However, their growth cannot be taken for granted. They need support. They need access to capital.
While options for secured funding remain, we know from conversations with accountants that options for complementary unsecured lending are severely limited.
This is because existing lending models struggle to absorb the increased cost of origination of unsecured lending versus secured lending. Analysis of future cash flows, strategy and meetings with management all add up for a smaller loan size.
This leaves a funding gap for unsecured loans of between £0.5m and £5.0m. Too big for Peer2peer (P2P) platforms but too small for the banks and debt funds.
This is, however, important credit as it is often the missing piece that helps small and mid-sized companies grow into larger businesses. It is also a key driver of productivity gains across the economy – something that is vital in today’s economic climate as the recent Budget reminded us.
So, what do we need to do?
Accountants are trusted business advisors to the SME community. Their advice and networking is often central to their client’s debt and capital raising strategy.
As such, we believe accountants should be at the centre of any lender’s credit process, helping their clients access funding with greater certainty and quicker decisions.
However, it can be difficult to justify fees in a process that is too small for a P2P loan, and where either the lender is also levying an arrangement fee or where there is a high level of uncertainty regarding the outcome.
Existing lending models must change to accommodate the value-added work provided by an accountant into the process. As we do at Caple, greater certainty on outcome must be provided at the beginning of a process and the lender can levy no arrangement or any other fees.
In this way, accountants can play a central role in the process, and be remunerated by the client without the client experiencing any increases in the cost of funding.
What’s more, accountants are well-positioned to advise on the suitability of the proposed lender.
In a world where all credit was provided by high street banks, this was unnecessary. However, with a larger number of non-bank entities now in the market, understanding the quality and reputation of a creditor has never been more important.
Providing the capital
It is important to note that to a lender unsecured funding is attractive credit for good businesses, and is used to be entirely provided by banks.
However, banks are often unable to provide it in sufficient volumes due to a subdued risk appetite and the absence of experienced local managers to provide the key interaction with, and assessment of, management teams.
As a result, if robustly originated and assessed at sufficient scale across multiple countries, it presents an attractive asset class for large, long-term institutions such as pension funds and insurance companies.
This is where accountants become a key part of the process. Through their expertise and knowledge of their clients, they are able to originate loans and build detailed funding proposals. This helps clients to access funding while steady stream of new investment opportunities for institutional investors is ensured.
For institutional investors, SME loans not only offer portfolio diversification but also comparatively higher levels of return compared to traditional fixed income markets.
In today’s current climate where any and all productivity gains should be grasped with both hands, we’re missing a trick by neglecting SMEs.
But with new lending models that make the best use of accountants, institutional investors and technology, SMEs can now access the funding they need to develop and grow. In turn, they can make an even greater contribution to UK economic growth and job creation.
Dominic Buch is managing partner at Caple