Help small firms survive the great funding drought

Advisers could benefit from government proposals for companies that do not have access to equity funding

Nikki Cann
NIKKI CANN ASSOCIATE DIRECTOR NACFB

In the past few days the Treasury has been busy publishing documents proposing changes that could affect the commercial finance industry.

One of these, entitled Financing A Private Sector Recovery, examines issues faced by businesses looking for funding in the aftermath of the credit meltdown.

This report was launched with business secretary Vince Cable’s promise of more stick and less carrot if banks don’t start lending more to small businesses, although on close inspection the report is more comprehensive than this initial sound bite would have you believe.

Members of the National Association of Commercial Finance Brokers deal predominantly with small to medium-sized entities so my interest in the report is primarily with regard to this sector.

It states that SMEs have suffered from the tightening of credit markets more than their larger counterparts because they have limited access to various other forms of finance that can be used by big enterprises.

Reliance on bank funding alone made the SME sector particularly vulnerable when the crunch hit.

Larger businesses have access to equity funding, whereby investors purchase shares. This is off limits to SMEs because the amount they are looking for is often below the limit of the average investment fund.

Private sources such as venture capital or business angels offer an alternative, but figures from the British Venture Capital Association suggest the amount raised by SMEs in this way fell 18% between 2008 and 2009.

This means they are finding themselves under even more pressure at a time when traditional bank finance sources are restricted.

The report also looks at making equity funding more accessible to the average SME and how this might be done. This seems to signal a move away from traditional funding routes.

Reliance on bank funding alone made the SME sector particularly vulnerable when the credit crunch hit

But it also acknowledges the risk to SMEs of keeping all their financial eggs in one basket. That weakness was well and truly exposed when many lenders effectively shut up shop.

The report is full of points to consider. One note that caught my eye is that the government is keen to promote what it calls better informed businesses. One way it is looking at doing this is by increasing transparency.

“The government is interested in the steps banks could take to make it easier for businesses to find competitive deals by increasing transparency in the loan application process,” the report states.

Taking this approach at face value, it would do away with much of the smoke and mirrors our members face every day, with banks claiming to be lending more than ever while at the same time turning down good applications.

But there’s no doubt that full risk assessment is complicated. We’re supposed to be moving away from box ticking, and communicating this could be fraught.

Interestingly, the report also states that “there is evidence that smaller businesses undervalue the benefit of external advice”.

With some joined-up thinking, brokers could be an excellent conduit to both alternative finance options and transparency. And that’s the view we will put forward.