Author Trevor Clawson
These are unpredictable times for the UK economy. The great financial crisis remains fresh in the memory of business owners and its effects are still being seen in the form of relatively low wages growth and lagging productivity. Meanwhile, the ongoing talks on Britain’s future relationship with the European Union are a reminder that the future too is uncertain. Against this backdrop, a significant number of Britain’s SMEs are acutely vulnerable to any downturn in trade, according to a survey by the business lender, Nucleus Commercial Finance.
Small business owners were more or less evenly split on the question of whether the UK should remain in Europe, but as the survey indicates, the possibility that current trade talks will lead to a poor outcome is now a major concern, trumping both the possibility of another major financial crash or the threat of digital attack by hackers.
And almost half of the businesses taking part in the survey said they are financially exposed to any event that impacts on trade, with 47% admitting they wouldn’t last a month on the basis of their current cash reserves. 30% said they wouldn’t last two weeks.
According to Mike Smith, a managing director at Jameson Smith & Co – a business adviser specialising in company debt and insolvency – company owners are right to be concerned.
“I have been advising SMEs for over 38 years and have had the misfortune to see first-hand the impact three recessions had on varying sized companies,” he says. “Even reasonably strong companies had the rug pulled from underneath them by their unsympathetic bank.”
Smith says it is crucial that companies set aside cash for the inevitable rainy day.
“Try to get into good habits early on in your business life. Ideally, you should take 10% of your net profit and place it in a deposit account. Now, here’s the tricky bit – manage on the rest. This is much easier to implement the earlier you start until it becomes a firm habit,” he says.
Carl Reader, Business Expert at Dennis and Turnbull chartered accountants, agrees, but adds that each business owner will have his or her own comfort zone when it comes to cash reserves.
“I know businesses that could pay their expenses for 12 months. For others it’s a matter of weeks,” he says. “You need to decide on your comfort zone and marry that to the steps you to ensure you have the cash that you need.”
Access To Finance A Priority
Those steps may well involve seeking new lines of finance. The survey finds that access to funding is a priority as businesses enter the New Year. Across the country as a whole 39% of businesses say they will be seeking external finance in the months ahead, with businesses in London (61%) being particularly cash hungry.
A majority of those who intend to secure additional finance see it as crucial to their success, with almost two thirds (64%) saying failure to access funds would have a detrimental impact on their business. As the survey points out, many of the businesses questioned were not thinking of growth capital. Their aim was to ensure they had the cash to go on trading.
A wider Canvas
The UK corporate finance market is serving up more options than ever before, with ‘alternative finance’ providers in the shape of peer-to-peer lending and crowdfunding platforms now firmly established as additional sources of debt and equity funding. And beneath that broad “Altfi” umbrella businesses can access not only term loans and equity investment but also borrow against the value of invoices
Alternative finance providers are continuing to win market share from traditional banks. For instance, according to a report published by the Cambridge Centre for Alternative Finance in December, peer-to-peer debt providers advanced £1.26bn to SMEs in 2016, a figure that accounted for 15% of lending to the sector. Fast forward to the third quarter of 2017 and the leading peer-to-peer platform, Funding Circle rang up £114m in new net lending to SMEs, compared with £94m the largest four banks in the same period.
But according to the Nucleus survey, High Street lenders remain the first port of call for the ‘overwhelming majority of business, even though one in five have been declined finance at some point in the past.
Failure to Plan
Regardless of the chosen source of finance, Reader says the problem facing many businesses is that they fail to plan ahead. “The average business gets finance as and when it needs it, “ he says. “That means they are often approaching banks when they are in a distressed situation.”
And that creates at least two problems. Firstly if a business has hit a cash flow bump – or will hit one within a couple of months – there is very little time to arrange new finance. Secondly, in the eyes of banks, a sudden requirement for finance means higher risk and consequently higher interest rates.”
It is always advisable to spend the time to prepare any ‘pitch’ to finance providers well in advance of applying for a loan. An application will help immeasurably if the business can provide not only comprehensive information on current and historical trade but also projections for future revenues and profits that have been thoroughly sense-checked. Finance providers tend to be sensitive to over-optimistic revenue projections and they will want to ensure that the applicant has not only considered the impact of slower than expected trade but has also made realistic assumptions about factors such as customer demand or the cost and availability of supplies.
As Carl Reader explains, mapping out a financial requirement 12 months in advance demonstrates that a business owner has “strong financial management ability,” an attribute that impresses lenders. Equally, forward planning takes away time pressure and enables a business to seek quotes from a range of providers.
“The key is to be proactive,” he says.