50 sme 100 – roundtable ... continued from previous page
Banker Ian Nash accepted that “the funding market has shifted in terms of bank parameters, driven by what happened eight years ago. For Santander, it is now all about fuelling our customers’ ambition and helping them achieve their business plans through a range of different financial solutions. Within my perspective – business new-starts to £50m-plus turnover companies – I can now signpost businesses towards the right type of funding whether that be bank debt, the Business Growth Hubs of local LEPs, a VC house or a crowd-funder.
“We have been a consistent supporter of businesses in the UK, with lending over the past four years growing by an average of 20% per annum, and we take pride in our dedicated relationship-banking approach. The tide has changed and we are seeing more and more businesses approaching us to get a fresh opinion on their financial strategy going forward.”
Elliott said a core part of her VitalSix work with businesses was on preparation for investment. While a detailed business plan was essential, businesses needed to realise that growth often came from a mix of funding and financial phasing. “We see too many pre-revenue plans which say ‘I need £1m of investment.’ We don’t want to put the dampers on ambition, but it’s unlikely an early stage SME will get £1m in one tranche from one source more likely are phased funding rounds.”
M&A and funding activity is increasing . . .
Garden said a lot of deals were now being done, mainly by cash-rich companies and those supported by high-net-worth individuals or shareholders. “There is definitely an appetite to add bolt-ons to businesses in order to develop markets or improve growth with a view to exiting as a bigger company in 3-5 years time.”
The challenge of M&A today was not so much financial as successfully coping with change management such as merging business cultures and computer systems.
“In the past six to 12 months there has been a big pick-up in our banking instructions, acting for both companies or banks. Our VC work, pretty much non-existent a year ago, is also very busy now. Companies are getting money in to develop products or investing in new market opportunities through additional staff and resources.” The VC funding route is often attractive to companies as it can bring with it specialist advice and contacts, Garden added.
. . . along with the risk of ‘boom and bust’?
Taylor feared that cash-rich companies and easy cash might create a market ‘bubble’. One warning recently was the tech-share market volatility following Facebook’s stunning $19 billion valuation of its startup acquisition Whatsapp, with just 55 staff and $20m turnover last year.
“There is pent-up demand for growth out there.
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number of big players.” The objective is to grow the business to 20 times its current size within five years.
“We’ve had steady organic growth over 21 years, but we’ve spotted an entrepreneurial opportunity. We can afford to spend our own millions, but not tens of millions.”
London-based US companies offering significant growth capital had been “knocking at our door, and we’re chatting to them. It’s pretty nerve- wracking, but we have a good clear business plan”.
Alex Minchin
Some investors have been sitting on their money and haven’t had good areas to invest in. In the rush not to miss the next wave they are perhaps now not being as rigorous as they should be.”
Available funding was also a concern. “There are some fairly lax VC people out there and some of their growth capital multiples are startling – up to 20 times last year’s revenue – yet we have been astounded when companies have taken on such funding.”
“My worry, and I saw it in the dot-com era, is that these businesses will simply go out into the market and burn their cash.”
Garden agreed: “Speaking to some of our VC and PE funding contacts, there are some investors willing to pay extravagant multiples not just in the technology sector, across all industries and the key concern is not to be tempted into over-paying for good assets.”
Taylor: “The banks are in an invidious position today and have to be prudent. Some businesses have had poor financial advice in the past but generally banks are now doing all that they should be doing.”
Minchin pointed out that British companies often produced better products than their foreign rivals, but in USA, for example, US competitors were more likely to win the race to market because they had more access to VC funding. He knew of one British company considering moving to the US to gain funding and keep pace with the competition.
Elliott agreed that technically superior British products could lose out without "the wraparound of funding, marketing and sales support. There is a different culture within the US investment community”.
Growth: international, local or self-funded?
Local funding for SMEs is available through the Thames Valley Berkshire LEP, Elliott pointed out. The LEP’s Funding Escalator has over £7m, both for debt or equity-match funding, for suitable local business models. There is also new grant money coming through the Business Growth Hub, another key LEP funded initiative.
Taylor said his company was relatively cash- rich but was considering external funding “to prevent getting left behind in the boom area that is ‘the cloud’, which will mature out with a
Barry Potter
Late or extended terms of payment, particularly by large corporates, were crippling SME cashflows and often preventing plans for growth.
Anns felt the corporates were being heavy- handed: “They just say: We’ll do it our way, if you don’t like it, then don’t have our business.”
“It is pretty poor practice," said Taylor, suggesting the Government should address the problem as a matter of economic necessity.
Minchin revealed that his average outstanding debt on invoiced work had been 76 days. “Lack of cashflow was stopping us from growing, I had to employ someone to chase the debtors, but we couldn’t take on extra income-earners.” In
THE BUSINESS MAGAZINE – THAMES VALLEY – MAY 2014
Nash reported good local uptake on Santander’s Breakthrough Fund, a £200m mezzanine interest-only debt fund created as a growth solution for sub-£25m turnover SMEs. “Last year we saw a significant increase in our support for local businesses with lending facilities and this alone has created 223 jobs in the region. That momentum has continued into this year, which shows there are businesses locally looking to expand.”
Elliott pointed out that growth did not always necessitate taking on external funding. A profitable company could grow by self- investment supported by good strategic planning, strong management, efficient productivity and skilled operational teams. Appropriate funding to fuel growth is what’s important.
OK, it’s time to pay up
Murray queried if payment terms were still a problem for SMEs. ‘They certainly are’ came the Roundtable reply.
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