Is SME lending about to catch a cold?

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Amid concerns over oil prices reaching a low of $10 a barrel, stock markets around the world tumbled yesterday. At 4pm (GMT) The Daily Telegraph reported that £60 billion had been wiped off the FTSE 100 as the day’s trading looked set to close 4 per cent down. As market analysts assess the impact, many will point the finger of blame at volatility in the East.

However, the catalyst isn’t just one thing but many: a number of adverse factors, combining to send ripples through global financial markets. Slowing growth in China is clearly one such factor, but there are others.

The International Monetary Fund (IMF)’s downgrade of its global growth forecast, residual effects of the Eurozone crisis, the tumbling price of oil and other commodities and the knock-on effects on markets such as Russia and Brazil are leading to significant investor jitters.

But did we see it coming?

Unfortunately the answer is most likely yes. Alongside others, I warned of the potential of another recession throughout the past year. We have learned little from the 2008 global downturn and I believe it’s only a matter of time before global economic commentators return to banding around the dreaded ‘R’ word.

So what next?

The Governor of the Bank of England has signified that an interest rates rise is likely to be delayed until later in the year (if at all in 2016). It’s clear that Mr Carney is also concerned and is keeping the one remaining – albeit diminished – monetary policy instrument up his sleeve in case things take a severe turn for the worst.  And unless markets recover, there’s a significant possibility that the tides will turn towards another recession. At this stage, UK SME lending will start to catch a cold, as banks begin to retreat and investors pull back from market-based lenders.

Over the past 18 months there has been massive overheating in the supply of finance to SMEs and if UK growth reverses, the loosening of security criteria amongst lenders, coupled with reduced margins, will end in pain. It always has in the past.

This time there is a new breed of lenders, many of which think the rules have changed. However, the vast majority are yet to see a full economic cycle through.

I believe that only those funders who have weathered the storm and come out the other side in the past will succeed in a downturn.

Asset based funding: underused and untapped

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A recent assessment from The Bank of England’s Q3 Credit Conditions report found that “credit availability for smaller firms had improved and was approaching normal levels.”

It’s fair to say that in my thirty-plus-years in the financial services industry, I have never seen so much money chasing so few business customers. Whether peer-to-peer lending and crowdfunding or traditional banking channels, SMEs are swamped with lending options.

It’s clear, however, that many SMEs don’t want to take on further debt to grow their businesses.

But even if business owners don’t want to extend credit lines further, or take on new lending, there’s a significantly untapped asset, which is much closer to hand and already owned by the business – it’s invoices.

This Autumn, the Asset Backed Finance Association (ABFA) reported that British small and medium sized businesses are owed a staggering £67.4 billion in unpaid money, a £18.9 billion increase since 2011[1]. Literally billions of pounds of potential funding is left untouched by SMEs who could be borrowing against their invoices to secure vital short-term funding.

In our SME Confidence Tracker, worryingly we are now seeing emerge an underlying hesitance and caution amongst small business owners and decision-makers. Less than half of SMEs expect their business to grow in the weeks leading up to the new year, while 16% are resisting investment to focus on building up their cash reserves.

This conservative approach extends to a focus on the upkeep and maintenance of their existing businesses, replacing broken machinery and equipment, rather than investing for growth.

But smart investment now will position a small business ahead of competitors and ready them for that next big business decision: whether that’s exporting into overseas markets, adding a product line, or hiring a new intake of skilled staff.

When funding was tight SMEs had no choice but to hold-back on growth opportunities. Now that the market is awash with capital just waiting to fund growth plans, we must encourage our small business owners to be more ambitious in their outlook in order to keep fuelling sustainable growth. Though just one option available to SMEs, it has been encouraging to see asset based finance take a higher profile in such discussions over recent months.

Right now, there is a fantastic opportunity for SMEs to reach out to secure the funding support they need, not just for day-to-day orders but for growth.

If you’re interested in finding out more about unlocking working capital, check out some of our client case studies on the Daily Telegraph website here.

Dark clouds on the economic horizon according to UK SMEs

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The findings of our SME Confidence Tracker, reported in the Daily Telegraph, highlight subdued business confidence in Q3. Our research among 1,000 UK SMEs, shows declining business performance and significantly lower sales expectations for the final quarter, when compared with the same period in 2014.

Investment is also on shaky ground. Less businesses are recruiting, and – overall – investment in people is down 6%, year-on-year.

Though there are small pockets of optimism in both geography and industry, research points to a more cautious and pragmatic approach to the future. Those businesses that are investing are prioritising IT and equipment over people.

The results of the Confidence Tracker align with the Bank of England’s summary of business conditions for August and September, which shows slowing growth throughout the UK and across key sectors.

