The coalition government’s attempt to kick-start SME lending has not been a success by any stretch of the imagination. Finalised in February, Project Merlin was the government’s attempt to force the top five mainstream lenders to make credit available to SMEs.
The top five banks signalled their desire to lend £76 billion to SMEs during 2011 (£190 billion to business in total), a figure which, unless the situation improves dramatically, looks like little more than wishful thinking on behalf of all concerned.
First-quarter lending to SMEs under the scheme was £16.8 billion, a considerable way off the £19 billion run rate that is necessary to meet the £76 billion target. Banks put the shortfall down to a lack of demand; SMEs beg to differ.
Commercial finance advisers are witnessing first-hand the problems that SMEs are encountering. Adam Tyler, chief executive of the National Association of Commercial Finance Brokers (NACFB), says that, despite various government initiatives, it appears to his membership that obtaining funding has not become any easier in recent times.
He explains, ‘There appear to be two contradictory stories: one from the frustrated brokers stating that large volumes of good-quality cases are being rejected by the banks; and the other from the banks, which insist that cases are being accepted but demand for borrowing is muted.’
The feedback from the ‘shop floor’ has not been hugely favourable, he says, with many NACFB brokers stating that restrictions on lending have not been relaxed by any noticeable amount: ‘We have heard many stories from our members about well-researched and strong deals that have failed after much scrutiny and hoop-jumping being required by the lender – ultimately, deals that would probably have been relatively simple a few years ago.
‘The feedback from commercial finance brokers implies that only a small number of good-quality applications even get to the stage where they are formally assessed – so some of the backslapping and self-congratulatory attitudes fail to give an accurate depiction of how many cases are even formally considered despite the strength of the proposals. The frustration from brokers and SMEs is palpable to say the least,’ he notes.
Roger Dewsbery, senior underwriter at commercial broker Crystal Mortgages, says that when high street banks claim that they’re trying to get deals done but are not getting the demand, they really mean they’re not getting applications that match their appetite.
‘The key for banks with applications is their perception of serviceability,’ he explains. ‘Banks don’t want to repossess – they’ve had plenty of that recently and it doesn’t get anyone anywhere. It’s far better to have the deal structured in an affordable way; security is almost secondary.’
His firm, while arranging deals with high street lenders and other finance providers, also has its own in-house lending facility. He says it does deals that are of no interest to the large banks, regardless of how they are pitched.
He is not referring to applicants with adverse credit issues, but specifically those without three years of accounts history. ‘We’ll consider recent start-ups where we feel the deal is right – for instance, if the current management figures show that the trend is moving into one of correct affordability.
‘Also, if a bank nearly did a deal, the chances are that we actually will do it.’
Similarly, David Whittaker, managing director of specialist broker Mortgages for Business, says the situation for SMEs seeking commercial mortgage finance is ‘a bit better’ than it was 12 months ago: ‘The opening months of 2011 saw a stabilisation of the commercial mortgage market, with the high street banks “fighting” for market share of high-turnover businesses buying premises from which their businesses can trade.
However, balance sheet constraints can leave them short on loan-to-value bands on medium-sized loans – appetite for stand-alone mortgages at 75 per cent LTV is still strong.
‘Options above 75 per cent LTV are limited but available for strong businesses that are willing to switch banking to the new lender.’
Unsurprisingly, Whittaker argues that there are tangible benefits to be had from using a commercial finance broker: ‘They know the market and save borrowers having to do lots of legwork,’ he explains.
‘They have long-standing relationships with lenders and often have direct access to the underwriters, which can be crucial in determining whether an application for funding is approved or rejected. Brokers will really fight the borrower’s corner.’
In terms of high street lenders, Whittaker feels that their underwriters can be ‘extremely tough’. ‘Aldermore Commercial Mortgages and Whiteaway Laidlaw Bank are relatively new entrants to the market and represent good alternatives,’ he adds.
The Finance and Leasing Association, the trade body for the asset, consumer and motor finance sectors in the UK, reports that UK businesses are increasingly turning to asset finance when investing in new equipment. Its most recent quarterly confidence survey, published in June, suggests that finance company chiefs expect this trend to continue.
A total of 78 per cent of respondents expect broker-introduced asset finance to grow over the next three months, and 75 per cent expect equipment dealer and distributor finance to do the same.
Asset-based finance is a generic term used to describe products including factoring, invoice discounting and asset-based lending (ABL). These facilities involve funding against a range of corporate assets including invoices, stock, property, plant and machinery and sometimes even intellectual property and brand.
Roger Dewsbery says that asset finance can often supplement other forms of finance, such as a commercial mortgage, in order to provide the client with the money they need: ‘We’re often finding that the commercial mortgage isn’t enough. We know we’ll need to find more so, for example, we’ll use asset-based lending or a factoring facility in order to make it up to the desired level.
‘Asset-based lending is not just for purchase purposes. You might find a printer who has a lot of high-value equipment, but no one will lend money on it because he owns it!’ That’s when, he says, asset finance can really help.
Invoice Finance is a Growth area
Latest figures from another trade body, the Asset Based Finance Association (ABFA), indicate that invoice finance is outperforming all other types of business lending. Total advances from members have grown 9 per cent year-on-year, whereas finance through leasing and hire purchase grew 8 per cent and wider bank lending actually contracted by 2.5 per cent in the same period.
