances. “It is now time for us to get cleverer about the way we finance business, and it is time for businesspeople to get cleverer about the way they access finance,” she said. “If more financiers and businesspeople had been wiser regarding what finance was appropriate to the needs of their business, I don’t think we would be in quite the mess we are in now.”
Kate argued that traditional credit lines often fail to meet the working capital requirements of growing companies. Where facilities such as overdrafts have to be renegotiated as a business grows, receivables finance is much more flexible since it is linked directly to the income generated by the business. Thus, the facility grows as the volume of business grows. Jamie Young, Director of Feist Hedgethorne, observed that renegotiating an existing funding line in the current financial climate could be a daunting prospect for many SMEs.
Jamie cited his own client-base as an example. “I have clients that have relatively modest bank overdrafts of £30-40k, and whose businesses are undergoing small amounts of growth,” he said. “These clients have been concerned about approaching the bank for an increase in their overdraft facility in case that overdraft gets reduced.”
The debate about “clever financial solutions” was more than a discussion of the relative merits of Invoice and Asset Based Lending versus more traditional forms of credit. At its heart was a widely shared perception that businesses should be aware of all the financial options on the table – asset finance, overdrafts, term loans, private equity, etc – and make a decision based on the right solution for the right circumstances.
Allan Laing argued that the industry itself must continue to evolve solutions that match the requirements of business clients. “What I see as a customer of bank lending and bank debt is that the offering to a company like ours is pretty inflexible and hasn’t changed over seven years,” he said. “Right now we have got 25-30% of our products in the company that we didn’t have five years ago, and that is the nature of our business model. We have got to keep changing as we go along because some things drop off, new things come along.”
Closing the gap
Perhaps the answer to providing businesses with appropriate funding lies in promoting a closer relationship between financiers and their clients. Certainly some of our ThinkTank panel expressed concern about the perceived gap between financiers and finance-seeking clients, the distance between the two making it difficult for financiers to make a proper assessment of an applicant’s viability. “I think the remoteness of certain lending institutions is the challenge,” said Oliver Woolley, who cited the workings of credit committees as a case in point. “I think there is a disconnect between the credit committee and the customer,” he said. “You have the customer – a small business owner – who goes to see his or her bank manager and presents a case. The bank manager will normally say, ‘This looks interesting. Yes, I’m sure we can get this through.’ Then they put it up to a credit committee who has no connection with the business owner, and the committee then comes up with a decision based on various criteria, crediting scoring and formulas. The final decision conveyed by the bank manager is often, sadly, that the credit committee has declined the application.”
As Venture Finance Managing Director Peter Ewen pointed out, in traditional finance this decision is normally based on fairly narrow criteria and often ignores important factors such as the quality of the management team. “If you disregard the bigger picture and don’t take a more balanced approach, your decision-making process isn’t considering things properly,” he said. In Peter’s view, this chain of decision-making has contributed to a sharp decline in SME confidence within the finance industry.
At your service
The closeness of the relationship between financiers and their clients was seen by some of the panel as a reliable indicator of the overall quality of service, particularly within the banking industry. David Brockhurst argued that one of the unintended consequences of the restructuring of the banking industry has been an erosion of the individual bank manager’s authority and an increased disconnect from business customers. “The demise, if you will, of the local bank manager,” as David puts it. “It drives out any individual’s ability to be quite agile.”
As Peter Ewen sees it, the competitive drive to cut prices ahead of the financial crisis also contributed to the problem. “By driving down costs, we have seen a production-line situation in some parts of the industry and that has affected service quality,” he said. These factors beg the question of whether businesses themselves focus too much on price rather than service.
Evidence from Venture’s Credit Check survey suggested a shift in priorities, with 60% of accountants stating that reliability rather than price was the key driver when businesses assessed the quality of their relationship with lenders. “I see that all the time in our client-base,” said Peter. “Clients are beginning to say, ‘actually a relationship is more important than the fee or the discount rate.’”
It’s a finding supported by Jamie Young’s experience with clients. While stressing that entrepreneurs certainly focused on both price and required guarantees, consistency was regarded as equally important. “The big thing is whether funding is going to be there going forward or if it’s going to be pulled,” said Jamie. “That’s ultimately where a lot of my clients are at.”
As businesses prepare to address the challenges of recovery, there remains a real demand not only for access to finance but also for a closer relationship between business owners and financiers. Assurances of reliability and consistency of service can also help restore business confidence that may have been lost during the recession. Equally important is the flexibility of finance packages, allowing SMEs to access funding that will fit their particular circumstances and therefore help them meet the recovery from a position of strength.
• The panel detected a shift in priorities, with many companies seeking a stronger working relationship with their financiers.
• This has led to a switch in focus away from cost and towards value-added finance that is both reliable and aligned to business needs.
• SMEs require funding that is sustainable, readily available and flexible enough to match the ambitions of the business.
• The recovery of SMEs is presently held back by economic uncertainty and lack of access to finance.
• Financiers should understand their customer needs and tailor their solutions accordingly.
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