- Alex Hambrook, Business Development Manager, ABN AMRO (A)
- Simon Alsop, Head of Business, ICAEW (S)
- Witold Chojnowski, Senior Manager, KPMG (W)
- Glenn Blackman, Director, Cashflow Acceleration (G)
- Hazel Lucian, Corporate Finance Analyst, UHY Hacker Young (H)
Topics of Discussion
- To what extent should companies be seeking out growth opportunities?
- How should businesses fund growth?
- Who is primarily responsible for encouraging growth?
- The issue of ‘crowd funding’
A: To what extend do you think companies should be seeking out growth? Or is it about consolidation at the moment?
G: The economy needs growth. If you as a business don’t grow then somebody else will come into your sector and do it instead, so you must grow.
S: The business consolidation cycle should be over by now; it should have been over in 2009 or 2010. UK companies have balance sheets totalling £700bn so there are clearly people sitting on their hands waiting to invest. We have had false dawns before but people seem to have lost confidence, they are more risk averse now. Consistent growth has been forecast for this year; we avoided a triple dip and maybe even a double dip recession. There’s certainly the problem of companies taking the line of least resistance, tucking money away in pension funds or returning it to shareholders but not a lot of investment into growth happening.
W: I agree with you. Confidence is the big thing. If you look at the asset based lending market in terms of utilisation I see a lot of banks and funders and overall utilisation rates are at only 45%. That means people are only using 45p in every pound they can use, they are sitting on piles of cash and asking themselves: are we confident enough to invest in R&D funding, to buy another business etc. Historically when we’ve delved into this market there’s always been a funder and it always generated business for all sides (accountants, solicitors etc.) but I think we are still far away from that. But yes there are some green shoots.
G: You can grow organically or you can consider an M&A, but that’s a far bigger risk. I hope there’s an increased appetite to grow businesses organically.
W: There’s certainly money out there with distressed investors. Insolvencies have gone down as businesses would appear to be OK cash wise.
A: There’s certainly risk. There’s been a real shift in how risk is seen within and outside a business. There’s a real culture of blame nowadays, so it’s a lot harder.
A key word that’s come up there is confidence and I’d say particularly confidence in the economy that is driving or not driving the growth itself.
A: Simon raised a point about the risk aspect; would you say this applies from a business’ or a lender’s perspective?
S: I think it’s mainly from a business perspective. They aren’t feeling confidence because of the uncertainty of the economy; the appetite towards risk has changed globally. Businesses aren’t going out there to ask for money, they assume that there’s not a huge amount available to them at the moment.
W: Banks have got the money. In the ABL arena there’s £20bn worth of facilities and as I said earlier less than half of that is being utilised. It’s not a situation whereby lenders are giving out money and then the businesses aren’t going to give it back; they can do as they are sitting on lots of cash. The difficult question is how they unlock that cash that they’ve got and help fund new start-ups and entrepreneurs that are just coming into the business world. That’s where the risk is (start-ups, entrepreneurs). That’s where the distressed investors will say, you’ve got a very good idea, here’s £100,000, go for it. Will the banks do that? I’m not so sure.
A: In terms of businesses funding the growth, where is it going to come from? Is it as easy as saying they’ve got their own balances they can use or are there tiers? Is there a scale for unlocking the cash?
G: There are definitely different pockets of businesses; there are figures that are put out by various parties. The Federation of Small Businesses (FSB) put out a research paper saying that 42% of credit applications are unsuccessful, so there are certainly businesses that can’t raise enough funding. We interviewed 100 new start-ups and 31 of them said that they weren’t able to raise enough finance when they first started, so there are pockets that don’t have access.
W: That’s the big thing, how do you unlock that? Well, lenders have to lend money without security. What the banks are required to do is build up their capital requirements and they aren’t lending because they themselves are worried about falling over as a business! It’s about having the confidence to say I believe in your idea or product, but how do you get the banks to do that?
