I was chatting with the head of a London-based accounting & advisory firm about the contraction in bank lending to businesses, and the scary signals that are emanating from the Fed, IMF and ECB.
I told him about how we are trying to combine simple technology with business relationships to get cash flowing faster to small and mid size businesses and how are approaching a problem that is the sum of many parts.
His first response was interesting: an accountant advisor could actually do (and does) everything we were proposing to do. Good accountants/advisors can help a business work out when it will run out of cash, arrange introductions to lenders, negotiate favourable rates, and even assist in collection follow up. Secondly, good solid businesses had no trouble finding money – banks were quite happy to lend to them.
OK then. Maybe someone should tell the US and UK Treasuries to stop shouting about this and ask all congressmen and MPs who have embarked on this quest to find something else to do!
Apparently, he had his own theories on why bank lending was not on the up, but suffice to say, he did not think that the liquidity squeeze affected good solid businesses. Now what is racing through my mind when I hear these words from a smart professional is:
- either the majority of businesses are not good solid credits;
- we are all overhyping a situation that does not exist;
- banks are glossing up reality;
- or that my idea is a threat to relationship-driven advisor-influencer networks.
Maybe option 3, but most certainly option 4. Not 1 and 2 anyway!
I chuckled when he said that although he could not see the benefit to what we were trying to do, he could see how the ‘suckers’ (the word he used to describe these businesses who were not ‘good solid’ credits and did not have the right finance team or advisors to help them get a loan at good pricing from very friendly banks) might find the visibility and convenience useful.
I asked him how many connected and proactive advisors were out there. Strangely, the response was, “many”. So, my next question was of course, “why all this noise about SMB financing and working capital”? The ‘sucker’ theory re-emerged, amidst images of shaky, owner managed businesses who would be happy to try anything to get the credit and visibility they lack.
Banks have asserted that business credit quality is low, as is demand. Businesses say that banks are not giving them what they need and many don’t bother applying. Businesses that fail to find the credit they need are not ‘suckers’ or poor credits. They are simply mismatched to the type of lending (and in many cases, the lender) that they are applying for.
The first port of call for a business that realises it needs cash is generally the accountant /advisor, or the bank manager. Depending on the financial institution and where it is located, the bank manager may turn down the facility request, reduce it drastically or turn it down down. A few may refer the customer to the bank’s own invoice finance affiliate.
Those with a good advisor, a friendly asset financier and a willingness to go beyond an overdraft or traditional facility discover age-old and historically popular invoice finance. Although this can be more expensive than traditional bank facilities, it ends up being the best solution if managed correctly.
Especially, in an age of austerity, de-leveraging, dislocation and double-dips.
An independent asset lender issued a press release citing research done for it by the Centre for Economic Business Research (CEBR), an economic consultancy:
- Up to 650 000 UK firms could be considered suitable for commercial finance (invoice finance, asset lending);
- These 650 000 firms account for £8 billion of the UK’s small and midsize business (SMB) lending gap;
- The Asset Based Finance Association (ABFA), the industry trade body membership only services between 40 000-50 000 businesses, suggesting that the remaining 600 000 + businesses either have no debt or rely on bank overdraft, term loans and credit cards.
The CEBR research goes on to suggest that addressing the SMB funding gap using asset lending and invoice finance could increase UK GDP by up to £1.4 billion by end 2012.
So there is a way out of the current financing gap, cant we just snap our fingers?
It is workable, but will require lenders and policy makers to do a lot more to educate SMBs and their accountants/advisors on ways to finance working capital. Brokers and accountants/advisors do a great job, and are active introducers to the asset lending community. But they are clearly not talking to as many businesses as they would like to.
We also need to recognise that arranging finance is time intensive for both lenders and borrowers. For that matter, invoicing and collecting is not exactly a breeze for businesses either.
Everything is done manually, because, well, if its been done that way for 20 years, it must be right!
I have some ideas on how we can do more to educate the business community and their advisors on working capital.
As for improving the way businesses manage their collections and find and talk to the right lenders, watch this space.
If the businesses who need to free cash flow are ‘suckers’, sign me up and send me the badge!