Making the most of commercial finance
ANALYSIS As Chancellor George Osborne’s £20-billion credit easing scheme for small businesses gets off the ground, critics argue the plan will make little difference to cash-starved firms, writes Elliot Wilson
However you read the figures, they aren’t good. In the post-Lehman Brothers era, the government was supposed to get banks lending again. That was the point of a somewhat doubtful plan called Project Merlin. Big banks like RBS and Lloyds were given targets to hit with the aim of supporting worthy but struggling firms, notably small and medium enterprises (SMEs).
That hasn’t happened. Most lenders missed last year’s targets. In 2007, 90 per cent of loan applications by small businesses were successful but by 2010, according to the Office for National Statistics, that number had dropped to 65 per cent.
Insolvencies are up. Costs are rising. The average smaller firm is owed £39,000 in late payments. Little wonder SMEs are struggling to get the nation’s GDP growing at a decent lick.
Now the Coalition Government has launched a National Loan Guarantee Scheme aimed at kick-starting a private-sector recovery.
“Sadly, the credit crunch is a reality for all too many smaller firms,” says Ben Wilkie, editor at independent financial information provider British SME. “The smaller you are, the shorter your corporate life, the harder it is to get funding. It’s like consumer financing and where to get a credit card; it helps to have paid off a few others beforehand.”
To be fair, banks are lending, coming up only just shy of the (admittedly low) Merlin targets. But it is claimed that they are too slow to discriminate between healthy companies and sickly ones. Process has replaced judgement, leading to an inability to determine if a rising company is worth the risk or not.
“We never meet anyone who goes to a pre-arranged meeting at a bank – and the funding was there, the deal done,” says Pippa Croney, a director at consultancy Board Intelligence. “Banks aren’t making it easy, so small firms are disinclined to attempt to borrow money. It’s a hassle to jump through so many hoops.”
The range of companies struggling for funding is staggering, from asset-rich property firms to patent-rich digital media firms. Too much funding is based on a firm’s rolling cash flow rather than their realisable ambitions. “It’s easier to get a loan based on the fact that you own a factory that’s owed regularly sums of money, than for that firm to get financing to build a new factory,” says Mr Wilkie. “That way of thinking isn’t good for economic growth at all.”
Many experts are inclined to give up on Britain’s banks entirely. Small firms are “desperate” for funding, says James Meekings, co-founder of peer-to-peer lender Funding Circle. “Yet they aren’t applying for loans because bank processes are so laborious. It takes months to get anything done.”
Make no mistake – it is still a tough trading environment for Britain’s firms. In order to thrive, our business leaders must take the initiative and learn how to make the most of commercial finance.
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