The Guardian Small Business Network – Managing cash flow

First published on the Guardian Small Business Network on December 1 Guardian Small Business Network

Panel talk: obtaining funding to access new markets

Alison Coleman

At our final breakfast seminar, in Leeds, the discussion focused on how to overcome the challenges that some small business owners face when seeking financial backing

As the last in the current series of business breakfast seminars arrived in Leeds, a city widely regarded as the financial capital of the north, it was perhaps fitting that the discussion around accessing new markets focused on finance.

The panel, chaired by Phillip Inman, the Guardian’s economic correspondent, and featuring Martin Pallett, international business manager with Lloyds TSB; Kenton Robbins, regional director of the Institute of Directors Yorkshire, Roger Hutton, senior partner at law firm Clarion, and Lawrence Tomlinson, founding chairman of the LNT Group, explored some of the finance-related challenges facing seasoned and novice exporters.

Access to investment funding presents one of the biggest, and this was discussed at length, with arguments from both sides, lenders and potential borrowers, highlighting the complexity of the situation.

With overdraft usage at around 50% according to Lloyds TSB, funding limits are there but demand isn’t. Support from UK Trade & Investment (UKTI) and its export finance division have helped to boost bank confidence, but with cash balances rising and hesitancy over purchasing and investment, business confidence is lacking was the conclusion.

Some manufacturing business owners disagreed, citing their frustrations at the banks’ reluctance to lend to what is seen as a high risk business sector.

Others had issues with cashflow being hit by longer lead times resulting from a slowing down of some far eastern economies. Panel recommendations included tighter control of cash management and lining up debt funding in plenty of time, before the cash runs out.

Alternative finance sources, such as crowd sourced funding platforms and peer-to-peer lending, also came under the spotlight, along with the lack of regulatory controls that has made many small firms wary of them.

Funding initiatives seen as a positive move include the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) which offer attractive tax breaks to encourage high net worth individuals to invest in small companies.

And on the day that the prime minister was preparing for an anticipated showdown over EU budgets, Europe’s place as one of the UK’s traditional export markets came under scrutiny. With fresh export opportunities in South America, the Middle East and far east opening up, Britain’s global reputation for producing quality goods should deliver a competitive edge for UK manufacturers, provided they can access the investment funding they need.

For businesses making inroads into exporting for the first time, there is more support available, explained Pallett, as he highlighted the bigger role that UKTI now plays in the small business sector.

“UK Export Finance, part of UKTI, is supporting the banks and giving them confidence by getting the debt facilities out there, when the business lacks the capital or the security but has secured a good contract that with all the checks and balances will work,” he said.

An example of that support is a working capital scheme to provide the debt that businesses need to make and deploy their product, with UK Export Finance providing up to 60% support for that debt, for levels as low as £25,000.

Where advance payments for contracts secured by a business have traditionally been held by the bank as a guarantee, UK Export Finance will support up to 80%, allowing the bank to release the payment to the business and oil the wheels of export trade.

However, manufacturing firms maintain that it is the banks’ perception of their sector as high risk that has made borrowing so difficult. According to LNT Group’s chairman Lawrence Tomlinson, the blame lies with the banks’ sector policies and credit committees.

“I find the bank’s local teams very good and they understand my business. They will back a credit proposal, but higher up it’s about the risk,” he said.

A return to old fashioned banking arrangements built on relationships was the simple and ideal scenario proposed by one audience member and was met with agreement from others.

But as the Guardian’s Phillip Inman pointed out, there was a problem with that. “The UK has a complex economy; it is the sixth largest in the world. It is a complicated environment out there, so we need to get away from a traditional focus. People talk about old-fashioned relationship management; surely what we need is new-fashioned relationship management?” he suggested.

What have been emerging are new-fashioned funding routes that provide alternative finance solutions for high growth firms. One example is the SEIS, which was launched earlier this year and allows private individuals to invest up to £100,000 into a company and get up to 50% tax relief in the tax year the investment is made.

Clarion’s Roger Hutton said: “We are seeing a lot of requests for private investment from private wealth. It is being facilitated through networks where there is good connectivity and driven by schemes such as EIS and SEIS.”

It is the collective efforts of investors that have given rise to the crowdfunding phenomenon, and more recently, aggregation of funding sources, with two or three forming a pool of finance. However, a lot of business owners are wary of these informal lending arrangements.

IoD Yorkshire’s regional director Robbins said: “There are moves to formalise and structure crowdfunding models to remove that fear. It is an emerging market that I’m sure will be regulated, but it does provide small businesses with a solution and investors with a return on their cash.”

And there are potential drawbacks to this informal approach, said LNT Group’s Tomlinson.

“When you have individuals investing in a business they want an end game, possibly within a couple of years, through the sale of the business. Is that what we want to see? Many entrepreneurs are looking at growing their business long term and employing people, and we need to encourage that,” he said.

One audience member’s comment that the £8bn that the UK pays to the EU every year could be better invested in UK firms looking to grow their exports prompted a debate over the merits of EU membership for small businesses.

The consensus was that British firms should be broadening their export horizons, with Pallett highlighting again the work being done by UKTI, in conjunction with the banks, to facilitate this.

He said: “We have business clients who export to the EU, but hedging their bets by looking at the emerging economies of Columbia, Egypt, and Vietnam, with much younger populations of people who want to buy western, including British, goods. Increasingly these firms are using UKTI to identify the best markets.”

 


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