Transactional funding and the art of building relationships

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We’re living in a time of exciting change where the word “digital” is on many lips. A recent internal presentation from IBM declared that “digital disruption has already happened” given that Uber is the world’s largest taxi company without owning any taxis and Airbnb is probably the largest accommodation provider without owning any properties. What sets these digital services apart is that they do not seek to replace people with technology. They simply utilise technology to enable consumers and providers to connect more easily.

So, how does this digital world impact the SME finance market?  There is a common view that SME owners are happy operating digitally and received wisdom goes that digital means no people, no relationships and a world where everything is rational and transaction based. But the SMEs I speak with value the relationships they have with their funding partners and ask that they’re not kept at arm’s length through digital means.

I believe that successfully funding businesses and helping them to grow in the long term is  much more about relationships than transactional lending. For funders such as Bibby, it’s about taking a relationship-based approach to supporting our clients. Of course, this means providing innovative and up-to-date systems to support this, but it also requires personal communication – the kind a machine built solely for transactional interface simply can’t perform.

But for now it seems that many technology platforms see the trajectory as heading towards a more formalised model of online lending that involves less people.

What I sense is that when a company uses digital means to enable greater people contact in a way that is easy and simple, prospective clients will be happy to embrace the change. The implication for me is that this will not be a ‘rules based’ or ‘tick-box’ approach  but rather, it will need to embrace the flexibility of decision making based on the experience of people, facilitated by technology.

Understanding your customer and their needs is as important as ensuring the right level of funding arrives in their account at the right time. At this stage in our digital progression, we cannot lose sight of the positive role people play in guiding SMEs towards achieving their goals.

At Bibby, we are proud to be in The Sunday Times’ Best Companies to Work For as we feel this is testament to the emphasis we place on the relationships we have with each other and our clients.

For now digital-only platforms are operating in one corner of the market. If they want to move beyond transactional services they will need to provide a greater service to SMEs, a service we believe can only be enhanced through relationships between real people.

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.

Why P2P lending is not a silver bullet

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The myth of the P2P panacea

I am in favour of anything that increases choice and enables the UK’s SMEs to access the funding they need to grow. The peer-to-peer (P2P) lending market has grown substantially since the first provider, Zopa, arrived in the UK in 2005, with the market surpassing the £1 billion funds advanced mark by the end of last year. To be clear, this is the total of all loans and not the funds-out at any one time.

Unlike many traditional funders, however, new players on the financing spectrum have been welcomed by government and policymakers alike, without so much as a hint of caution. Politicians, particularly, have viewed this newly emerging sector as a panacea that will shake-up the market and solve the funding needs of small businesses forever.

Moreover, it has been branded by some as the ‘Uber of finance’, supposedly disrupting an uncompetitive or dysfunctional market that was ripe for innovation. This narrative, though appealing in its simplicity, is far from the truth.

The UK has long boasted a healthy and highly competitive alternative financing sector, which it should be proud of. But, all too often, policy-makers ignore an already mature sector; seeing competition in the market as a two-horse race between major high street banks and shiny-P2P lending platforms. They seem to love the new, just for its novelty.

But, it’s the alternative middle-ground that has proved itself time and time again. In fact, just this month the Asset Based Finance Association announced that £18.9 billion was lent to businesses in the first quarter of 2015 – a £1.2 billion increase year-on-year. Through bull and bear markets, independent funders and asset based lenders have demonstrated their longevity and local presence in the UK market. This strong track record is largely ignored as it is not new. It is, however significant and most importantly, it provides real support for businesses when they need it. It did so right through the last recession and helped prevent the downturn being even worse.

The limitations of youth

Despite the halo effect surrounding new market entrants, these platforms still account for only a tiny fraction of SME lending in the UK. Furthermore, funding amounts advanced to SMEs are limited and cannot yet satisfy the full range of business needs.

Notwithstanding its attractiveness to media and government alike, awareness of this lending option is generally low among business owners. Our quarterly SME Tracker found that just 1% of SMEs used P2P or crowdfunding in Q1 and half of the small businesses we surveyed for our SME Manifesto in May said that they would not use a P2P lender.

It’s evident that many do not share policymakers’ enthusiasm for these lenders and  owners and decision-makers explained that they either distrusted P2P lenders or felt they would not be able to get the financing that would be right for their business through this channel.

Apples and oranges

A fundamental problem with debating comparable merits of different funding types is ensuring comparison on a like-for-like basis. A P2P lender provides funding pure and simple – not credit control, sales ledger management or payment collection. Many can’t offer multi-lingual or multi-currency services, helping businesses to enter new markets or import goods from overseas.

Fundamentally, P2P lending is more about delivering an investor return than the provision of funding and services to small businesses.

Strong funder, strong future

Looking ahead, the UK faces a referendum over its membership of the EU and a tough monetary policy decision on when and how interest rates will change. As recent years have proven – we are never too far away from the possibility of a return to recession. It will be fascinating to see how the market fares through the whole economic cycle. The lack of a capital buffer may expose unwary investors to more risk than they bargained for.

I wish all lenders well and believe there is room in the market for us all. What we do need is more balance when it comes to evaluating options.

Earlier this month, our research found that 14 per cent of SMEs use loans from friends and family to fund their business with a quarter (23 per cent) using a bank overdraft. As this period of political and economic uncertainty continues, SMEs must future proof themselves from financial shocks by ensuring that they have sustainable and flexible sources of funding, tailored to their needs. This could be a combination of financing types, including overdrafts, leasing, loans, invoice finance or even P2P.

However, we must recognise that financing in 2015 should have a wider purpose beyond simply offering a lump-sum. Funders have a larger role to play in society – managing relationships with customers and suppliers and helping small businesses position themselves for growth.

It is here that a finance provider can become an extension of an SME’s own team; a role that many independent funders are proud to play.