sme finance and the recovery

SMALL BUSINESS FINANCE AND THE RECOVERY : 

SMALL BUSINESS FINANCE AND THE RECOVERY Results of the CBI/ACCA business and practice surveys

About the surveys : 

About the surveys Fieldwork: Aug – Sept 2010 Main survey: sample of 380 SMEs, sizeable samples by region ‘Corroborating’ survey: 93 accountants in practice who work with SMEs

Slide 3: 

PART I: Dealing with the banks

Are the banks lending? : 

Are the banks lending? Most SMEs that apply for funds obtain them 73% of applicants at least partly successful In line with nearly every other survey and banks’ claims, but much better than anecdotal evidence Banks no more aggressive than suppliers 22% of SMEs reported restrictions in credit 29% reported increased information demands

Demand and success rates : 

Demand and success rates

Is there a bias? : 

Is there a bias? Success rates for micros are lower 33% (loans), 50% (overdrafts) This is not the case for asset-based Cashflow can explain most, not all of this Security & guarantees might explain more Few regional effects Scotland (-) and Wales (++)

Do businesses want to borrow? : 

Do businesses want to borrow? Demand is relatively low Only 33% applied for new overdrafts and 22% for new loans in the last 12 months Even fewer will use overdrafts next year Accountants report that: There is latent demand for finance in general Clients made changes in order to get loans But mostly not improved information flow Due mostly to cost and ‘lack of sophistication’

Discouraged demand? : 

Discouraged demand?

Where is demand coming from? : 

Where is demand coming from? Liquidity, not investment Accountants: increased need for finance despite falling investment, headcount and flat orders Very substantial effect of cash positions on demand Substitution e.g. Asset-based, late payment, directors’ and FF funds make up for lack of overdrafts

Slide 10: 

PART II: We’re all banks now

Way too big to fail : 

Way too big to fail Trade credit is bigger than banking Flows are about twice those of bank lending Accts payable equal to ca. 19% of SME assets UK SMEs are owed £24bn in late payments Trade credit is growing more popular Used by 26% last year; 15% used late payment Very high success rates (ca. 90%) 24% to 32% could seek trade credit next year

If SMEs are banks, what about risk? : 

If SMEs are banks, what about risk? Then they need to work a bit harder 54% say they have tightened credit in last year Only 26% report tighter credit terms or pressure from suppliers And they probably don’t realise it Credit management policies: 13% ‘weak’ Receivables: 20% ‘weak’ Cashflow: 25% ‘weak’

Assessing SME credit policies : 

Assessing SME credit policies

What could they be doing better? : 

What could they be doing better? Credit management is relationship based This does improve the quality of receivables But alternatives can be overlooked Credit checks, quantitative metrics not used These tend to provide additional confidence Many make allowances for econ. conditions This is particularly poor practice

What could they be doing better? : 

What could they be doing better? Treat credit as a financial issue 94% of accountants advised on ‘monitoring and forecasting cashflow’ But only 29% advised on ‘monitoring and implementing credit policies’ Use more current information Credit information is typically twice as old as the information SMEs would use for own purposes

Slide 16: 

PART III: Government support

Is it working? : 

Is it working? Tax deferral is definitely working HMRC has excellent reach Of course, 11% using BPSS is not good news Awareness of EFG is as good but approval rates are very low Overall, only 3% used this in the past year Grants are most commonly used (11%) But seem to be biased towards larger SMEs Not the case with ‘centralised’ EFG or BPSS

Is it working? : 

Is it working?

Conclusions : 

Conclusions Cash is king Banks still in the lending business But micros still struggling SMEs are also in the lending business Need to adapt to the role of creditors Poor information is a barrier to growth Low supply, low demand equilibrium Government is helping But must review and rebalance support

Short-term trends in demand : 

Short-term trends in demand

Use current information! : 

Use current information!