A: Do you think those types of businesses understand the bank’s credit appetite that is what the bank are looking for when they receive an application? Some of these businesses don’t have an experienced FD.
S: I don’t think they do. They misunderstand what the bank’s risk appetite is; the ones looking for distressed finance are looking for cash flow rather than investment and then you’ve got the entrepreneurs looking for an investment when they have an idea. I question whether the banks are the right people to be lending to these kinds of businesses. That seed capital is what most people assume banks would shy away from.
A: Glenn you have experience bridging the gap between SMEs and the ABL provider or bank, how do you see things?
G: The thing which shocks me is that you have these reports all over the place and businesses talking of having difficulty, but I could point you towards a market of ABL lenders hungry to lend. It’s about putting the two together. These figures about credit applications being turned down, there were actually only about 8% from that list of 100 that we definitely couldn’t help, so that’s tiny compared with the FSB’s research. The trouble is that people don’t know about ABL, they don’t understand it. They don’t understand the traditional lines of credit and they certainly don’t understand alternative finance. They think it’s exactly the same process as getting an overdraft in order to get invoice finance and it’s certainly not.
H: I’ve only ever worked in a slow economy, but in the last year or so it’s gotten better. The process just takes a long time, but eventually we find solutions for people.
A: From a bank’s perspective we talk about the value chain (from when we identify a need to delivering on that need). Four years ago we timed it at 31 days and now it’s 6 months! Some prospects have a birthday before it happens!
G: People are much more discerning about that, people are far more cautious, they become risk averse.
A: In terms of the flexibility of the terms and the lender, do you think that has changed somewhat?
W: What’s happening certainly in the ABL market is that the documentation is too thick. There’s a 12 page document with absolutely every problem that could occur, there are so many requirements under the facility that a lot of people just say ‘let’s stick with the overdraft’. In the ABL sector it’s too prescriptive, too tied in.
G: I think there’s definitely an appetite for more flexibility amongst businesses. It’s come up in the survey work we’ve done. The big contrast for me was that we did a sample of SMEs and asked them if they used overdrafts. The people that were using them, the average funding equated to 3% of their debt book. If you look at the ABFA figures, the funding is about 43%, so the flexibility is certainly there in alternative finance. But businesses don’t know that’s there, they don’t know that it’s a route to take. They tend to turn to their bank or accountant as their first port of call so it’s about getting the message out amongst those particular channels.
S: (on accountants) I deal with businesses who tend to have an FD. You can separate out into two camps the ones who don’t need money and then people clearly in trouble and desperate to raise cash. They don’t have security. The press sometimes misconstrues the real purpose of banks and these businesses don’t understand what a bank is for. Some people in business don’t see banks as a business, so they don’t understand that risk/return trade off. There’s certainly still a lot of stigma attached with factoring. When the economy is still fragile, people don’t want to do business with people who might well go out of business, but I like it, it’s a cheap way of raising money. Businesses don’t think outside the box. Accountants do have a role to play, they have people who want to invest such as high net worth clients. They can play more of a facilitating role.
Who is responsible for encouraging growth?
A: Banks, government, the SME community?
G: As businesses we initiate it. There’s a role for the government to try and stimulate it but also the banks as they are businesses as well.
W: The government has got to provide a fertile ground for these businesses to start up. You have to have those ideas such as tax breaks that could get things going, e.g.: don’t pay income tax when you start up. In the old days, when purchasing plants and machinery, you got tax breaks for it. I don’t see that coming in at the moment. It’s everybody’s responsibility though. it’s about having that environment which I don’t think we have at the moment.
Another thing we haven’t spoken about is zombies. Interest rates are so low and they have been for the last 5 years, so it still hasn’t stimulated growth. The leaders of businesses know their market but they don’t understand the concepts of cash flow, of capital etc. That’s when we have problems.
A: Just to explain, a zombie is a business that effectively is trading, has a lot of borrowing, managing to pay for its borrowing but only just about managing. If there’s a catastrophic event, it changes the whole dynamic for the business and both it and the lender fall over.
