Beggared if you don't

The Forum of Private Business is campaigning for significant changes to the lending culture, says Phil McCabe

While the latest figures show lending to larger firms has increased, lending to small firms has fallen.

In response, the Forum of Private Business (FPB) is urging small firms to look elsewhere for credit if their banks continue to refuse them.

While traditional lending remains the preferred route for small business, and Forum research suggests bank overdrafts and loans remain their favourite services, a growing range of alternatives is emerging.

Some savvy entrepreneurs are already starting to take advantage of some of these, including online, crowd-sourced funding provided by the likes of Funding Circle and Funding Store.

Some 20 per cent of FPB members, we think, believe these innovative platforms could offer a solution to their finance needs. However, one in 10 of our members admits wanting to wait and see how these offerings develop over the next few years.

We were very interested to see that our research suggests there is still loyalty among small business and a reluctance to switch providers. That is despite the banks’ unwillingness to provide them with affordable lending.

At present the more immediate non-mainstream sources of finance include friends, family, and even personal credit cards. This is clearly not sustainable, particularly in the long term.

We reiterate here that the FPB’s latest research suggests that as well as seeking better support from their banks, entrepreneurs are beginning to explore more of the options that might be available to them.

Indeed, almost all survey respondents who claimed to be considering alternative financial products already used some type of asset-based finance, including hire purchase agreements, or leased equipment or machinery.

Some financial services are more valued than others. Surprisingly, almost half of those we surveyed said they would not consider equity finance. None indicated it was a preferred option.

The government’s new Fitness Finance campaign should hopefully see SMBs improving their chances of accessing credit in 2012. The scheme, launched recently by business minister Mark Prisk, aims to help small firms maximise their funding options.

Notably, it will see the government offering business advice on cashflow management and the importance of maintaining a good credit rating for lending purposes.

Any help for businesses to maximise the chance of their bank manager agreeing to provide credit is clearly welcome news for SMBs. It also sends out a positive message that the government wants to help foster enterprise, and that it is the primary key to boosting economic growth.

Business owners should certainly be proactive and control their own destinies. This means reacting to the demands of lenders by providing exhaustive financial projections, including up-to-date, accurate and standardised financial information. This is important.

Ultimately, banks must also play their part if small businesses are to be able to drive economic growth.

It is unsustainable for lenders’ decisions on creditworthiness to continue to use severely restrictive risk criteria. This is a result of over-centralisation and a reaction to the problems created by previous decade’s more liberal lending environment.

The FPB believes banks should reinstate local decision making and that boosting competition between mainstream lenders, and with new organisations, would drive up levels of service and bring down costs.

Further, as part of the Fitness Finance scheme, SMBs will also receive lessons on how best to position themselves to avoid becoming victims of the late-payments phenomenon.

Late payments destroy companies. According to payments group Bacs, the total owed to small firms in the UK exceeds £33bn. We have also seen Experian figures that suggest small companies are waiting even longer for invoice payments to arrive.

The FPB has long campaigned on behalf of its members on the issue, and the fact the government is recognising the situation as a barrier to business is a significant development in itself.

But there must be sustained measures introduced to root out something that has unfortunately become ingrained in the culture of UK commerce. We are working to secure the support of a range of organisations on a late-payments campaign that would address the problem once and for all.

Small firms’ prospects depend on them being able to access a range of affordable funding solutions. They will also rely on the financial stimulus that would be created by prompt payment becoming the norm - and avoid being beggared.

Phil McCabe is PR officer at the Forum of Private Business