SMEs Struggling to Finance Future Growth
Acknowledged by Prime Minister Theresa May to be the backbone of UK business, SMEs input a massive £200+ billion per year into the country’s economy. This figure is predicted to increase by nearly 20% by 2025. In January 2017, 99.3% of all privately-owned businesses were SMEs and they provided 60% of employment in the private sector.
However, despite these apparently buoyant statistics, very many SMEs are struggling to grow. The UK has the highest business start-up figures in Europe and currently its highest-ever number of small businesses (5.7 million as of Jan 2017), but a report by the Institute for the Study of Civil Society (Civitas) gives a gloomy forecast for their prospects.
According to the report, only a tiny three percent of these new businesses manage to grow over three years to have 10 or more employees. The UK is one of the lowest achievers in this area, in the Organisation for Economic Co-operation and Development (OECD) group of countries.
Why is growth so limited?
Traditional loan timescales and processes
SMEs are apparently, in part, being stalled in their growth because of the difficulties they are finding in accessing affordable and timely growth finance by traditional means. Improving plant and machinery or expanding into larger premises are expensive processes, which few SMEs can shoulder totally on their own.
At one time, the obvious place to go to first for business finance was the bank. A business owner seeking finance could sit down with the bank manager and discuss plans and projections face-to-face. The whole procedure was relatively quick, and the money made available when needed.
In modern banking, no such straightforward process is available.
A business owner will be assigned an account manager with whom they liaise, but this person will have no actual powers to facilitate a loan. Instead, they will act as an intermediary between the business owner and the credit team, which will make the ultimate decision. The business owner is not able to speak directly with that team or put their case personally.
This lends a somewhat faceless and opaque quality to the procedure and adds considerable time – often many weeks – to what may be a time-sensitive requirement, especially if questions and answers need to be relayed between the parties. Often, business owners don’t plan for borrowing capital until the definite need arises for it, so can be in a hurry to get the finance.
Decline in bank lending
Many small business owners, particularly of start-ups with no financial history, find that obtaining a traditional loan is harder or more costly than getting other forms of finance.
Figures from the British Business Bank (BBB) reveal that around 100,000 applications made by SMEs for loans are turned down every year. Statistics from the Bank of England show that bank net lending fell to around £700 million in the early part of 2017, which was a fall from around £3 billion the previous year.
Those businesses that are granted loans can find that the terms and security required can be prohibitive.
Even the granting of overdraft facilities for shorter term and lower amount borrowing has been curtailed in recent times. It’s not necessarily a safe borrowing method to rely on either, with existing overdraft facilities having the potential to be reduced or completely removed at a moments notice.
Reluctance to borrow
BBB report figures reveal that only 1.7% of SMEs applied for new loans in the 10 quarters up to February 2018, a record low since the SME Finance Monitor was introduced in 2011.
Only 43% of SMEs thought they would be granted a loan at all, but perhaps a more telling statistic is that a huge 70% are more willing to grow slowly or not grow at all than they are to take a loan to finance growth. This indicates a decline in small business confidence and continues the previous year’s trend.
What solutions are there?
For those businesses wishing to improve, replace or first-time purchase machinery, technology, transport or other high-cost assets, what alternatives exist to raise capital beyond a bank loan?
There are very many loan companies around which will offer quick decisions and flexible terms, but these can be expensive if an unsecured loan is required. If a loan is secured on the business and there’s a serious economic downturn, the business could be at risk.
Equity crowdfunding involves raising capital by selling bits of the business. Of course, this process has been around forever, with stock market share flotations and funding by business angels who take a slice of the business in return. This method usually requires investors to input large amounts of capital each, to be worthwhile.
The difference with equity crowdfunding is that investors can input tiny amounts each and the system relies on many people doing so. It works best for a specific project – perhaps buying a particular asset or developing a special product – something which can easily be described to and visualised by the potential investors. There are online platforms which handle the process, and which will take a fee for their services. They will hold the incoming funds until the target amount has been reached.
Peer-to-peer (P2P) lending
As a borrower, P2P lending works much as a normal loan does, but the loan amount is raised by a number of individual investors or lenders. The business pays interest on the capital it uses, which gives the lenders their investment return. The costs are less than those incurred by traditional lenders, making the interest rates charged also less.
All of the previous funding options either involve borrowing large amounts of money at interest rates which could change during the life of the loan, or require the business owner to part with some of the company equity. If this isn’t a desirable outcome, what else is available?
Is there a better alternative?
An alternative is asset-based borrowing, where the funding is secured on a specific asset of the business – perhaps physical resources such as machinery or stock, or even intellectual property or expected income streams. Asset-based lending can be structured as a credit line, which can be drawn on as needed and the costs are calculated on the basis of the risk to the lender. For large loans, lenders will often group and jointly fund the amount.
Commonly asset finance is used for financing or leasing an asset – vehicles, machinery handling equipment, technology are some examples – obtaining resources for a business without either taking out a loan or expending large amounts of capital. Funding will be secured on the asset and the costs spread over a period of time to suit the lifespan of the asset. Payments can even be spread irregularly throughout the year to suit organisations that have seasonally affected business cycles.
Depending on the form of finance chosen, ownership may pass to the customer at the end of the agreement, or it may be returned to the financing company. You can find out more about the benefits of asset finance here.
Whichever funding option you consider, get professional advice before you decide which way to go.
At Anglo Scottish Finance, we have a team of experts who can discuss your needs with you and advise on the most suitable and cost-effective funding methods for your business. We are experienced in all business sectors and our specialist knowledge is geared to ensuring that you get the best from the asset financing solution you choose.
If you would like to discover more about the options open to you for asset funding to grow your business, then please get in touch with Anglo Scottish Asset Finance today.