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Access to finance: SMEs are investing for growth

Access to finance: SMEs are investing for growth

By Adrian Sainsbury CEO of Commercial Division, Close Brothers

Access to finance is finally opening for SMEs, from just a trickle at the height of the financial crisis, to more of a stream- but it’s too early to say the floodgates are open. The latest data on the Bank of England’s ‘Funding for Lending’ scheme, designed to boost credit to smaller companies, shows that banks extended an extra £600m of loans in the first three months of 2015. Similar data for 2014 shows net lending shrank on average by half a billion pounds a quarter, largely due to repayments exceeding new loans.

The data suggests two things: Britain’s biggest high street lenders are finally stepping up to the plate (somewhat) and meeting their obligations, and SMEs and finally investing for growth.

These two developments are vital if we are to secure the recovery. Britain’s 5.2 million SMEs are the engine of our economy. Collectively, they provide over 15 million jobs and generate a combined turnover of £1.6 trillion. SMEs also account for 57% of the UK’s manufacturing, yet only one in five currently exports, so they are also crucial to the Government’s efforts to rebalance the economy away from financial services and to boost overseas business.

To achieve these aims, SMEs need better access to finance. Despite the latest Funding for Lending data, small businesses consistently worry about access to- and the cost of- finance. Research by the Federation for Small Businesses shows that 40% of SMEs have been refused credit by their bank.

However, support is there for SMEs. They can start by looking at alternative sources of finance beyond the traditional bank overdraft. Inefficient banking arrangements can hurt growth and make companies hostage to cash flow problems. Too many SMEs rely on overdrafts - a poor way for SMEs to borrow money. Banks can pull these loans “on demand”, without any notice, leaving companies with little or no time to find the means to repay them. And SMEs often find that overdrafts are not sufficient enough to meet the cost of the new machine tools, new personnel hires or vehicles that are needed to fulfil a big new contract.

Instead, banks are called upon to provide unsecured term loans instead. By their very nature, small businesses are riskier to lend to, because they tend to be at an earlier stage of their growth, without much of a strong balance sheet to support this type of finance. It is not realistic to expect high street banks to give SMEs this sort of loan because they run the risk of losing their money if the economy turns and the business folds.

Entrepreneurs, business owners and managers should think beyond overdrafts and consider tapping other sources of finance. These can include peer-to-peer lending - where individuals can lend money to other individuals directly, with a company, typically an online platform, matching lenders and borrowers; business angels - wealthy individuals who are prepared to invest their own capital in start-up companies in return for an equity stake; or putting their balance sheet to work through invoice finance and asset finance.

SMEs often fail to realise there is a lot of value sitting on their balance sheets waiting to be unlocked. Asset finance is a quick and simple way to unlock that value. How does it work? Simply put, asset finance is a loan that is secured against some or all of the assets of the company. This is often machinery and equipment or other tangible assets, but it is also possible to borrow against stock, property, or accounts receivable.

Asset finance is often combined with an invoice finance facility. Combining both short and long term assets in this way can free up even more value in a company’s balance sheet, by unlocking the cash held up in unpaid invoices so companies do not need to wait for their customers to pay them.

Close Brothers lends around £3.3 billion to thousands of UK small businesses. We expanded our loan book and market share throughout the financial crisis, while high street banks retrenched. And demand for our business continues to grow.

Earlier this year, we financed the merger of two SMEs through asset finance to create one of the largest independent metal pressing companies in the Black Country. In Burnley, we’ve helped fund new manufacturing facilities for a leading provider of highly engineered components to Britain’s automotive and aerospace industries. We’re working with countless other growing businesses to help fund their entry into new markets, their launch of new products, even to fund their day-to-day working capital requirements.

SMEs no longer need to rely on traditional high street banks to finance their growth. Alternative finance providers now offer a rich variety of both debt and equity solutions. It’s now up to SMEs to seize the opportunity.

This was posted in Bdaily's Members' News section by Adrian Sainsbury .