Cfi: NACfB
Bridging the funding gap ‘Financing a Private Sector Recovery’ raises excellent issues
Larger businesses have some access to
by Nikki Cann, associate director, NACFB
“The banks are not acting in the national
interest. I do not think they get it.” So said business secretary Vince Cable, commenting prior to the launch of a new green paper: ‘Financing a private sector recovery’, published by the Treasury, which looks at the issues faced by businesses looking for funding in the aftermath of the credit meltdown. Despite Cable’s headline grabbing promise of ‘more stick, less carrot’ if banks didn’t start lending to small businesses, the report itself is much wider ranging and more comprehensive in its coverage than this initial sound bite would have you believe. The report looks at the causes of the
implosion three years ago: how access to large quantities of very cheap, very easy credit led to an economy built on debt; how a box-ticking approach to risk management meant there was too much concentration on the boxes and not enough on the risk; and how things have moved on since.
New fuNdiNg optioNs The report states that SMEs have suffered disproportionately from the tightening of the credit markets because they have only very limited access to the other forms of finance used by large and medium sized enterprises. Reliance on bank funding alone made the SME sector particularly vulnerable when the crunch hit. This is especially worrying given the SMEs role within the economy at large with the report itself referring to them as a ‘vital part of the UK economy’.
equity funding (where investors purchase shares in a company) which is off limits to SMEs often because the amount they are looking for is often below the limit of the average investment fund. Private sources, such as venture capital or business angels offer an alternative, but figures from the British Venture Capital Association suggest that the amount of money raised by SMEs in this way has actually declined by 18% between 2008 and 2009, applying additional pressure in a sector already strangled because traditional bank finance sources have also become restricted. The report looks at making equity
funding more accessible to the average SME and how this might be done. This seems to signal a move away from the more traditional funding routes – and also away from the original headline grabbing sound bite. But it also acknowledges the risk to SMEs posed by keeping all their financial eggs in one basket. That weakness was well and truly exposed when many lenders effectively shut up shop. So what does the Government propose
to do to help? The previous Government set up the Enterprise Finance Guarantee Scheme (EFGS) to offer security to lenders to encourage lending to small businesses. The EFG replaced the Small Firms Loan Guarantee Scheme and was launched back in January of 2009. Lender Aldermore has recently called for the Government to carry out its plans to re- vamp the Enterprise Finance Guarantee, following a drop-off in the numbers of business using this scheme, and it’s an issue picked up in the report. The Scheme itself offered less protection to lenders than its predecessor did, as the amount guaranteed under the EFG was capped at 9.75% of the total funds lent by each
46 mortgage introducer SEPTEMBER 2010
bank. According by figures obtained by Aldermore under the Freedom of Information Act, the amount of lending to SMEs under the scheme has fallen away by 23% in just 6 months. At the start of the scheme many larger
lenders reported that they had exceeded their targets in lending under this scheme and that the EFGS had been a huge success in getting new funding to SMEs. But brokers reported that they found it very difficult to access the EFGS for their clients and (unsubstantiated) rumours abounded about some lenders’ using the scheme to convert existing unsecured loans and overdrafts into EFGS loans. If this was the case it could explain the fall away in recent months, as all convertible lending will have already been through the process. One issue which raises its head again
and again is often to flat refusal of many lenders, or their representatives, to acknowledge that there is any shortage of lending in the first place. We’re more than happy to lend, they say, but businesses just don’t want to borrow. In the current climate there could well be some truth in that, but certainly our members are still reporting a culture of finding reasons not to do deals, rather reasons to do them. However, for whatever reason, the Bank of England’s own Trends in Lending report states that “The flow of net lending to UK businesses remained in May, and was more so than in April.” One final key point for brokers that the
Government is keen to promote ‘better informed businesses’ and one of the ways it is looking at doing this is by increasing transparency. Taking this at face value, certainly this would do away with many of the ‘smoke and mirrors’ which many of our members are facing on a day to day basis; lenders who claim to ‘lending more than ever’ while at the same time turning down good propositions.
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