Financing SMEs: Financing the Recovery
written by Angela Knight on 13/09/2011
With around 4.5 million small businesses and medium sized companies in the UK, it is obvious why we all consider this sector so important.
Given the size of the sector, it will always be easy – in good times and bad – to find some who have had credit applications turned down. There will always be businesses that are too risky: banks cannot afford to lend their savers' money to these. Most often, the reason why a loan or an overdraft is turned down isn't because the bank won't lend but because the business should not be borrowing. Saying no to borrowing - or no to more borrowing - is not necessarily wrong. Perhaps the business already bears a good deal of borrowing. Perhaps a business has a good idea, but an unsubstantiated model.
At this stage in this uncertain economy, businesses are paying back loans and overdrafts very fast indeed. There is not a lot that a bank can do about this. The result is that the stock of lending is going down. Pricing isn't what's making businesses do this. It is confidence – or rather lack of confidence. Where there has been a significant drop in the number of their customers, the likelihood of them coming back in the short term is not good.
There are many more important facts behind the headlines. It is essential to face these facts, as what is actually happening within this important sector of the business community is very mixed. Stories have been relayed, but these stories often lack nuance. Local or narrow surveys have resulted in imprecise reports and unclear pictures of the lending landscape. It is absolutely crucial to have that picture clarified if strong, effective policy making is to be achieved by the banks, by Government and by business.
July 2011 saw the inaugural publication of the SME Finance Monitor: an immensely helpful and extensive survey of the field. The Monitor, conducted by the recognised and respected independent organisation BDRC Continental, is unprecedented in scale and authority. The initial results generated a range of information, constructing a profile of three months earlier in 2011. From now on the Monitor will report every quarter. Every three months, BDRC Continental will interview 5,000 businesses representing all sizes of SME types operating across UK regions asking for their views on external finance and their experiences of pursuing it.
So what does the SME Finance Monitor's report show?
It leads on a crucial note: just half of 4.5m small and medium enterprises are currently using any credit.
Among the key statistics that followed:
15 per cent of SMEs had sought finance in the past year;19 per cent were considering a future application;13 per cent of those seeking finance wanted overdrafts, not loans (a sizeable majority were granted them);5 per cent of those seeking finance wanted loans - again, a large majority had their loan application or renewal refinanced.
In all, only 1.6 per cent of the SME population did not get new or existing overdrafts agreed – that is, 12 per cent of the 13 per cent seeking overdraft agreements.
1.4 per cent of the SME population did not have their loan applications or renewals funded – that is, 28 per cent of the 5 per cent seeking loan finance).
Before looking back on why these applications were refused, we should consider the Monitor's prospective view of the second quarter of 2011. When it comes to borrowing intentions in this period, two thirds of SMEs are not planning to borrow. Of the remaining third, 19 per cent said they would apply or renew financing agreements. The outstanding percentage said they needed finance but for various reasons were not proposing to apply.
What, then, were the perceived obstacles to growth for SMEs?
About a fifth considered that there were none. Another quarter listed a range of restrictive issues including legislation and a lack of skills.
When it came to finance, just about 2 per cent cited it as an obstacle to growth in the next three months. Finance was in fact a far weaker constraint than any of the others.
The biggest concern of all cited by business was economic uncertainty. Nearly half nominated that reason as to why growth in the months ahead would be difficult. Perhaps this is not surprising, given the prevailing atmosphere.
So the SME Finance Monitor has usefully stripped out the emotion and the estimates; the claims and the counterclaims. Instead, it presents actuality and accuracy, even where that means uncertainty. In turn, it means that effective remedies can be prescribed for at least some of the problems businesses experience.
Now, then, to zoom in upon this portrait to look at that small but incontrovertibly significant number struggling with business finance.
Better Business Finance
There are some clear credit concerns for some businesses. These concerns are not just held by the businesses whose applications are turned down for finance. They are felt by those who haven't sought assistance because they thought they would be turned down, or those who were discouraged by their bank from applying.
As an industry, banks are at the table and ready to make the necessary changes to increase business confidence by freely giving them the help they need to get their financial applications right. Banks are committed to an aid programme specifically addressing the needs of SMEs.
The Business Finance Taskforce was set up for this purpose and the Better Business Finance programme it designed is getting to grips with these issues. The website details a newly established lending code and appeals mechanism for SMEs, increasing and ensuring the transparency of the borrowing process.
The SME Finance Monitor delivered data on profitability, financial education and organisation. Many SMEs are not profitable. Many SMEs' financial decision makers have no financial training. Many SMEs do not or cannot produce business plans or regular management accounts.
Even if people running businesses haven't produced accounts or a business plan, or do not have formal financial training, it doesn't mean that the business is unsound. But we all need a sounding board sometimes, even if things are ticking over nicely.
For that reason, the Business Finance Taskforce has designed an access scheme dedicated to providing business mentors to SMEs. The banking community is steadily training 1,000 mentors, attaching them to well-recognised "not for profit" mentoring organisations. These mentors are preparing to help businesses with the sort of issues identified by the SME Finance Monitor. More information is available at the website www.mentorsme.co.uk, and more assistance is being steadily rolled out across the remainder of this year with the help of many business representative bodies.
Getting some of the fundamentals in place will improve the future prospects of SMEs. It will not only enhance their ability to tap credit supply or supplement existing agreements, but it will also help them manage their money, and as a result their business, better.
The next SME Finance Monitor will be published by BDRC Continental in November. It should be carefully analysed by everyone in the business building team: entrepreneurs and established firms, financiers and politicians.
We the banks are prepared to say up front that we don't get it right all the time, but we are making sincere efforts to improve our understanding of this all-important sector. Collective interest in the information from the Finance Monitor and collective action upon its truths will result in better informed outcomes for both SMEs and the UK economy.