Ripples from overseas
Many observers believe that concerns over the stability of the global economy – as a result of declining growth rates in China – have caused anxieties in the UK economy and UK PMI reported  the weakest growth since April 2013 in September.

These concerns are compounded  by further questions over interest rates in the UK and US, the ongoing debate over EU reform and referendum and low – or negative – inflation we have witnessed in recent months. One can’t forget Russia either.

I believe that there is underlying inflation which is being masked by weak oil prices. If this is the case, when oil prices stabilise, inflation should reappear quickly. It’s likely to be for this reason that the Bank of England continues to discuss the possibility of a rate rise. There is also a reasonable possibility, however, that  some of these global concerns will dampen down demand, keeping inflation low. Only time will tell.

Problems at home
For SMEs, issues closer to home persist. Bad debt is on the rise, and over a quarter of the businesses we spoke with told us that they have been forced to write-off moneys owed to them in the past year.

Furthermore, late payment continues to act as a barrier to growth with almost half of businesses waiting more than 31 days for payment from customers.

In relation SME lending, things are also wavering. In my 37 years’ experience of lending, I have never witnessed so much money chasing so few business customers. One result of this is lower prices and – while this may be positive for SMEs in the short term – the accompanying rise in risk taken by many lenders is unlikely to end positively. In my experience, the longer a correction takes to arrive, the harder the landing will be.

Whatever the outcome of these domestic and global issues, it seems – for the time being at least – the hopeful optimism of last year has been replaced with anxious uncertainty as we move towards 2016.

Keep a weather eye on the global climate

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Clouds gathering over the global economy have implications for all businesses. From small wholesalers to the largest corporates, no business is fully immune to the effects of a global downturn.

I’ve cautioned for some time that another economic slump could be on the horizon and there are a number of significant challenges for nations across the world to contend with.

Recent ripples emanating from China have pushed this train of thought to the fore as the Asian giant’s stock market slide on “Black Monday” caused markets all over the world to wobble.

China looks vulnerable for the first time in years. Could growth be over stated? Might the stock market and currency be overvalued?  Only time will tell.

Earlier this month, The Independent reported that Samsung is to cut 10 per cent of its staff at its South Korean headquarters and the outlook of SMEs in Singapore has hit a three-year low with weaker sales predicted across all sectors according to the Singapore Business Federation.

Closer to home, the Greek crisis is far from abating as the country plans snap elections later this month, which could have profound consequences on the European economy if the third bailout deal is reversed.

Add to such concerns uncertainty over the UK’s place in the EU – and questions over the timing of interest rate rises – it’s plain to see that a lot could go wrong over the months ahead, any of which could have adverse effects for SMEs.

I was intrigued as to why the noises from the Bank of England discount the impact of volatility in the Far East and focus on the threat of inflation above 2% domestically. I do wonder if  this is simply talk to prevent excess rather than a real desire to raise rates. Who knows?

I believe that there is underlying inflation masked by weak oil prices. However, when unmasked, demand may drop due to overseas forces. This could dampen down inflation by another means. For my money a rate rise would need to be small and cautious if it comes at all this year.

Preparing for the worst

Homing in on the market for SME funding, there appears to mixed signals about how they are faring amid this macroeconomic fog.

The Bank of England reported in June that loans to non-financial businesses decreased by £5.5 billion on an annualised basis.  This marks the biggest drop since the bank started collecting data in 2011. Probing the data further, it reveals that lending to all SMEs actually remained flat, while the contraction took place among larger companies.

Yet flat lending figures appear to have done little to dampen the confidence of SMEs in the UK. The Federation of Small Business (FSB) recently recorded the highest ever number of firms planning to invest in their businesses. The FSB Small Business Index found that “nearly one third of businesses (32%) plan to increase capital investment over the next 12 months.”

Ultimately this means there is a mismatch between SME perceptions and reality as, based on the BoE figures, we are not really seeing the kind of increase in business lending that could likely sustain the significant spending and investment they anticipate.

The squally economic and regulatory weather means that SMEs will be well advised to be careful who they borrow money from. Larger funders have a habit of doing the hokey cokey when it comes to the SME lending market. They’re in when it’s all good and out when the sun stops shining.

Credit appetites are being stretched and margins compressed, and this is a sure sign that when growth slows the economic impact will be painful. The longer things take to turn, the more painful things will be. Working with relationship-based funding partners with track records of growth during recessions is where SMEs will fare best.

Only time will tell how this melting pot of global challenges will impact SMEs. It’s for this reason that businesses should hope for the best and prepare for the worst and this involves making sure their cashflow is in order, sooner rather than later.