News Article

Factoring & Invoice Discounting

Have Government changes really helped improve the finances of SME's?

By CreditMan Monday, January 20, 2014

According to leading chartered accountants in London, SMEs are sharing the same fate as their counterparts in all other parts of the UK when it comes to accessing traditional forms of financial help.

This national problem is highlighted by the fact that RBS alone has slimmed down its lending to smaller companies by a whopping £ 17 billion since its government led bailout in 2008.

Admittedly other banks have a somewhat better tale to tell than RBS but the fact remains that SMEs continue to be starved of finance at the very time when the opportunity for them to expand and create employment has not been better for several years.

Banks have traditionally provided the oil that lubricates trade and industry, mainly through loans and overdrafts but also via such aids to cash flow like invoice discounting or factoring. Despite all the government’s rhetoric, bank lending to small businesses is restricted because the big High Street banks are still prioritising the rebuilding of their own balance-sheets and it is mainly the SME sector that is being left out in the cold since that is historically one of the riskiest markets to lend to. Furthermore, regulators are still demanding that the major banks hold a higher percentage of their loan books in the form of their own capital to guard against future failures. This automatically limits the amount of total loans that they can extend.

Against this backdrop, chartered accountants in London have been questioning just how effective the government has been in nurturing SMEs whom they are constantly trumpeting as being the cornerstone of economic growth and new job creation.

True, there has been help with business rates as revealed in the Autumn Statement. In addition, the relatively new Enterprise Finance Guarantee scheme underwrote loans worth £111 million to SMEs in the last reported quarter of 2013 which is the highest figure since the election.

However, at the end of the day, there is only so much that the government can achieve – especially one that is ideologically non–interventionist. It would prefer to rely on free market solutions and, already, we can see much evidence that market forces are indeed coming to the rescue.

On the advice of their financial advisers and chartered accountants in the London area, SMEs are discovering new, emerging sources of finance, many of which have evolved from the Internet. There is, for example, a growing army of experienced businessmen and entrepreneurs who now act as mentors and hands-on investors in aspiring small companies although these business angels tend to prefer equity to debt finance. In addition, there are a growing number of venture capital funds, many of which are now owned by Blue Chip companies who are always looking to invest in SMEs with good growth prospects but, here again, we are talking primarily about equity investment.

For SMEs whose owners would still prefer to retain 100% share ownership, the free market is coming up with some innovative new solutions that are filling the void left by the big banks. These include crowd funding websites such as Funding Knight, a lending platform and Platform Black which specialises in invoice discounting.

The private sector is once again demonstrating that it can usually be relied upon to fill any breach in the marketplace but as chartered accountants in London are quick to point out – the government could still help matters by doing things that the private sector can’t like making more cuts to red tape and tackling high energy prices which continue to be a major worry for British SMEs.

Key contact:

Michael Davis, Partner
T 020 7380 4963