Looking at alternative sources
The current tightening in traditional lending sources has led to brokers looking for alternatives sources of finance. Adam Tyler, chief executive of the NACFB, looks at some of the options currently available
A
fter the best part of three years in a difficult market, ingenious brokers are looking for alternative sources of finance for their clients. But it’s not just brokers who are considering their options. New uses for equity finance are being discussed and alternative investors – both corporate and private individuals – are being sought. In the green paper, Financing a Private sector recovery, published by the Treasury a few months ago, one of the options put forward for consideration was making equity finance more available to the SME market. The recent report published by the Business Finance Taskforce also looks at setting up a bank-funded equity finance package, targeted at businesses with a turnover of between £10m and £100m. Despite pressure from government, the simple fact is that banks are not lending as much to small businesses as they used to. This is in no way meant as a criticism; banks find themselves in a bit of a damned if they do, damned if they don’t situation at the moment. European regulation insists on maintaining plump balance sheets and this ties the bank’s hands. In addition, the SME community’s almost exclusive reliance on bank loans as funding did make it vulnerable; and these vulnerabilities were well and truly exposed when banks were forced to rein in their lending. But with a lack of alternative funding sources currently available, if you are an SME, you don’t have much option but to keep all your funding eggs in one basket.
So where can the broker find their alternative sources of finance for their SME clients? Many brokers will know that there have always been sources of funding from individuals or syndicates, often called business angel capital, and from companies specifically set up to invest in companies, called venture capital. This is far from a new phenomenon; indeed these forms of funding
32 November/December 2010
have existed for SMEs for years but have always had a limited appeal, however at our Commercial Finance Expo back in June I was asked by several delegates whether there were any representatives from this sector at the show.
One interesting phenomena which is arriving here from the States is a new model of invoice finance. As we have seen in the last two years of our survey, invoice finance has become increasingly popular as the recession has bitten. Invoice financiers are still very much open for business and this, compounded with the fact that so many others aren’t, means a huge surge in popularity. But there are even parts of this sector looking for alternative funding sources, and this is where receivables syndicates come in. Here a finance company sits between SME client and the end funder. The company gathers together all the invoices its SME clients would like funded and offers them to the investors. It’s then down to the investors to choose which of the invoices they would like to fund. Investors can be either companies or individuals and the finance company in the middle simply acts as an interface between the investor and the company whose invoices are financed. There is some evidence to suggest that there is a bit of movement towards alternative funding already. Because of the issues with traditional funding, as well as the focus of the Treasury and the banking taskforce, alternatives such as equity finance have been thrust into the spotlight. Awareness, both among the broker market and the SME community itself, is gradually being raised and translated into enquiries and new business, arguably with some success. For example, data from the UK Growth Buy-out Dashboard, a quarterly analysis of the trends in the private equity market carried out by Cass Business School and Lyceum Capital, reveals that the amount invested in the smaller end of the market, £10m to £100m of investment, has increased by 25% in the last
Business Money
three months, with 12 companies raising an estimated £590m of buy-out funding. Obviously, yet again, this is the much larger end of the small market, but the trends are still encouraging. There is still much more work to do,
however. New initiatives from the Business Finance Taskforce still leave the smaller SME out in the cold. The average SME requires funding on a much lower level than is being proposed here: thousands rather than millions; and in addition there is still room for both more education and more awareness raising for brokers, SMEs, and potential investors for all these schemes. And there are other challenges too. The SME market represents a risky sector for angels or venture capitalists, so one idea is that tax incentives could be offered to make this kind of investment more attractive to investors. But unfortunately, even with sweeteners, there is a very real possibility that once the banks return to strength, the SME market will revert to being just as reliant on them as they always have been, and potentially just as vulnerable. So investigating alternative now won’t just help with the present, but could also help prevent the same problems happening again in the future.
Adam Tyler, CEO, NACFB, tel: +44 (0) 1392 440040
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