|SME lending: A complex picture|
|Wednesday, 27 October 2010 04:37|
More than two thirds of SMEs are cash rich.
More than two thirds of SMEs are cash rich.
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.
Newer news items:
Older news items:
Follow @theSMExpert on Twitter
Latest From SME Web
- Is hot-desking the future for small businesses?
- Lloyds Banking Group plc shares jump above 'break even' level
- SMEs breathe a sigh of relief as Britain narrowly avoids triple dip recession
- Amazon.com Inc tax haven news puts UK SMEs unfairly in the spotlight
- Google Inc's All Access music launch catches Apple Inc off guard
- Thomas Cook Group plc shares surge on refinancing plan