Getting enough credit for SMB buyers

Has vendor funding remained a largely unexplored answer to the channel's SMB funding crisis? Fleur Doidge reports

We are halfway through the year already, and there has been little to no relief from the channel credit pressures exacerbated by the reluctance of banks to loan funds to SMBs for investment and expansion.

New Bank of England (BoE) data on the government's Funding for Lending Scheme (FLS) show that 13 finance providers drew down £2.6bn in the quarter ending 31 March 2013 - £300m less than in the previous quarter.

That' is even though there are now 40 groups participating in the FLS, which comprises 80 per cent of the lending stock available, according to the BoE announcement.

John Allan, national chairman of the Federation of Small Businesses (FSB), says its research suggests that FLS may be making finance cheaper to small firms, but we now need to see more businesses being accepted for finance.

Although specialist SMB banks have increased their lending under the scheme, much more competition is still needed, he says, from both new banks and non-bank sources.

"Lending by the main high street banks has fallen by £700m," Allan adds. "They account for 85 per cent of lending to small firms."

Phil Orford, chairman of the Forum for Private Business (FPB), says any recovery this summer is going to come largely from firms spending their own stockpiled cash.

"But this is not sustainable in the long term. While three quarters are happy non-seekers of finance, there will come a point when they do need the help of lenders to grow. That could be the crunch point and a problem in the making for years to come."

The government's FLS, which reduces banks' and building societies' loan costs, was meant to encourage more lending, particularly to cash-strapped SMBs, to get companies investing and stimulate growth.

Twenty-seven out of 40 participants did in fact increase their lending - however, the BoE has warned it will probably take another six months before lending expands as a result of the improved credit conditions under FLS.

"Prior to the launch of the FLS in July 2012, Bank staff judged that UK bank lending was more likely to decline than increase over the subsequent 18 months," it wrote in this week's announcement. "Net lending is expected to pick up and become modestly positive over the remainder of the year."

It went on to add that net lending flows for Q1 2013 were "less negative" than a year ago for both SMBs and large businesses.

So what can the channel do while it waits for the money to funnel through to SMB prospects?

FSB's Allan notes that what many recent figures do not show is how many businesses are approaching alternative funders, such as peer-to-peer lenders. This realm of alternative finance may offer a chink of hope to some companies, he suggests.

"We have long said that there needs to be more competition and sources of finance for small firms because relying on the big five is clearly not working. To get the recovery on a firmer footing businesses need to access finance and greater competition in the banking sector should help this," Allan says.

"We believe the Business Bank will go some way to resolving this situation. Indeed, our own research shows that business confidence is up, suggesting firms want to invest but to do this many need the finance to make it happen."

FPB's Orford says established firms often appear to have few problems accessing bank credit. "We speak to our members all the time and this is something we hear frequently," he says. "It's the start-ups and the fledgling firms that are the ones with issues here."

Philip White, chief executive of independent financier Syscap, says the 2012 year saw 612 small businesses complain to the Financial Ombudsman about problems accessing loans and overdrafts in the 2012 year - up 17 per cent from 522 the previous calendar year.

"It is clear from the number of complaints that small businesses continue to face major difficulties when it comes to getting the appropriate kind of funding they need from banks," he says. "We hear from small businesses that banks still use the tight credit environment as an excuse to impose high fees on their customers."

He also says that dissatisfaction levels may be much higher than the above figure suggests - as the Ombudsman service only deals with individuals or businesses with fewer than 10 staff.

White concedes that the actions that have been taken may yet trickle down to branches and therefore customer level, but time is of the essence for many companies.

White's solution is lease funding, from an independent financier such as Syscap - which may itself benefits from the FLS. This cheaper money should allow firms such as Syscap to expand the funding it offers to businesses.

"Lease funding is also more suitable to a business's needs when it is trying to acquire a long-term asset or borrowing to help ease cashflow around predictable costs such as tax bills, because the lender cannot withdraw the funding at a whim, and it does not weaken the balance sheet of the borrower," White says.

Also, leasing companies may have the infrastructure and specialist skills that can assist SMBs - skills that "some banks" have lost, White adds.

Misery loves company?

Venture capital, on the other hand, may not be suitable for channel players, especially as entrepreneurial start-ups near Old Street are also complaining they cannot source funding in time.

A recent GfK/Grant Thornton study has found that 29 per cent of start-ups in London's so-called Tech City believe they are missing out on business opportunities because they cannot secure funding in a timely and reliable way.

The research found that respondents in Tech City tended to rely on angel investors, venture capitalists, and personal loans. But of the 43 per cent who had managed to raise capital, 23 per cent had problems such as delays in receiving the funds. Nineteen per cent said they had to lay staff off as a result.

So maybe the channel shouldn't go there in high hopes, either.

Perhaps though, a bigger role could be played by vendor and distributor finance schemes?

We approached Ingram Micro to talk about the expansion of its five-year-old CreditBuilder scheme. As reported on ChannelWeb, the distie plans to have £150m available to the channel by August 2013 and another 900 customers would be expected to take advantage of it.

Under the scheme, qualifying resellers can build a credit facility of up to £100,000 over a 12-month period. Ingram's UK office did not respond to requests for an interview.

However, Stuart Hall, UK and Ireland sales lead at Cisco Capital, the financing arm of Cisco, says the message has not got through about the availability of vendor funding programmes.

For example, although it has been around since early 2011, Cisco's SMB-focused programme EasyLease still has plenty of headroom - even though uptake of its offers is gradually expanding, he says.

"We all know that SMBs have had trouble accessing external funds," Hall says. "And the key thing is if you can help them acquire the technology they need."

The vendor, responding to customer requests, has extended the terms available, and interest rates appear reasonable as well, at three per cent for three years, four per cent for four years, and five per cent for five years.

"We are finding that the uptake has gone from strength to strength, but I still believe there is still a lot of messaging and awareness that could be raised," Hall confirms.

He says the reseller channel must play a bigger role in learning about credit availability and finance options - and then educating end customers.

Channel companies need to be much more proactive in explaining how projects could be funded, and not shy away from it, thinking it might be a complex or risky practice.

"I think many customers, particularly SMBs, tend to think of the banks, but I do not think it is common for them to think of whether Cisco itself has a finance offering," he says.

Perhaps resellers of various types tend to think the small print will be too much hard work?

Hall agrees that is possible but points out that Cisco's programme only has two pages of T&Cs - not the typical reams to wade through that you might get from a bank - and that it can take just 30 seconds to get a credit decision, and five minutes to get a lease document provided for the customer.

Perhaps channel sales staff require enhanced incentives that promote vendor finance packages, Hall suggests.