ABFA’s latest quarterly industry report also shows turnover growth of 15 per cent year-on-year, with total client sales in the quarter of £55.8 billion. Invoice finance clients are currently not electing to draw down all the lending available to them, which ABFA explains means that clients have sufficient funds for their business needs.
The total funding available was £21.1 billion, yet only £14.8 billion was utilised by clients, leaving £6.3 billion of funds still available. Kate Sharp, ABFA’s chief executive, claims that the figures show how successful the industry is, with no shortage of available funds: ‘Compared with all other major forms of business lending, asset-based finance has grown the most, as both clients and lenders realise its inherent strengths in these unpredictable economic times.’ Invoice finance has long been a facility taken up by firms looking to improve their cash flow arrangements.
However, it has not had the reputation of being a service that can be set up quickly. In light of increased demand from firms wanting a faster option, independent invoice and asset-based lender Venture Finance recently launched a ‘FastTrack’ invoice discounting service.
It enables companies wanting a standard facility to release finance from their assets in a few days, to boost cash flow and fund new deal opportunities. Venture Finance says it arranges an initial meeting within 48 hours of first contact, ‘quickly’ assesses the business needs and works to deliver a fully operational finance facility within five days.
The proposition is aimed at companies with an annual turnover of between £500,000 and £5 million and an established, well-run credit control function that continues to handle debt management.
Peter Ewen, managing director of Venture Finance, says the service was launched to cater for SMEs still struggling to access ‘the right finance at the right time to embrace new growth opportunities’.
He adds, ‘We saw an opportunity to fill this gap in the market, without sacrificing service for speed, as part of our continued commitment to increase business confidence and support a sector lauded as the engine of UK economic growth.’
New forms of funding
Lack of traditional bank finance to businesses has led to innovative new forms of lending. Launched last year, Funding Circle has pioneered so-called peer-to-peer social lending to businesses. With high-profile backers such as Jon Moulton of Better Capital, Funding Circle is an online marketplace where people lend directly to UK small businesses.
Loans are available for amounts from £5,000 to £50,000, with repayment schedules of either one or three years. Matching lenders with borrowers, Funding Circle argues that the more interest there is in a business, the lower the interest rate will be.
It also claims it can provide funds much more quickly than the banks, with accepted applications receiving funds within 14 days. Hot on the heels of Funding Circle is a proposition from ThinCats, which differs slightly in that loans are secured, typically in the form of a charge over directors’ property.
The service, which was launched in June, has a maximum loan size of £1 million, 20 times that of Funding Circle. ThinCats trialled its service in the Midlands in January 2011, facilitating eight loans totalling more than £1 million, the largest of which was £250,000 for a clothing company based in Cannock.
The brand is the trading name of Business Loan Network and was established by the team who manage the £10 million Advantage Early Growth Fund, together with 13 business angel investors that have been co-investing with them for the past seven years.
‘Up until now, peer-to-peer lending sites have facilitated smaller, unsecured loans but we have shown that there is a demand from serious investors and established businesses for a more sophisticated service providing access to the secured lending market previously dominated by the banks,’ says ThinCats’ managing director, Kevin Caley.
Not to be outdone by peer-to-peer lending, invoice finance has also just appeared in an innovative online setting. Marketinvoice claims to be the UK’s first online marketplace for invoice finance.
The site gives UK firms the opportunity to raise short-term finance or improve their cash flow by selling invoices raised to institutional investors.
Such investors bid to acquire the invoices, by suggesting an advance fee against the face value of the invoice, plus a discount fee. Marketinvoice says cash is then advanced immediately. Unsurprisingly, the proposition has been dubbed ‘eBay for invoices’.
Bridging finance continues to offer businesses a short-term solution. Rates are typically 1.25 per cent a month, so it’s not a long-term option. For lenders in this area, it’s all about “the exit” – they need to see how they are going to get their money back. For example, a professional landlord may not be able to secure mortgage finance for a property he buys at auction.
A bridging loan can offer the opportunity to purchase the property and refurbish it in order to then secure a buy-to-let mortgage from a traditional lender. This represents the exit for the bridging lender.
A variation on the bridging theme is offered by short-term asset lender Borro, as CEO Paul Aitken explains, ‘The lack of funding from banks is a blow for businesses, but with a little lateral thinking funding is available just by recognising the value of personal assets and using them as security for a loan from Borro.
‘This is not a long-term solution, but it will provide valuable breathing space while negotiations continue on arranging longer-term facilities or until the banks have been persuaded to ease the restrictions on lending to business. Borro stands ready to help those clients of intermediaries who want to look at all the options to fund their businesses at this time, as the case below demonstrates.’
Borro will lend against luxury items such as cars, watches, yachts and art. Andrew Brabham, an independent financial adviser from Essex, recently introduced one of his clients to Borro.
The client needed short-term funding for his business. The client, who had already been turned down by his bank, was considering cashing in investments which would have incurred heavy redemption penalties as well as a commission clawback for the IFA. ‘By introducing the client to Borro, funding was secured and the investments remained untouched,’ he explains.
Adam Tyler of the NACFB argues that if government and lenders really want to release more funding for SMEs, we have to truly understand what sort of financial help SMEs need: ‘The feedback that I receive directly from small businesses in the UK is that if we really want to help those at the struggling end of the SME market then we need a fund for businesses with a turnover starting at £100,000 that are looking to borrow, for example, £10,000 for new equipment.
This would allow these business to grow and to employ new staff – perhaps even ex-public sector workers – and this is how we can make a real difference to the economy.’