Small business finance options in response to ongoing criticism of banks

Since the start of the recession, banks have been lambasted for a variety of different issues and Vince Cable’s recent criticism only adds to this. His view that there is a “serious problem” in terms of access to small business finance and many SMEs are discouraged from even applying for loans, is the latest accusation that banks are failing to support smaller businesses.

There are 4.8 million small businesses in the UK and SME’s which accounts for 99% of all businesses in the UK economy, which in turn employ more than 59.8 per cent of the private sector workforce, contribute more than 49 per cent of the UK turnover, and account for two thirds of new commercial innovations, and if they are going to survive, prosper and pick up the slack of UK plc, they need to be aware that there are several alternative options available.

The Enterprise Finance Guarantee scheme

The Government’s flagship small business lending scheme, the Enterprise Finance Guarantee (EFG) scheme, where Government covers defaults of up to 20 per cent on the first £1 million of loans, is starting to dry up.

It fell by 31% in the last three months of 2010, which was down from £144 million in Q3 2010 to just £99 million in Q4 2010 which was also the lowest quarterly figure since it was launched in 2008 to provide targeted intervention for viable SMEs, close to the margins on risk, who could not access debt finance during times of tight credit conditions

The fact the scheme appears not to be working as well as intended is worrying as there are plenty of small businesses in this country, with robust finances, good management and sensible growth plans, otherwise being deprived of the capital they need if they are to grow.

EFG will continue until 31 March 2015, enabling up to £600 million of additional lending in 2011-12, and over £2 billion in total between 1 April and 31 March 2015, subject to demand.

Invoice finance

Another option, invoice finance, is by no means a new form of small business funding and is now more widely understood amongst SMEs. Even so, it is estimated that 25% of UK businesses are still unaware of invoice finance.

Invoice finance is a mechanism that can provide an instant cash injection, immediately boosting working capital, that many businesses need at some point in their development and which lack of is still cited as the biggest killer of small businesses.

It is thought that over the last two to three years the invoice finance sector has advanced small businesses more money than the banks have advanced in the form of overdrafts. In the UK with numerous banking scandals such as excessive fees, delays to processing payments which earns banks interest, uncompetitive lending, the credit crunch, bailouts and now the Payment Protection fiasco is it any wonder that banks are swiftly becoming the lenders of last resort for SME’s?

The banks have tried to venture into Invoice Finance but so far, their advances have been met with scepticism.

Under the invoice finance banner there are a number of services that companies can use.

Factoring releases the money tied up in a company debtor’s book and typical advances up to 85-90% of a company’s ‘approved’ customer invoices. The security is the invoice itself and the facility raises much needed cash for working capital, expansion or other commercial needs. Invoice Factoring is managed by a professional outsourced credit control, debt collection and sales ledger management service by the funder.

Invoice discounting works in a very similar fashion to factoring invoices and gives a company regular, managed cash flow but leaves the company in control of their own sales ledger. The funding method is identical to factoring in that up to 85-90% of a company’s approved debts will be available, usually the same day that invoices are received and that the invoice is the security. But, unlike factoring, the small business finance provider doesn’t implement the outsourced credit control, debt collection and sales ledger management services.

Other options include Confidential Factoring where the provision of funding and invoice management (i.e. credit control and sales ledger management) is the same as for normal factoring, but where the credit control and sales ledger management are carried out by the funder, but crucially, are conducted in the name of the client company, hence the term ‘confidential’. In normal factoring, the Factoring provider will use their own name, with Confidential Invoice Factoring, the factor acts as your own accounting department and uses the client company’s name when contacting customers which is useful for certain businesses whose debtors have a ban of assignment

North West Fund

The North West Fund is for SME’s in Merseyside and in Greater Manchester who are in need of £50,000 to £250,000 for growth purposes who can demonstrate a strong case for investment when applying. They need to provide a business plan which must show the business’ vision for growth and its ability to service a loan.

Loans can typically be repaid over 3.5 to 5 years and security, such as business assets or personal guarantees (at the fund manager’s discretion) will be required when applying.

The Fund is only for businesses that are using the funds for growth, and have a strong case to show.

The North West Fund is made up of a £92.4m European Regional Development Fund grant and a £92.4m loan from the EIB that has to be invested in North West businesses before 2015. Under EU rules 40% of the funds have to be invested in companies on Merseyside.

The Business Growth Fund

The Business Growth Fund is a national programme (unlike the North West Fund) and will invest between £2m and £10m in return for a minimum 10% stake and a seat on the board for a Fund director.

Backed by Barclays, HSBC, Lloyds, RBS, and Standard Chartered the £2.5bn Business Growth Fund is one of the outcomes of the Project Merlin agreement on improving the way banks support business.

Obviously not applicable to the small firms who make up SME’s but whilst banks have been lambasted (and rightly so) this is a possible step in the right direction for those viable businesses who do have strong growth potential but lack the capital / funding to commence their growth plans.

The sting in the tail maybe the equity stake?

“Minimum 10%” is just that, minimum and when it comes to banks and integrity, honesty and customers coming first, you would be hard pressed to find a non banker that would use any of those words in the same sentence as bank without the word “lacking” or phrase “devoid of”.

The proof is in the pudding and the results will speak for themselves in time.

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