article
A complex picture
11 October 2010
Lenders continue to be criticised for being reluctant to provide
funding to UK SMEs. However, this picture may not tell the whole
story and almost certainly isn’t as straight forward. For example
Santander increased its loans to small businesses by 16% last year
whilst RBS has extended £23.5bn in new loans in the first half of
this year, the majority of which have been given to small
firms.
Another tension for SMEs is forecasting the implications of the
emergency budget measures such as absorbing the 2.5% VAT increase.
Adding to this are the projected wide-ranging cuts to public sector
budgets predicted in the autumn spending review. Once the emergency
budget and the autumn spending review have been fully gauged
however, SMEs and lenders should hope for increased activity and
availability of credit.
What must not be overlooked though is the amount of SMEs
actually looking for funding. A survey of UK business leaders
conducted by Illuminas for RBS found that a substantial 72% were
not intending to borrow over the next 12 months. It would appear
that many have focused on paying down their debts and more than
two-thirds say they are cash rich. A further 20% are confident that
if any extra funding was required, they could acquire it from other
sources such as parent companies.
Equity-only funding for corporate acquisitions has also
experienced a recent upward surge. With many law firms reporting
dips in debt-financed deal activity, it comes as welcome news that
corporate teams involved in SME equity deals have remained
reasonably busy over the last 18 months. Law firm’s such as Browne
Jacobson have enjoyed particular success in equity-only deals,
having recently advised the Paperchase management team in Primary
Capital’s £20.5m private equity-backed MBO of the stationery
business. The firm has also seen sustained activity in service
based sectors such as private social care over the past 12 months,
having just acted for the management in the MBO of Eden Supported
Housing backed by Sovereign Capital.
Increased demand has promising implications for the private
equity sector, but it should also not be forgotten that in the
wider picture, the debt facilities taken up at the height of
lending before the recession will soon need refinancing. Of the 28%
of businesses from the Illuminas study which are intending to
borrow in the next year, over half will be looking to various forms
of asset based lending (ABL) such as invoice finance facilities.
When read in conjunction with research from Venture Finance
reporting that 53% of accountants now believe ABL is the most
effective form of financing to support growth, finance directors
will no doubt be looking to take full advantage of it in their
refinancing.
Lenders, particularly those that offer ABL may find potential in
the unlikely source of cutbacks in both the private and public
sector. As more businesses outsource to cut costs, the outsourcing
industry itself has seen encouraging growth.
The biggest opportunities however, may still be emerging. As the
scale of public sector cutbacks becomes clear, outsourcers are
equally increasing as replacements for these services. With the
relevant government departments essentially ‘guarantor’ for payment
to the outsourcing businesses, invoice and asset based finance in
this sector may become one of the safest financial vehicles between
lenders and expanding SMEs.
It seems then, that the public’s view of SME access to lending
in general does assert that lender attitudes still need to warm in
particular to smaller SMEs. Nevertheless, closer analysis does
reveal a significant and largely overlooked stable landscape of
cash-rich SMEs not even looking to borrow. When the anticipated
need for refinancing emerges, along with the opportunities that
growth in outsourcing will provide for ABL, the dynamic of SME
lending activity should see a healthy increase.
This article was first published on
smeweb.com
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