Corporate Finance Brief: What next for the SME Finance Sector?
Director Lisa Entwistle-Evans considers whether the New Year may herald the continued rejuvenation of the SME finance sector…
“In recent years we’ve been in the painful position of seeing viable small businesses struggle to access finance. Even clients with a proven track record, a strong team and clear growth plans have been refused funding by risk averse banks who are constrained in their lending policy.
Fortunately, over the past 6 months, we’ve seen a gradual relaxation of restrictive criteria, and many clients are now accessing overdraft and loan facilities in order to grow their business.
The quarterly SME Finance Monitor, published by BDRC Continental, found that 40 per cent of SMEs used external finance in the three months to the end of September, a figure that remains virtually unchanged since the middle of 2012. So why does the appetite for external finance appear flat, when the economy seems to be improving?
Perhaps the principle reason for this is the “confidence gap” between anticipated and actual success rates – almost half (46 per cent) of those planning to apply for external funding do not believe they will be successful; many SMEs wanted to apply for finance, but did not do so for fear of application rejection. However, the reality is happily much different; in fact, 71 per cent of all loan and overdraft applications in the last 18 months have resulted in a facility, whilst an impressive 99% of those applying to renew an existing facility were successful – good to know in terms of business continuity. And whilst first time applicants (FTA) still remain less likely to be successful (45 per cent) than those who have borrowed before (65 per cent), its welcome news that FTA success rates are no longer declining, and are now higher than they were in the previous 18 months (38 per cent to Q2 2014).
Continues Lisa “As a practice, we’re very positive about the results of the latest SME Finance Monitor and hope that confidence in the market will build in 2015. In fact, several announcements made in early December regarding future access to finance. should see the new year off to a strong start for SMEs:
Firstly, a further £400m will be provided to companies to support venture capital through the highly successful British Business Bank’s Enterprise Capital Funds (ECF) programme, with the Government making a commitment that the enhanced funding would ensure the programme can continue into the next Parliament. In addition, a greater pot will ensure that larger investments can be made in small businesses which demonstrate growth potential.
Secondly, the Enterprise Finance Guarantee scheme (EFG) is to be given a further £500m of new lending in 2015/16. The EFG encourages lending institutions to lend to viable smaller businesses that would otherwise be declined for lacking adequate security by underwriting a proportion of the risk associated with new small business lending by banks, . To date the EFG, which is managed by British Business Financial Services, a wholly-owned subsidiary of British Business Bank plc has facilitated £2.9bn of lending to small businesses since its launch, creating a more diverse and vibrant finance market for smaller businesses, with a greater choice of options and providers.
Finally, the Funding for Lending Scheme (FLS) which has the remit to encourage banks to lend by offering them discounted loans on the condition they pass them on to customers, is to be extended for a year. The extension provide lenders with continued certainty re the availability of cheap funding to support SME lending during 2015, even in the increasingly unlikely event of further turbulence in bank funding markets.
All of these measures are designed to inject life into the small business sector, but communication is key. We find that awareness of these key funding support initiatives is low (see statistics, left) and whilst we are proactive in advising our client base on all available options, the Government and the financial sector also need to do more to communicate what is available to foster growth in the UK small business community”