Reflections on the changing funding world

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Some onlookers thought that 2015 would be the year when we might be able to move on from the fallout of the financial crisis, with UK banks finally forgiven for their past misdemeanours. There were positive murmurs from the Government and a clear desire to get on with the vital work of restoring trust and confidence in the financial services sector.

Indeed, in his June Mansion House speech, Chancellor George Osborne spoke about the UK financial services industry’s capacity to be the best in the world, with “more competition, more innovation and more players in retail markets.”

The industry expected an end to the loathed bank levy as a result, but surprisingly Mr Osborne levied a new surcharge of 8%, applicable to all banks and building societies, including ‘challenger’ banks, which he previously appeared to embrace.

Defending this seeming U-turn, the Chancellor said “the banking sector has to put something back into the economy, so there will be no changes to the tax surcharge this fiscal year.”

It seemed that all was neither forgiven nor forgotten.

This ongoing stasis in relations with the banks is regrettable mostly because of the unintended consequences of legislation and regulation. The sad truth is that the weight of a tightened regulatory burden falls on the shoulders of UK businesses – the very organisations the Chancellor is hoping will power us on to continued economic growth.

With European and global regulation forcing banks to meet ever-higher capital and liquidity requirements, banks are increasingly unable to lend to businesses. This is even more severe in the case of SMEs and start-ups, who are considered high-risk. As the banks move to shrink their balance sheets, they are also largely exiting many forms of business lending.

It simply doesn’t make financial sense anymore for the banks to lend to businesses.

An even hand

As the head of a large independently owned financier, many may think that this is welcome news to me. But the reality is that – in a business’s funding tool-kit – there is a place for traditional forms of lending, in addition to non-bank forms of funding.

From overdrafts to invoice finance, leasing to bank loans, the market needs a full range of offerings to meet small businesses’ needs.

At present, however, the current media landscape portrays SMEs as having an ‘either or’ option. Either secure funding from a bank or peer-to-peer (P2P) lenders. But there are other avenues for businesses.

You would expect me to highlight invoice finance, but leasing and asset based lending are two other viable forms of business funding.

If SMEs rush to P2P lenders, in place of more established forms of funding, they are putting their faith in – as yet – unproven and untested players that only offer funding pure and simple, without value added services, such as sales ledger management, credit control or payment collection.

A recent Evening Standard article discussed rumours of a looming P2P lending failure and it is my belief that the Chancellor must be even-handed in highlighting risk within the financial system. This includes extending appropriate warnings about newer forms of finance to both SMEs searching for funding and investors looking for returns.

The Chancellor should also remember that the UK has a significant tradition of independent asset based financiers. At any one time such funders provide £19.3 billion in to businesses and this significant contribution to employment, growth and output must not be taken for granted.

The Government should avoid chasing start-up numbers and nurture aspiring businesses

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According to the Department for Business Innovation and Skills there were 5.2 million private sector businesses at the start of 2014. This reflected a record annual increase of 330,000 businesses and the first time the business population exceeded 5 million.

The political and business landscape is awash with calls of support for aspiring entrepreneurs and StartUpBritain – a Government backed initiative to “accelerate enterprise in the UK” – aims to create 600,000 new start-ups this year.

Of course, it’s important that we encourage and support entrepreneurship, but boosting the number of start-ups seems more of a crowd-pleaser than good policy. It is an arbitrary target predicated on perceived wisdom dictating that the UK will be a better place if there are more start-ups.

It’s a fact of life that many start-ups are unsuccessful, with insurer RSA estimating that as many as half of UK start-ups fail within the first five years. Would it, therefore, not be better for the Government to back initiatives that nurture existing firms and prevent more from failing further down the line?

I’m not suggesting that we redirect Government support from start-ups to more established businesses. My point is that we need to do more to develop initiatives that support not only the ‘new’ but also those looking to take the next step on the way to growth.

This means taking a hard look at the processes and practices that help firms transition from fledgling start-up to small business, examining the milestones along this journey and helping them to avoid potential stumbling blocks.

Identifying issues

To support these businesses, we must first identify the most pressing issues they face. A lack of research and preparation is the most common stumbling block for aspiring SMEs but owners can also fall foul of hiring the wrong staff, failing to seek advice or underestimating the importance of access to sustainable finance to help facilitate their growth. The decision to employ staff or buy more stock is a huge step and often such decisions can bring about a new company’s demise.

Many firms assume that getting customers through the door is the most important thing, but what happens when their largest customer consistently pays late? Or an important supplier goes into administration? Or the insolvency of a key customer means they’re unable to recover a substantial debt?

Businesses are often tempted to put their eggs in one basket by relying on a single customer, but this can be disastrous. Findings of our latest SME Confidence Tracker reveal that one in four businesses has suffered a bad debt over the past 12 months, with many unable to recover from such losses.

To counter this chronic issue, businesses should stabilise their finances and take measures to protect the enterprises they have worked so hard to create. As a sector, we talk often about the negative effects of late payment but we can do more to educate businesses on how to protect themselves against bad debt.

Guidance

Just as start-ups need backing to set-up and launch, businesses that have overcome these initial obstacles need guidance to grow and succeed. Guidance can come in the form of advice from local or central business groups, Citizen’s Advice Bureau or friends and family. This guidance can also come in the form of the business finance community and independent invoice finance providers that offer additional support services such as sales ledger management, credit control, multi-currency services and multilingual support for those trading overseas.

By all means, we should continue to promote entrepreneurship and educate our future leaders on the opportunities available in business. We must ensure that we do not neglect established businesses of the future.

It is these SMEs that will boost GDP output, create jobs and wealth, and ultimately return the UK to economic prosperity.

