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FPB puts banks in spotlight over lending
Written by staff reporter
Amid the furore surrounding the LIBOR-fixing scandal, new Forum of Private Business research shows that many cash-starved small businesses are still looking to the banks to provide growth capital and restore confidence.
A huge 94% of firms on the Forum’s cash flow and finance panel see improved access to finance as ‘important’ or ‘very important’ to restoring business confidence – with 40% reporting that their cash position has not improved over recent months.
“While some firms are seeing improvements to cash flow, working capital and growth capital many more are seeing these deteriorate and are looking to the banks to provide the finance for growth in order to boost business confidence and drive economic recovery,” said the Forum’s senior policy adviser Alex Jackman.
“Small business owners are likely to feel vindicated that the banks are being taken to task given the experiences they have had in recent years – but clearly mainstream lenders remain centrally important in their eyes. Entrepreneurs believe banks can do a lot better and are calling for improved levels of service, including more branches, faster and more transparent decision making and greater choice.
“There is caution in some quarters over alternative forms of funding but the research suggests that, if these improvements are is not delivered, many entrepreneurs alienated by mainstream lenders are more than willing to vote with their feet and explore newer, more innovative financial services less dependent on automated risk criteria. There is an important role to be played by accountants and other financial advisers – including bank representatives – in guiding them in the direction of funding solutions that work for their businesses.”
Jackman added: “Of course, reducing business costs and making inroads in tackling the huge problem of late payment would also improve the situation greatly.”
Specifically, while cash flow has improved for 26% of respondents it has deteriorated for 43%. Further, working capital has declined for 41% and improved for 23% of panellists and growth capital has deteriorated for 55% and improved for 18%.
More than half (54%) of firms surveyed cite rising costs as among their biggest financial headaches, which is almost identical to the number in September 2011’s cash flow and finance panel survey. This is followed by a third (33%) identifying late payment as a main financial problem, an increase of eight per cent from September.
One in five (20%) business owners report a lack of choice when seeking finance, up by 16% from September 2011, and 17% are experiencing difficulties in accessing funding at all – an increase of 11%. Cutting product and service costs (nine per cent) and the steep cost of finance (six per cent) were identified as other main finance issues.
Banks and commercial finance
Panellists were asked what they would require from financial providers in the future. In all, 40% called for more transparent decision making, 38% for more of a focus on investment in local communities and businesses in line with the UK’s perceived economic needs, 36% demanded faster decision making and 34% called for specialist national development banks dealing with issues such as export and catering for high growth firms.
In addition, Forum members want greater access to alternative financial products via a ‘one stop shop’ (31%), greater lending flexibility taking various factors into account (28%), state-backed support to lower finance costs and a level of securitisation through the banking system (26%), more information available covering areas such as payment records and credit ratings to help firms make supply chain credit decisions (24%) and more physical bank branches or branches where more than one bank brand is accessible 17%).
Further, 17% of owner-managers called for more distinctive lenders operating in the small business finance market, and 14% a greater number of providers offering broadly the same service.
The main lessons that panel members felt should have been learned from the banking problems experienced over the past few years are:
•The importance of consistent and reliable lending to SMEs;
•Not to take excessive risks – possibly splitting high street lending from higher risk activities;
•Greater understanding of businesses, potentially through local issues;
•Linking rewards to responsibilities. Bankers’ bonuses were the most clear evidence to many businesses that nothing had been done to reduce the excesses of the past;
•Banks should not be too big to fail;
•That quantitative easing on its own does not lead to growth.
Factors behind slow lending demand
When asked why demand for bank finance was apparently so low among small businesses, 61% of respondents reported that they or other firms within their network had received signals from banks that they were not prepared to lend.
For 43%, the terms and conditions were considered too harsh, particularly surrounding additional security requirements, and 37% said they were simply delaying investment until the economy improved.
