7 Jan 2015 02:01pm

Fit for lending: Part one

Funding is available for growth if you know where to look, how to apply and understand what will be beneficial for your business. In the start of a year-long campaign, economia investigates how businesses get themselves fit for lending

Last November MPs concluded the debate on the remaining stages of the Small Business, Enterprise and Employment Bill in the House of Commons and it started its journey towards Royal Assent through the House of Lords.

By seeking to reduce regulatory burdens and facilitate the inception, financing and growth of business the government has received overall support from micro, small and medium-sized businesses.

70% of small and medium-sized enterprises across Britain think the government could do more to support small firms

For as recent research from YouGov on behalf of KPMG revealed, 70% of small and medium-sized enterprises across Britain think the government could do more to support small firms.

And if prime minister David Cameron is correct and “red warning lights are once again flashing on the dashboard of the global economy”, then businesses need all the support they can get if they are to help drive growth.

Once the Small Business Bill becomes law it will have a significant impact. Just look at its scope: from access to finance, exports and regulatory reform to competition, public sector procurement, childcare and insolvency – the measures covered are vast.

Of all of these, access to finance is the one that perhaps gets the most press because raising funds is a common barrier to enterprise, especially for SMEs, which find the experience of fundraising more challenging than their larger counterparts.

The Autumn Statement in December provided some comfort. Chancellor George Osborne’s package of support to boost lending for SMEs included £400m to extend Enterprise Capital Funds – government-backed venture capital funds investing in SMEs – and £500m of bank lending to be guaranteed under the Enterprise Finance Guarantee scheme.

Both are run by the British Business Bank. But according to Geoff Parkes, a teaching fellow and doctoral researcher at Aston Business School in Birmingham, the measures amount to little more than a drop in the ocean. He said in December: “Extending the Funding for Lending Scheme by another year and focusing it exclusively on small and medium enterprise lending is all well and good, but thus far, the scheme has accounted for less than 2% of all lending to small firms.”

He added: “The British Business Bank is also a worthwhile initiative, but for many small enterprises it remains untried and untested.”

So this year economia has decided to explore access to finance in more depth. But we are turning it on its head. Instead of haranguing big banks for not lending we’ll be taking a more proactive approach, looking at how early to mid-stage firms can get themselves finance-ready and become a more attractive lending proposition.


  • Where do businesses traditionally fall down when approaching lenders?
  • How do they get fit-for-lending?
  • What’s the ideal business plan?
  • What impact does late payment have on the finance culture? (The Bill has created a duty for large and listed companies to report their payment practices in an attempt to ease financial pressures resulting from late payments.)
  • What are the alternatives to traditional finance and what do these lenders want to see from pitchers?
  • How should entrepreneurs prepare for a float or acquisition?
  • What’s the difference between debt and equity?
  • What impact will audit threshold and exemption have on businesses and their understanding of finance and figures?
  • And crucially, what role do accountants play in helping businesses raise finance?
  • What sort of conversations should businesses be having with their accountant?
  • And should practitioners be doing more to raise awareness of their skills, support and availability in this area: as authoritative advisors, as business partners, as assurers?

Figures from the latest SME Finance Monitor (a quarterly survey of 5,000 businesses on past borrowing events and future borrowing intentions) show that just 10% of businesses seeking an overdraft from a bank and 20% seeking a loan from a bank take external advice before they apply.

According to Clive Lewis, head of enterprise at ICAEW, those figures reveal a problem: “When they’re asked why they didn’t take external advice the bigger businesses say ‘we got it last time and thought we’d be successful this time’. The smaller businesses say, ‘we didn’t know where to go to get advice’. If accountants want to, or already provide a service helping businesses access finance they have to make it clear,” he says.

But who goes to a bank asking for money without preparation or advice? Figures suggest it’s a common failing, says Lewis: “Research shows that businesses don’t adequately prepare for an application. Very often, when they do go to the bank they have unrealistic expectations about how quickly they’ll get the money.

“There’s some BIS research showing nearly half of all businesses going to a bank expect to get the money in a week. In these times, post-recession, that is unrealistic. Banks take a minimum of two to five weeks or even longer.”

What this last-minute approach suggests is that you haven’t got a grip on your finances, explains Lewis. If you’re expecting the money in a week, you’ve probably only just discovered you need it.


80% of small business lending flows from the big four banks

Of course, not every SME needs to go to a bank or alternative lender with cap in hand. Some have no need for finance while larger, more established firms tend to have little difficulty accessing it. But if you look at first-time applications for a loan or overdraft from businesses trading on average less than five years, one in two get turned down, says Lewis.

The good news is that one of the measures in the Small Business Bill requires banks to share information on businesses that they reject for finance (where they have consent) with online platforms to help them link up with alternative lenders and challenger banks.

A Competitions and Markets Authority study found that 80% of small business lending flows from the big four banks – Lloyds Banking Group, RBS, HSBC and Barclays. According to Ian Cowie, chairman of SME banking at RBS, his bank at least is working hard to ensure there is a flow of finance to business customers.

“As I meet small businesses across the country it is clear that many do not know about, or understand, how to access the help and support that is available to them. We’ve been going out to customers proactively to explain how much we would be prepared to lend to them, should they want to expand and grow. We strive to make ourselves easier to do business with. One way we’ve done that is to tell customers what we need from them before they ask.”

But with access to finance from traditional lenders still considered to be a perennial problem in the business community, a growing number of entrepreneurs are looking towards alternative financial providers, or even their own supply chain or personal funds to finance future growth.

“Access to funding for SMEs remains an area of red hot debate,” says Iain Moffatt, head of KPMG Enterprise. “There is already a wide range of support available, but a complaint that the marketplace is too fragmented and difficult to navigate at present. Unfortunately, this is dissuading businesses from accessing the funding they need. Greater clarity around, or a simplification of, the myriad of schemes and incentives available would therefore be incredibly welcome,” says Moffatt.

So how do businesses give themselves the best chance of funding? According to Clive Lewis, they need to answer some key questions: how much they want to borrow, what security they can offer, are they prepared to offer personal guarantees, is debt or equity the choice, and if they’re going for debt how do they propose to repay it?

“Once you’ve answered those questions and decided you need finance, go and get some help from your accountants. And if they don’t provide the service, go to one that does.”

1. The government established the British Business Bank to help unlock finance for smaller businesses. The stock of lending and investment provided by BBB programmes in 2014 stood at £2.7bn, with over 38,000 businesses supported. But there is more to be done...

2. Recent research from Nesta and the University of Cambridge indicates that gross financing will total around £1.7bn this year, a 161% increase from 2013. New sources of finance (such as peer-to-peer lending and crowdfunding platforms) are growing but from a low base.

3. Most small businesses are not aware of the full range of external finance options. This varies: 85% are aware of leasing or hire purchase, but the figures are much lower for alternative funding sources, with 32% aware of crowdfunding and 35% aware of peer-to-peer lending.

4. Only a minority of SMEs (18%) seek external advice when applying for finance. Of those SMEs that do seek advice, 95% find it useful. Accountants and financial advisers are the most common sources of advice used, with accountants in particular being viewed as a trusted source of information.