WEEKLY COMMENT 4-02-2106
By Barry Edwards
Small Business Report
The British Business Bank (BBB) has published its report headed ‘Small Business Finance Markets’ this week which is a very comprehensive review of the sector with detailed statistics of the funding provided. It is well written and worth reading even if you only read the executive summary, click on the link below to see the report;
A short extract from the report is below;
“At an aggregate level, flows of both debt and equity finance to smaller businesses grew in 2015 showing that finance markets have improved. Notably, after several years of contraction, net bank lending to smaller businesses has increased for four consecutive quarters. Asset finance has also continued to grow strongly. Alternative finance business lending, though still less than 3% of gross lending, grew by 75% to £1.26bn in 2015.”
It has taken seven years for the SME finance market to grow again since the financial crisis which shows how difficult the climate has been for this sector. Although the BBB has been a success and has been needed for some time, creating further involvement by large institutions is only gradually having some impact and most of that is with the ‘peer-to-peer’ lenders.
The costs of lending to SME’s are high compared to larger companies which makes the Internet based providers attractive to banks who are starting to use this process to control overheads. In future, it is very likely that all SME lending below a certain amount will be handled through ‘Peer-to-Peer’ lenders who are now beginning to adopt the term ‘Marketplace lenders’. In effect this means that the original concept of lots of individuals lending to companies will become a small part of the Internet based lending scene. The BBB are also active in this sector providing funds to the well-established lenders as part of their wholesale funding remit.
Throughout the report the main thrust is to support lenders who can help those companies that have the potential to grow rapidly. They tend to be the companies that employ people and have a big impact on the success of the economy providing they can access the finance to fund their growth. This is where the BBB is trying to make a real difference and the report explains how they are doing this.
The core of the problem is providing professional support in conjunction with the funding required which has never been the method adopted by banks and the alternative finance providers. It has been traditional for all lenders to rely on credit reference agencies and on-line sources for their guidance on lending and not do anything when the loans have been made unless something problematic occurs which is normally too late for outside help to make a difference and restore the fortunes of the business.
To that end, the BBB have set up the ‘Finance for Growth’ pilot which has been allocated £100 million to match private funds on a fifty/fifty basis to achieve this ambition; it is currently seeking partners and closes on the 31st of March. Unfortunately, immediately after the autumn budget, the government cancelled their ‘Growth Accelerator’ project which was managed by Grant Thornton and had built up 3000 advisors to help SME’s grow. It was having a good impact on providing the right advice for these businesses and paid a substantial part of the fees when utilised.
It seems strange that the ‘Growth Accelerator’ project was not incorporated into the ‘Finance for Growth’ plan to solve the core problem. The reason was probably that the government was not willing to provide the funds directly from tax revenue and consequently it was not considered. However, if they had incorporated the tax incentives for investment in equity funding available under the EIS and SEIS schemes they could have got around that funding hurdle. Creating a large fund supported by private individuals using these schemes and combining it with the ‘Growth Accelerator’ project would have been a very effective organisation for solving this fundamental problem.
Everything is in place and Grant Thornton is there to manage the project and all the fees would be paid by the companies supported from the funding that would be arranged, both equity and loan. I am sure the ‘Marketplace Lenders’ would be delighted to work with the project to provide the loan finance to expand their businesses and they would have the advantage of proper monitoring form the advisors. It seems you could not get a better arrangement and have an organisation that could achieve exceptional things for the SME sector.
There are other government schemes already in place that could be incorporated into this project and you can see how that would work if you look at the ‘Economic Growth Plan’ in the right hand column of this page in categories; see ‘Enterprise Managers’ discussed in that paper. Let’s hope somebody in government takes some notice and takes advantage of the opportunity that is available.
That’s all for this week, more observations next week.