As business lending from banks dries up, explore other funding options

December 13th, 2010 by Chris St Cartmail

Last week, another report demonstrated that the stream of press announcements from UK banks about ‘turning the tap back on’ business lending is nothing but empty rhetoric.

The Centre for Economics and Business Research (CEBR) found that lending to small businesses, with less than 200 employees, dropped 4.5 per cent this year. Now this is compared to 2009 lending figures, which were very low in any case.

Despite calls from the government for the banks to release more funds to the illiquid small business sector, it is being stymied by the banks reticence to comply for fear of breaching stringent new capital holding requirements being brought in by the EU.

Businesses have to face the fact that they are going to fund their growth, whether organic or through acquisitions, with their own cash or other means.

Not everyone of course is in the fortunate position of having a large cash pile with which to buy businesses. The Business Sale Report has several dozen very prolific subscribers with substantial in-house reserves that each purchase a distressed company virtually every month or two, and are building up sizeable companies without huge cash outlays. On purchase, they invariably trim off unnecessary elements of the business, often administrative or IT functions that can be handled centrally. The businesses are either left to run under their existing brand/company name or are consolidated under the group brand.

For those without cash reserves, the gradual recognition that funding from banks is still difficult to obtain is prompting many business owners to tap into family, friends and other directors as finance sources. According to research by the Forum of Private Business, while only 10 per cent of businesses owners sought funding from private sources in 2010, a huge 45 per cent were anticipating to do so next year.

Another source of funds moving into prominence is asset-based finance, which has grown by 11 per cent since last year, according to the Asset Based Finance Association. In the last quarter, over £15.1bn has been raised through asset-based finance. This increase is complete contrast to bank lending figures, and shows that small to medium firms are becoming more resourceful in seeking alternative avenues to finance business acquisitions.

Equity and angel finance is also set to increase its share of the total funding pie. It is common knowledge that a far greater proportion of businesses in the US are funded by business angels or venture capitalists than in the UK. Estimates suggest there is somewhere around £4bn of angel funds already in place in this country, ready to be invested into companies that have scope for expansion or consolidation.

What more can the government do? There are two main areas that interest groups are focusing on – 1] calling for the government to further drop the corporation tax from its new level of 20 per cent that comes into effect next year; and 2] extending the Small Firms Loan Guarantee Scheme which is due to end on 31st march 2010. This enables companies with annual turnover of up to £25m to obtain government-backed loans of up to £1m.

Another idea proposed in a paper recently by Equity Development is that the government should drastically simplify and reduce employment law rules for business that have less than 20 employees.

You cannot hold back ambition, and many businesses are determined to pursue a growth strategy through diversification and consolidation of competitors at a time when organic growth is difficult to achieve. With company insolvencies continuing at a rapid pace, and with no end for the trend in sight at least for the next twelve months, the business opportunities for savvy entrepreneurs with funding solutions in place are clear and numerous.