For those who have not already read it, the report released by the BIS Task Force will make interesting reading. Some of the figures quoted in there are scary:
- 9% of SMBs sought financing in 2011;
- 1/3 of SMBs applying were unsuccessful in their loan application;
- a projected 5 year funding gap of £44 billion for small businesses (range of £26-59b);
- 1/4 of SMB financial decision makers have a financial qualification.
The Task Force has correctly recognised that there needs to be a multi-pronged assault on blockages in SMB cash flow and financing and there are many positive steps that can be taken.
The 11 main recommendations fall broadly into the following categories:
- Increasing Awareness and Demand for Alternative Forms of Finance
- Improving Access to Capital Markets Financing
- Stimulating Growth Through Supporting Smaller Companies
- Boosting Finance Options for Business
- Developing New Financial Products
- The Evolving Regulatory Environment
The categories all make sense, and each has its own importance. As the Task Force admits, it has “not identified a single silver bullet solution” and has instead “explored a number of useful areas”.
Many of these recommendations are likely to need further study, consultation and time to implement but are a welcome step in the right direction.
One interesting goal is the establishment of the Business Finance Partnership (BFP) to invest in the development of non-bank lending channels. With a shrinking lending pool, adding alternative sources to business finance is key.
Before worrying about investing in models that the private sector can do just fine, the BFP needs to get the regulation and objectives right, and make sure that balanced (not overzealous, rules-based bureaucracy) regulation is supplemented by conducive infrastructure that facilitates the end to end flow of credit.
If constituted properly, the two proposed agencies could play a vital role in tying all the pieces together and make sure the various market components function well and keep the system running.
The recommendations on e-invoicing, and invoice finance and supply chain finance are closest to my own heart, and ones I believe have the ability to quickly and significantly make a difference.
Not only does supply chain financing and invoice finance offer businesses a better chance of securing finance within their means, it can also free up 50% more capital for banks (to further on lend to other businesses).
This area has huge potential for non bank participation and commercial debt investors can lend to SMBS as easily as banks and asset lenders, making it the fastest way to improve liquidity to SMBs.
The Task Force, is understandably, enticed by the idea of auctions and exchanges and these can play a role in widening access to receivables finance. However, as I mentioned in previous posts, I don’t think that the market is ready for these to take up a meaningful slice of the invoice finance pie just yet. The industry will need to take a few more steps in the right direction for all the pieces of the puzzle to come together and the new entrants to find the right business model and traction.
In the meantime, using technology to improve working capital management, simplifying, standardizing and improving invoicing and rethinking how the financing process can be made simpler and more pleasant will make it easier for new innovation to be adopted.
That is something even a start-up can tackle. I can certainly think of one that has started trying!