The lack of access to finance for the SME is recognised as being a significant barrier to the country returning to growth!
The 2013 budget presented little hope that this funding blockage would be released anytime soon.
The chancellor announced a reduction for UK corporation tax to 20% from 2014, a £2,000 NIC holiday and a reduction in the UK corporation tax and an extension of the Capital Gains Relief tax for investors funding businesses via the Seed Enterprise Investment Scheme.
However, the only thing in the 2013 budget to free up funding to the SME was a £30m VOUCHER SCHEME to gain access to professional advice in supporting those businesses that have found barriers to growth, and require expert help.
The details are sketchy at best, but the Budget ‘Red Book’ states that the scheme will look to “target a number of specific areas of advice such as making a successful loan application to a bank or taking on an employee”.
The dire position regarding the availability of bank funding for the SME was highlighted in the recently published Bank of England’s Agents summary of business conditions. Please find below the key points in relation to SME finance, investment intentions and the state of the economy within which we all operate:
• The cost of credit was reported to be falling for some firms, though not for many smaller companies. Improvements in credit availability remained mostly confined to larger businesses and credit demand remained weak.
• Investment intentions had edged higher, which was said partly to reflect improved confidence amid diminished uncertainty about the near-term global outlook.
• Growth in exports of goods had edged up and perceptions of the outlook for export demand had improved.
• Manufacturing output for the domestic market remained slightly lower than a year earlier, though forward-looking sentiment had improved.
• Output of business services had ticked up, with some increase in mergers and acquisitions and financial market activity.
• Construction output remained subdued, though there were reports of a slight strengthening in private homebuilding activity by larger firms.
• Employment intentions had edged higher in business services but were broadly flat for manufacturing, consistent with the pattern of output in those sectors over the past year.
• Capacity utilisation remained a little below normal. There were few reports of recruitment difficulties outside of information technology and engineering.
• The rate of growth in labour costs per employee remained subdued, though some firms reported increasing pension costs.
• Inflation in material costs and finished import prices was unchanged.
• Output price inflation remained muted.
• The rate of inflation in retail goods and services prices had edged up.
The report summarised the situation regarding Credit conditions as follows:
The cost of credit had fallen for many companies, though this was yet to generate any material increase in lending. Falls in loan pricing would take time to feed through to actual borrowing costs as existing lending was reviewed and repriced gradually over time.
Banking contacts reported that some smaller companies might not see lower costs because lenders were seeking to increase the differentiation of loan pricing across the small and medium-sized enterprise sector. Smaller companies and firms in those sectors perceived to be of higher credit risk were yet to report any material increase in credit availability or in banks’ risk appetite.
More generally, bank lending for new activities or expansion was reported to be much harder to find than funding for ‘business as usual’. The availability of non-bank finance also appeared to be easing further, as reflected by very recent evidence of an improved functioning of the initial public offering (IPO) market.
Demand for bank lending was still reported to be weak, with many companies looking to reduce debts or build up cash reserves. While that often reflected precautionary motives, in a gradually increasing number of cases, contacts reported accumulating cash for potential future investment or acquisitions activity.
There were continued reports of a decrease in forbearance by banks on commercial property lending.
Comment
It seems that the traditional banking sources of finance for the SME are to remain ‘closed for business’ for some time to come. The current business finance environment is very obviously the new normal, so we all need to get comfortable with the situation and start to source our business finance from other alternative providers. Whilst there are a number of these types of finance providers out there, they are inevitably harder to find as their profiles are dwarfed by the big 5 UK banks.
I would be very interested to hear comments on this article and/or any of your recent experiences in business funding, good or bad. As always, I can be contacted at john.thompson@transcapital.co.uk, or on 0845 689 8750.
Image by: west.m