It’s been a fairly regular refrain over the past six or seven years that small businesses can’t access finance. I’ve never been persuaded by that view. It is the case that, due to capital constraints and reductions in headcount, the days when a company could simply call a bank and automatically arrange a loan are long gone. But that’s partly an issue for the borrower to address: there’s competition for capital in the bank sector, but there’s also competition for getting the attention of the banker in the first place.
There are two key elements to doing this successfully. The first is ensuring that you have a clear understanding of the diverse financing options available, and the variety of drivers that influence lending decisions for each of the providers. The second is ensuring that you present your proposal in such a way that the lender does not need to do all the leg work. A good proposition poorly presented will struggle. So what options are available?
The bond markets may sound like an odd place to start, given that small businesses are generally locked out, but there is an indirect relationship between them and the availability of bank finance. Larger companies have been able to access more of their funding by issuing bonds over the past five to six years, and this has freed up capital on constrained bank balance sheets to be aimed at small businesses.
This means banks are more likely to be able to offer loan products to small companies than many assume. This includes the vanilla senior debt-style corporate credit that most banks provide, but also asset-backed financing, which has grown substantially in recent years. This type of debt is secured against a business’s assets – from machinery, equipment and vehicles, to inventory and receivables. Some banks are also willing to offer subordinated debt, and the growth of challenger banks has seen lenders appear that have different drivers to more established institutions.
Beyond the bank market, venture capital trusts are providing senior debt and more junior financing products to smaller companies. In the credit fund market, meanwhile, a number of funds have sprung up in recent years that are explicitly targeting smaller businesses. This has been given added impetus by the government’s agenda. The British Business Bank has put money into credit funds, in many cases matching money lent pound for pound. The retail bond market is a further option available to some borrowers.
Finally, the peer-to-peer part of the market is clearly growing. It operates in a different way to other lenders, and therefore has its own idiosyncrasies and challenges in terms of how a firm can successfully access finance. It is likely to become increasingly influential.
Given all this, getting the presentation of your business right is more crucial than ever. And this is where an adviser can add value. First, they are more likely to know how the different types of provider think, ensuring that the borrower is much more prepared for the challenges and questions they are likely to encounter.
Second, the process of comparing and contrasting is now a lot more difficult. An experienced adviser will have a better understanding of the choices available to the borrower, which can have advantages in terms of negotiating power. Making the choice between financing options will include an assessment of key lending terms such as interest rates, entry and exit fees, and pre-payment penalties, but also other, equally important factors, such as covenant structure, certainty of delivery and future support as the business grows. In short, how confident the borrower can be that appropriate funding will actually be forthcoming.