Weekly Blog by Philip King, CEO of the ICM - 'Making business add up'

I've been catching up on reading that accumulated while I was on holiday and had a look at the SME Finance Monitor over last weekend; the full document can be found here: http://www.sme-finance-monitor.co.uk

 

A few interesting statistics struck me: 43% SMEs are using external finance, compared with 51% a year ago; 34% of loan and 21% of overdraft applications were declined; banks offered alternative funding or pointed to alternative sources of finance in just 9% (loans) and 13% (overdrafts) of cases; 70% of those declined felt the advice they received from the bank was poor and 25% were not given reasons for the decline decision. Almost more alarmingly, only 8% (loans) and 14% (overdrafts) of declined applicants were aware of the appeals process even though it's been available for well over a year now, and just 47% were aware of any of the Government's lending initiatives, of which the National Loan Guarantee Scheme is but one example.

 

So we still haven't fixed the problem that banks (and the Government) aren't communicating adequately with the SME community, and the message persists, particularly from the media and some business organisations, that banks remain reluctant to lend. But we do also need a sense of balance.

 

I've just started listening to Jonathan Moules' book 'The Rebel Entrepreneur'. Jonathan has been Enterprise Correspondent at the Financial Times for several years and he makes the point in an early chapter that, although the banks may seem reluctant to lend, there is a balancing argument that says the current economic situation is in part due to banks lending when they shouldn't have done so, and on terms that were unsustainable. He argues that many businesses do not merit being lent to, and gives examples of very successful businesses that achieved their growth by managing in the early days on a shoestring and refusing to incur debt that could sooner or later become a millstone. If the banks don't impose sensible lending policies, we'll be in danger of repeating the cycle all over again.

 

I'm an avid follower of Dragons' Den and it's hard not to be frustrated by entrepreneurs who clearly have a brilliant business idea but cannot remember, or worse do not know, the salient financials on which their request for funding is based. If someone cannot say how much the business turned over or made/lost in the recent past, then why would anyone have the confidence to risk their own capital? Talking to bankers I hear many examples of businesses who seek funding based on a business case that is at best unrealistic and, at worst, simply doesn't add up (literally).

 

Just as businesses have to help themselves by applying basic credit management principles, so they need to think through their plans and ensure they put together a business case that is realistic and believable before they ask for funding. The more information they provide, and the better it is, the greater their chance of success. 

Weekly Blog by Philip King, CEO of the ICM - 'A positive route to growth'

So the latest Project Merlin figures have been released and they show that, in the third quarter, new lending to business was £57.4bn, of which £18.8bn was to SME's. Let's remember that the full-year targets are £190bn and £76bn respectively with £157.7bn and £56.1bn being achieved so far. Simple arithmetic tells me, assuming nothing much changes, that the total lending target will be achieved and the SME target will probably fall a trifle short. Not surprisingly, the data has generated the usual and expected clamour for banks to be forced to lend more to small businesses.

Regular readers will not want me to reiterate my view with regards the fallacy of 'forcing' banks to lend, and they will have seen my blog last week talking about some basic errors made by start-up businesses. I believe my observations then support my contention that lending decisions should be based on rational - rather than political or emotional - criteria.

I was privileged to be a contributor to the BIS/UKTI-organised UK Growth and Finance Fitness event in London last Thursday, and the subject of SME growth and finance was a recurring theme in Lord Green and David Cameron's opening speeches. Vince Cable also took up the theme in his address, as did Doug Richard, and early Dragons Den guru and an angel investor, who expressed his views clearly and articulately.

The reality of course is that not all SMEs want or need to borrow; indeed a recent SME Finance Monitor report showed that 47 percent never use external funding ('never' defined as neither now nor in the past five years). What we need, therefore, is an environment in which SMEs want - and feel confident - to grow, and one way to achieve that would be through a growth in exporting.

Two statistics in David Cameron's speech struck me in particular: firstly, only one in five SMEs export but if that figure was increased to one in four, Britain's trade deficit would be wiped out; secondly, Britain exports more to Ireland than to Brazil, Russia, India and China combined; the BRIC countries therefore represent a huge potential market.

So why don't more SMEs export, and, perhaps connected, why don't more SMEs want to obtain external funding? I've said in a number of forums with government and others that the key to SME growth is less about obtaining funding, and more about building confidence. Increased confidence would deliver more willingness to introduce new products and services, more willingness to enter new markets either at home or overseas, and more willingness to take on additional staff.

I've also expressed my view that many SMEs don't consider exporting because they see it as a 'dark art' and are afraid of the unknown. I'm delighted ECGD announced at the event that it is changing its name from 'Export Credits Guarantee Department' to 'UK Export Finance' and is going to work much more closely with UKTI. I believe that even such a cosmetic change will make SME's less apprehensive or uncertain as regards what the former ECGD does - and the help it can provide.

A recurring theme also came from the panel of small businesses who are successfully exporting. They started exporting because they were in a desperate situation and it was their last hope of keeping the business alive...and it worked. What we need is more businesses embracing exporting as a positive route to growth rather than a last resort and act of desperation.

Weekly Blog by Philip King, CEO of the ICM -'Kill or cure the zombies'

On Monday the Financial Times ran a story with the headline "Institutions urged to kill or cure the zombies" which talked about "zombie" businesses, to describe those that can pay interest on their debts but has no viable means of repaying the principal over the long term. The article highlights the fact that many businesses are passed the point of no return but are staying afloat because of low interest rates, HMRC's discretionary Time to Pay arrangements, and/or banks keeping businesses in "intensive care" rather than allowing them to fail. It is little comfort to see a respected newspaper making the very same arguments that I have been saying for at least the last two years in my public assertions that there is a spike of corporate insolvencies waiting just round the corner. I recognise that it has taken longer to reach the corner than I anticipated but I continue to maintain that we are going to see a substantial increase at some point. Too many businesses are in a state of denial and it is only going to take a change in one factor to push them over the edge, be that the rent quarter day this week, a negative response to a request for an extension to the HMRC Time to Pay arrangement, an increase in interest rates, or another factor such as a large customer failing or failing to pay sufficiently promptly.

If you watched Dragons Den this week you might have seen the director of a twenty year old business seeking £100,000 investment to help his business grow. Upon questioning, it became apparent that the business had been loosing money in three of the last four years, had a very low balance sheet net worth and, if current forecasts were met, would be technically insolvent at the end of the current financial period. The argument that sales next year would be much better and would see a return to profit seemed to have little substance and, not surprisingly, there were no takers among the dragons. It's obviously difficult to see the whole picture from a few edited minutes on TV but the scenario of a business thinking tomorrow will be better without realising the reality of its financial situation today is not uncommon.

In the FT article, Christine Elliott, Chief Executive of the Institute of Turnaround said "she would like to see institutions that have potentially viable businesses under their care change their mindset. They should either recognise non-viable businesses and deal with them through insolvency or put in place a transformation plan to achieve their potential". We credit professionals have a very similar task: to recognise viable businesses and help create profitable sales for our own organisations, and to recognise non-viable businesses and ensure exposure is minimised. Sometimes we to have to decide whether to kill or cure the zombies.