Welsh development bank hoped to ease funding crisis

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In Wales this week, the BBC reported that a development bank for businesses had been recommended to help the Welsh economy continue to grow. Dylan Jones-Evans, professor of entrepreneurship at the University of the West of England in Bristol produced a report which concluded that a development bank would ease what he described as a ‘market failure’ in available finance.

One of Professor Dylan Jones-Evans previous reports found that there was a gap of £500m a year between what businesses want to borrow and what banks are willing to lend.

Finance Wales

The call for this sort of financial institution in Wales could spell the end for the arms-length body, Finance Wales, which is a subsidiary of the Welsh government. Professor Jones-Evans’s other reports have raised valid questions about how well Finance Wales is doing in its remit to support businesses and help grow the Welsh economy.

Finance Wales has helped many businesses, but it has been widely criticised for the interest rates that have been charged. Figures recently revealed that investments in firms from Finance Wales’ main European fund had only resulted in 20% of the jobs they were expected to create in Wales.

Critical of the proposals

Some people have expressed criticism of the proposals the involvement of the Welsh government in the decision making process rather than Finance Wales who as an arms-length organisation are separated from ministers.

At the present time, business owners in Wales can access loans from the UK government, Finance Wales and the Welsh government. The idea for a development bank would be to bring all loans, development grants and business advice together in one place.

Lending available

I’d encourage Welsh business owners caught up in the ‘market failure’ to provide funding, to look at other avenues of lending available including invoice finance which my team here at Bibby Financial Services specialise in.

Invoice finance provides cashflow solutions for business owners by releasing value tied-up in outstanding customer invoices. This form of finance, combined with the expertise of those who offer it, could be a life line for Welsh business owners trapped in the current stalemate.

Check back for more updates on this subject.

David Postings

UK CEO, Bibby Financial Services

About David Postings

David Postings is the UK Chief Executive Officer for Bibby Financial Services following his appointment in April 2012. David is an experienced senior executive with over 35 years’ experience in financial services. David has extensive knowledge of the commercial finance landscape.

You can read more about David Postings and his position at Bibby Financial Services in the About Me Section.

 

David Postings looks at Bibby Financial Services reports and studies

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My team at Bibby Financial Services continuously monitor the market to enable us to better service our customers. We often use the market insight gathered to produce regional or sectorial reports and our latest two reports are available on this blog.

SME Sentiment Scotland

I’ve blogged before about funding Scotland’s thriving SME sector, and prior to September’s referendum my team produced the SME Sentiment Scotland report, which was a look at the country’s small and medium sized enterprise sector.

The report was based on research conducted among 500 businesses and includes a look at typical business profiles, sources of business advice and growth expectations.

Building growth on a heritage of excellence

The publication of our West Midlands report coincided with the official opening of Bibby Financial Services’ West Midlands Business Centre and – again – I’ve written before about the thriving local economy in this region.

It’s now widely recognised that the West Midlands is a great place to do business and – developing beyond our strong industrial heritage – over recent years the region’s central location and supporting infrastructure links to the rest of the UK and further afield, have put it firmly on the map as an area of inward investment.

Livelihood businesses in the UK

Also available on my blog is our report based on microbusinesses in the UK. This was based on research we conducted among smaller businesses and we found that more than a quarter (26 per cent) would close their business at retirement, rather than selling it or passing it on to a family member. In fact, findings were picked-up by The Telegraph, where some of my comments on the report were also published.

I’ll continue to host the latest studies carried out by my team at Bibby Financial Services on this blog so check-back in future if they’re of interest.

Alternatively, if you have any questions or feedback on our reports or suggestions on topics for future studies, feel free to get in touch with my team at: www.bibbyfinancialservices.co.uk.

Thanks again for reading.

David Postings

UK CEO, Bibby Financial Services

About David Postings

David Postings is the UK Chief Executive Officer for Bibby Financial Services following his appointment in April 2012. David is an experienced senior executive with over 35 years’ experience in financial services. You can read more about David Postings and his position at Bibby Financial Services in the About Me Section.

Bibby Financial Services in the Guardian Small Business Network

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Research conducted by the Bibby Financial Services marketing team featured on the Guardian Small Business Network (GSBN) earlier this month.

The article points towards recent statistics from the Bank of England’s Funding for Lending Scheme (FLS), reiterating what many small business owners experience: that businesses are not getting the financial support they need from the banks.

One in three SMEs looking for alternatives

The GSBN included figures from our own research showing that one in three SMEs is considering other forms of finance. The businesses we surveyed cited poor customer services and a lack of flexibility from traditional banking institutions as the main drivers for change.

I believe that small businesses are becoming more like consumers and they want to try different types of funding before taking them on to see if they’re compatible with their business model.

So it’s crucial that funders become more flexible in their approach if they are to meet the growing demands of the marketplace.

Bibby Financial Services

In the first half of this year our annual client turnover handled has reached £4.9bn in the UK, with global client numbers now approaching 10,000. While we have grown, we’ve continued to put our clients at the heart of our strategy.

Today’s businesses expect more from a funding provider than ever before and we intend to continue to do everything we can to support our clients, old and new. It’s for this reason that we have recently launched an offer for businesses that are new to invoice finance; to give them the opportunity to try this unique funding type, without being tied-in to long-term contracts.

To find-out more about the offer or to speak to a member of my team, you can visit the Bibby Financial Services website here.

Thanks for reading.

David Postings

UK CEO, Bibby Financial Services

About David Postings

David Postings is the UK Chief Executive Officer for Bibby Financial Services following his appointment in April 2012. David is an experienced senior executive with over 35 years’ experience in financial services. David has extensive knowledge of the commercial finance landscape.

You can read more about David Postings and his position at Bibby Financial Services in the About Me Section.