THE RISKS OF CAUTION
Venture research has revealed that UK SMEs are braced for hard times ahead. But overcaution carries its own risks, as Venture Managing Director Peter Ewen explains
For a few short hours it seemed that Europe’s leaders succeeded in hammering out a deal to reduce the Greek debt and avert political and financial crises in the eurozone. The celebrations were short-lived. The deal sparked renewed round of political turmoil in Greece, and in the chaos that followed the carefully honed solution began to spring some serious leaks. Days later the attention shifted to Italy and there is now a real threat that Rome will not be able to service its debts.
We have to give Europe’s leaders some credit. They have indicated a willingness to take radical steps to protect the Eurozone. The problem is, they are not acting quickly enough. The measures that have to be taken – notably a much bigger role for the European Central Bank - have been widely discussed. The problem is that politicians are stymied by national considerations. The result has been too much talking and not enough decisive action.
And the UK has not been insulated from the fallout. Instability in the eurozone affects Britain’s SMEs in at least two ways. The euro-inspired turmoil in the world’s capital markets may not have a direct impact on UK SMEs, but it certainly creates an atmosphere that does little to encourage entrepreneurial spirit. More directly, anything that impairs growth in the single currency area will inevitably create a much tougher environment for Britain’s exporters.
Reluctance to borrow
Against this backdrop, evidence suggests that Britain’s SMEs are expecting hard times. According to research carried out by Venture, around 61% of businesses are holding cash reserves as insurance against further financial difficulty, while 47% are holding ‘investible reserves’ that exceed the day-to-day needs of the company. The research has also uncovered a reluctance to borrow, with 56% saying they would be concerned about the risks associated with taking on debt, even if it were to finance growth.
Such caution is understandable, but too much circumspection carries its own risks, both for individual companies and the economy as a whole. As the UK economy recovers, much of the job and wealth creation must come from SMEs. Indeed, it is our agile, innovative SMEs that will lead the way to a strong, sustained upturn. But for many this will mean shifting up a gear, adopting a positive approach that will lend them a competitive edge. The risk for the overcautious is that in failing to invest they will cede the future to more adventurous rivals. The risk to the economy, meanwhile, is that unwillingness to take risks will slow the rate of recovery.
Funding for the future
Companies willing to invest in the future will need reliable finance and the ABL industry is ideally placed to meet their requirements. Indeed, I would recommend that all businesses consider the assets at their disposal. Whether in the form of debtors, inventory, plant and machinery, or property, they could well find there is more than enough value on the balance sheet to raise the cash they need for working capital or growth purposes.
Later this month, members of the Asset Based Finance Association (ABFA) meet for their annual conference. I would expect every delegate to focus on the importance of providing funds for businesses when they need it. And the message that ABL funding is available should help boost the confidence of Britain’s all-important SMEs.
Peter Ewen
Managing Director
peter.ewen@venture-finance.co.uk