Sharing the thoughts and expertise of Kirsty McGregor, founder & chairman of The Corporate Finance Network www.TheCFN.org.uk - supporting UK accountancy firms who are experts in SME Corporate Finance
Enough is enough!
The Chairman of The Corporate Finance Network has today written a blog appealing to be noticed by the government. She says the new Funding for Lending scheme won't work and ENOUGH IS ENOUGH!
That’s it, I’ve had enough! Help needed…
Don’t panic I’m not suicidal! But after reading the news last night and this morning I’ve decided to put pen to paper, or fingers to the keyboard actually. I’m just baffled, jaded and a little bit bemused by the announcement this morning that the Coalition has yet another new scheme to encourage lending by banks….which I can guarantee won’t make a scrap of difference! So let’s recap on the brief history of these schemes and then I’ll tell you what I think, in my typical direct & northern manner…!
So we had the Small Firms Loan Guarantee Scheme (SFLGS), which in its early days actually worked really well. Launched in 1981 it was scrapped in January 2009 after the default rate was considered too high and banks didn’t like it so much.
Then the Enterprise Finance Guarantee Scheme (EFGS) from January 2009 which never worked well in my opinion. The guarantee for banks was too ineffective in practice, and the security requirements for borrowers wasn’t appetising either. The Coalition kept grabbing headlines by increasing the capacity for banks, but in reality, few banks were using it. Officially I think this scheme is still running?
Then along came the much-heralded National Loan Guarantee Scheme (NLGS) from March 2012, supposedly encouraging lending by reducing interest rates by 1%. But the pricing of facilities wasn’t the problem. I could’ve told them that, in fact I’m sure I did!
So today we have the new Funding for Lending Scheme, providing cheaper lending to banks, effectively using the government’s better purchasing power on the money markets, as long as they pass that money onto businesses.
So why am I tired of all this?
Firstly from the banks’ own perspectives:
- The pricing of facilities isn’t really the issue, it’s the availability of credit due to underwriting policies. Even if banks receive money cheaper in order to lend on to businesses, it doesn’t really change their view of the risk they are willing to take. If the crunching of their numbers meant that they could only offer facilities at 8% before (and some businesses would have probably taken them at that rate) but the bank still wasn’t willing to offer that facility, then they won’t change their mind now because they can offer the facility at 6% .
- There has been a sweeping change in the lending landscape by institutions. Banks are reshaping their own balance sheets. The requirements of their regulators, and also their shareholders, are insisting they take a less risky approach. And I don’t think the government can actually do anything to change this!
Secondly from the SME’s perspective:
- Most are nervous of investing or borrowing and/or attempting to inject some serious growth into their business as the economic climate has been difficult for so long now
- Many SMEs don’t want to subject themselves to a rejection for new lending from their own bank. Besides the time the whole process takes up (when business owners should be concentrating on running their business), the negative psychological impact this potentially has on a business owner can be very detrimental. Business owners are entrepreneurs that are often driven by energies that are linked to their emotions. When they are down, the business won’t thrive. So it’s not worth taking that chance.
- They are nervous of the stability of existing facilities and don’t want to draw any attention to their business. They won’t put themselves under the spotlight, for fear it will affect their current lending arrangements. And we can’t blame them for that, because I’ve seen this happen many times!
Stop moaning, Kirsty – give us some answers!
Issue number 1 – Banks have historically, recently, and are continuing to, damage the trust that business owners have in them. The very recent withdrawal of the ‘free banking forever’ promise by Santander continues to provide an example of this. Overdrafts are annual agreements, but banks appear to be able to make changes within that timeframe. Loan agreements also seem to be able to be amended on the bank’s side. So what is the wording in these contracts actually worth to a business owner?
- legally the contracts (lending agreements etc) need to be more secure and more transparent for the business;
- the implementation of longer term overdraft facility agreements – not just annual; separate short-term and medium term facilities should be offered;
- Businesses need to look elsewhere for borrowing. We are continuing to champion the independent asset based lenders and the newcomers to the market who are using crowdfunding models. These lenders also benefit from technological solutions keeping their costs down & their reach wider, rather than the typical high street model which involves huge overheads;
- Businesses need to recognise that not all accountants can advise them on the best way to fund their business. The firms at The CFN are experts in SME Corporate Finance. We are inventive and creative and are continually finding new solutions – for example using intangible assets as security was once a no-go area for lenders, now we are doing it! Most accountants are not like us!
Issue number 2 – Businesses are nervous of taking new risks; yet many businesses are struggling to breakeven and can’t grow. Organic growth is very hard in this climate, even for the best business owner. So it’s time to sort the wheat from the chaff. Many sectors need consolidation. Businesses need to merge. Many business owners are desperate to sell up and retire. But purchasers aren’t out there & they are trapped. And there’s a lot of bad business owners out there too that shouldn’t be in business at all. But at the moment they may be providing employment to a handful of people, and they are just pottering along, but they will always struggle.
- Let’s have less focus on start-ups (inherently risky & huge failure rate) and more focus on buying existing business which need to transfer ownership. I’m encouraging our firms at The CFN to work with their clients to dispel the myth that acquiring a business is only the remit of larger corporates. There are 3 risks when buying a business – Financial, Operational & Legal. Business owners are more realistic of the value of their business if they want to exit, so outside lending is hardly used, and therefore the financial risk should now be minimal (if structured carefully). Operational risk needs to be mitigated with good preparation, good integration planning and knowledgeable due diligence. And finally the legal risk can be managed by using a decent corporate lawyer.
- And what about a tax break for purchasers on acquisitions? Putting these smaller, under-performing businesses into the hands of other SMEs who can mould them & grow them would hugely benefit the economy, local and national. And we’ll stop the ever-increasing number of retiring business owners just winding their business up & making redundancies because they can’t sell. Keep the employment, keep the output. And if there was a tax break for businesses to encourage them to take the risks, then there’s winners all round.
We are at the coal-face of the problems SMEs face, across the country. The government have continually missed the point. These Advisory Groups, Business Finance Taskforces and allied committees are made up of the great & the good who don’t see what we see.
So now I’m on a mission for the government to listen to me! Yes, I’m a mere northerner who’s still living in the north, a woman (& a working mother with 2 young children continually trying to do the work/life balance thing), massive amount of small business advisory experience, no public school pedigree but a heck of a lot of common sense thrown into the mix! And by gum I know what I’m talking about! So any assistance to get this blog in front of those in power would be much appreciated! Let’s stop this nonsense now!