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Money, money, money

Rich man's world?

Some think it can't buy you love and others think it’s what makes the world go round but regardless of your own personal thoughts and beliefs businesses simply can’t do without it.

I’ve been working with owner managed businesses for fast approaching 30 years now and the subject of finance and cash flow has always been right at the top of the agenda.

Whilst the topic may not have changed, the options in this area most certainly have and the number of new and innovative solutions now on the market is both impressive and somewhat overwhelming.

The awareness of these alternative funding options is also impressive with research showing that well over half of all UK businesses are aware of options such as crowdfunding and peer to peer lending. 

So we’re all good then? We know that businesses still have finance as one of their top priorities but the market has developed and expanded significantly. Business owners are generally pretty well clued up on the options now available. Does this mean everyone is happy?

The short answer appears to be a resounding no. Lending within the SME sector is at best stagnant and probably moving backwards. Almost 80% of SMEs have less than £10k working capital to their name and, frustratingly, business failures remain stubbornly high.

The numbers

Total net borrowing within the SME sector rose by only £0.5 billion or, to put it in more startling numbers, £7.25 for each person in the UK. In fact the number of businesses using external finance actually dropped from around 38% to 36%.

More concerning is that a survey by the British Business Bank revealed that 73% of owner managed businesses would rather forego growth than accept external finance - which fits beautifully with the revelation that only 3 in 10 SMEs grew last year.

But the reluctance of businesses to raise finance doesn’t point to everything being all rosy with small and medium sized businesses. The number of business failures is still eye wateringly high. Almost half of all owner managed businesses experience late payment from customers (with a third saying it causes cash problems) and most SMEs are owed well over £9k in late payments at any one time.

When you consider the following it is hardly surprising that businesses won't borrow: 

  • Almost 90% of all borrowing is STILL with 4 high street banks;
  • The numbers are difficult to get but it’s broadly accepted that high street banks convert less than 10% of all the applications they receive;
  • 4 out of 5 businesses that do look to borrow approach only one lender;
  • Businesses typically need to access the finance they are seeking in less than 10 days.

So one’s tempted to ask. What the hell is going on? And moreover, who is to blame?

Right answer to the wrong question

Although there is no shortage of reports detailing the issue, they do tend to come from a large scale point of view. They provide bland and largely meaningless analysis of huge numbers and trends which may be ideal for governments and central banks, but they’re all a bit short on the detail and, crucially, the why.

I was once involved in a project that wanted to find out why more small businesses in the region weren’t exporting. All sorts of studies had been commissioned and there was - what was thought - a good understanding as to why; things like too much red tape, language barriers, cultural issues, lack of export financing.

The reality is that whilst these things were being raised by businesses, they were being raised by businesses that were looking to export in the first place. The project was answering a completely different question to the one it was tasked with. 

It was answering why businesses weren't exporting more rather than why more businesses weren't exporting.

The same is happening within the whole area of finance for SMEs. Too much focus is on businesses that want to raise finance but can’t, rather than speaking to those businesses that don’t view properly structured debt as part of their business model in the first place.

Structured finance

That the recent report makes such a noise about the correlation of growing businesses relative to businesses that won’t consider external lending is completely valid and valuable in the case of a growing business or a business that wishes to grow.

But not every business does

When a business does need to raise money they typically need the funds in a short period of time, as little as seven days. For those businesses it is not about growth, it is not about strategic financing, it’s about paying the VAT or PAYE, meeting the payroll commitment or the owner simply paying him/herself.

For those types of businesses I am usually able to get them a same day decision (assuming the requirement is less than £50,000) and funds can be in their account within a matter of hours. 

But then the real work starts

The 'work' meaning the business must start to wean itself off short term, expensive, reactive finance and onto long term, sustainable and structured finance that supports and reflects the working capital requirements of the business, not how much the impending VAT bill is.

I was recently approached by a company that needed to raise just £15,000 to cover its VAT - but needed within 10 days. It was the second quarter running that they had been in this situation and the second quarter running that they managed to dodge a bullet.

My help came with a caveat that we used the next 3 months to ensure the next VAT payment came out of working capital and not emergency funding.

It required a fundamental shift in thinking and approach to business: one where they ceased to be one of the 60% odd of SMEs that don’t bother with management accounts to one of the few that actually sits back and thinks about business structure and financial needs.

We're not talking debt for growth, debt for expansion, debt for new machinery but sustainable, sensible funding of the businesses working capital needs.

So what's the message?

  1. Debt can (and for many should) be an integral part of the working capital structure of a business 
  2. Expanding fast or purchasing equipment is not the only time to be looking at your options
  3. You can now apply to several (sometimes hundreds) of lenders as effortlessly as applying to one
  4. High street banks may not be a suitable option for your business
  5. Structured businesses usually have structured debt.

Need help and advice?

To chat through your options feel free to drop me a line at phil@nbsadvisory.co.uk, or complete the contact form or call +44 7596 537289