W: There are inconsistencies we are seeing. It’s this whole culture of mothballing, an intensive care situation of the banks. The banks are the blood flow of the economy and if there’s no confidence in them there’s big trouble for the economy.
A: This comes back to the issue of green shoots. And we need to ask: are they green shoots or advanced mould? What do you think the levers are that will push it forward and create a shift, both in terms of lending and the economy?
S: I think it’s as much about red tape as lending. Businesses find legislative obstacles very challenging. As you say, it’s about the government encouraging that growth environment, making it a lot more business-friendly, pro-business. If people understood how important financial services were to the whole country they’d probably have a slightly different attitude. My parents are in Yorkshire, they say that London is this big parasite feeding off the rest of the country, but it’s the other way round. The economy in London is feeding the rest of the UK. It’s the most profitable in Europe. There’s a real misconception as to what value businesses can provide an economy. The EU question and debate seems so ill-informed and emotional, it needs to be fixed before 2015. It’s not about Brussels. SMEs do complain about red tape implemented by Brussels but it’s not about that, it’s about how we implement what comes down from Brussels. Germany has a very, very strong SME market and they are right in the centre of Europe. It’s got nothing to do with the EU.
W: How is it that the German market is so robust? What could we learn from that market and their successes?
S: The family businesses there take a longer term view; they are driven by long term goals. There’s a lot we can learn in terms of that longer term approach. There seems to be this perception that the end game of building a business here is that they’ll sell it on for profit, whereas in Germany it’s about being passed down through the generations. There’s more care involved.
A: The car industry: I remember when it was on its knees and now UK car industry outperforms its European counterpart, where was that turning point?
S: I think it’s about the premium brands. Also, there are lots of SMEs tying into these large companies, supplying parts and so on. And these SMEs are growing because of it.
W: 50% of the vehicle is manufactured in the UK, so there is a base. The car industry in particular is a success story. Local manufacturers, the SMEs, provide the components, driving the SME growth in this sector.
W: Print is in contraction by contrast, the rise of digital technologies is affecting that. It was historically very involved with invoice finance. Leasing for printing equipment as well.
A: Glenn, say a business is struggling, has debt from a bank and has got facilities that are fairly inflexible. What is the best way of shedding these issues and putting themselves in a ‘better place’ as it were?
G: The invoice finance route is always an option with these kinds of businesses. Typically they can raise a lot more money than they can raise through the traditional overdraft and in a lot of cases a client will move to an invoice finance facility and be able to pay part of their overdraft back using that. They can then release extra money for their cash flow, that’s one option.
A: Quite big in the US is this thing called crowd funding, it’s a new idea that is making its way over from the States. It can be quite cheap for businesses in terms of cost of funds.
G: There’s an emergence of this and there are various parties doing it. One of the main things we come up against in the UK market once again is the trust issue. It’s hard to convince people, especially when there’s no big bank name behind a lender.
H: More businesses are starting to lend in this way, as they can try it out in small amounts and then if it works they can increase the lending.
G: Businesses do like the idea of being able to complete these kinds of transaction applications online and get an instant decision on funding.
W: It cuts out that red tape which is a big problem.
H: They’re starting to lend more, at first it was in the tens of thousands but now these kinds of crowd funding circles can raise millions.
A: What’s the viability of it on a large scale?
H: It’s an open field. They rate different levels of risk and different interest rates, so it’s not a simplistic ‘one size fits all’ approach.
S: If you go back 100 years there were lots of different stock exchanges all across the UK. It’s like that situation now with crowd funding, we are cutting out the middle men as it were as virtual stock exchanges are created. If you are a start-up it’s a very attractive option.
A: It’s like eBay for invoice finance. You can put your invoices online and people bid on them to dictate how much you are lent.
G: There are new options there for businesses trying to access some funding. There seems to be a need for more than they have at the moment. Every single business we spoke to in one study said if they had more funding, they’d be able to grow more than their projections for the next year. So that says to me that there is definitely a market that needs servicing!