In addition, 31% cite a lack of rewards for risk taking as the reason for reluctance to approach banks. The same number actually believe slow lending demand is positive, to some degree, because they feel businesses are better growing using their own profits without relying on funding from banks or other financial providers.
Finally, 23% blame small business owners’ inability to negotiate with banks, 13% a lack of affordable financial advice and 12% an awareness that there are alternative funders competing with banks. Unaffordable lending costs were mentioned by eight per cent of respondents.
Opinion is divided as to the viability and longevity of ‘alternative’ finance, with 24% of panellists deeming it to be a temporary phenomenon compared to 27% who think it is not.
The majority said did not know. Reasons given were that they did not borrow, were happy with the service they received from the banks or did not know enough about alternative providers – or feel the need to find out about them.
Criticisms of alternative funders include a lack of credibility, and also trust in advice provided, lenders, poor face-to-face contact, greater understanding of how traditional banks work, the tendency of banks to commoditise good services, a preference not to invest at all rather than take a risk on unfamiliar credit streams and hidden costs and stability of alternative providers.
Confidence in alternatives was influenced by factors including distrust and annoyance with the banks and bank charges, greater flexibility displayed by some of the potential providers and an understanding of alternatives’ operations gained through necessity.
Small businesses were asked where they would turn to for advice on alternative finance. In all, 69% said their accountant, 37% their bank manager, 24% a consultant or other financial expert and 20% other business owners. A total of 10% said they would not seek advice and just eight per cent would turn to a trade association.
Where gaps in the provision of financial advice exist, 43% of believe the government should step in – while 39% disagree.
In general, those who felt that the government should provide support for business owners wanted this information in the form of self-help guides. One or two felt that certain financial advice – on high street lending and improving cash flow – should be available through the banks, arguing that this may make them more likely to lend to businesses clearly following this advice. It was also hoped that it might help the bank’s local team to understand more about how the business works financially.
Supply chain finance – late payment
With approximately £35 billion owed to small firms in outstanding invoice payments, and with the Forum at the forefront of recent lobbying to tackle the problem, firms were asked to report the underlying factors behind late payment.
In total, 42% reported behavioural late payment (where clients do not see prompt payment as important), 13% procedural late payment (where clients’ internal procedures slow down payments) – particularly in public sector supply chains – and just identifying 8% bad debt (where clients simply cannot pay).
Some respondents reported instances of major customers ‘standardising’ their contracts at 90 day payments, up from previous 30 or 45 day payment periods.
Others are concerned that, despite a 0.5% Bank of England base interest rate, their customers are deliberately holding on to payment – and are even being counselled to do so by financial advisers - in order cushion against rising prices.
However, 38% of business owners surveyed said they are affected by none of these forms of late payment and a number have even seen an improvement in payment times over the past few months – particularly those who have proactively built some level of slow payment into their pricing structure and cash flow projections.
Few firms are suffering from bad debt, probably because they are more likely to vet supply chain finance than others and are open to working more closely with their customers, many of whom they have built relationships with.
Generally, the government is believed to be doing a good job on tackling late payment. One in six respondents think there is nothing further the government can or should do other than continuing to pay their own suppliers on time and insist it is up to business owners to sort out their own cash flow issue without any ministerial assistance.
However, some business owners noted that payment disputes with local authorities and other public sector institutions have increased recently. Businesses felt that prompt payers should be encouraged through the procurement system while others felt that opening up procurement to smaller companies would reduce the ability of large companies to dictate terms to subcontractors.
Suggested solutions to late payment include:
•Legislative solutions to contractual issues: one in 10 businesses felt that contracts where payment terms of more than 45 days were used as standard should be outlawed or that 30-day contracts should be enforced at all levels. There were some variations on this in terms of timings - some thought 60 days was the cut off point, while others felt that payments to subcontractors on public sector (10 day) contracts should be faster;
•Naming and shaming late payers;
•Examples of good practice should be highlighted and promoted;
•Random checks to see that subcontractors and consortium members are being paid.