With many banks preferring to say no to financing businesses, directors are desperate to find new forms of finance. Tim Evershed and Kurt Jacobs examine some of the alternative sources available.
The nice man at the bank smiles a nice smile, nods an understanding nod, but still refuses to give your businesses the money it needs to keep going. “I’m sorry,” he says. “It’s not me but the credit committee says they would rather not.”
As the credit crunch continues cash remains a scarce commodity, so finding and securing capital has become paramount for all enterprises. So what alternative public schemes and private initiatives are there to help get businesses through times of crisis?
The majority of public finance schemes are available through the regional development agencies Advantage West Midlands (AWM) and the East Midlands Development Agency (Emda), which are busier than ever as they respond to the downturn.
Jonathan Lowe, head of business investment at Emda, says: “Pre-dating the credit crunch are various funding sources, which we’ve set up over the past seven or eight years, but we’ve also been busy over the past few months responding to the credit crunch.”
The RDAs have highlighted two major grant schemes available to companies in the East and West Midlands. The Grant for Business Investment aims to encourage small and medium-sized enterprises (SMEs) to invest in land, buildings, plant and machinery, while the Grant for Research and Development (R&D) awards support the development and commercialisation of new technologies.
“It’s about supporting innovation. People make the mistake of thinking they have to demonstrate that their R&D project is low risk, but it’s actually about us supporting and mitigating a high-risk investment in developing a technology, in a way the private sector would find hard to justify,’’ says Lowe.
Patrick Palmer, head of Access to Finance at AWM, says the number of businesses accessing the Community Development Finance Institutions (CDFIs) initiative more than doubled in 2008 as capital from traditional sources dried up.
CDFIs provide loans of up to £50,000 through providers, under the umbrella of the Fair Finance Consortium, to small businesses that cannot access finance. In addition, AWM says The Advantage Transition Bridge Fund, which lends between £50,000 and £250,000, is receiving more applications.
Palmer adds: “We’re keeping the total in that fund under review and will top it up if necessary. The Enterprise Finance Guarantee is intended to get the banks lending and hopefully take the pressure off the transition fund.”
Businesses that qualify will be those “where their inability to access mainstream finance is impeding the company or preventing them operating”, says Palmer, adding that “a viable business plan and a management team capable of delivering it” are crucial.
“The most important issue is to show where your turnover is coming from and how constant it is. Forecasts should be based on explicit conversations with customers and how low they think sales could fall.”
Emda is behind the £5m East Midlands Transition Loan Fund. It was launched in February 2009 and lends up to £250,000 to businesses unable to access bank finance. Lowe says: “Interest is charged at a level over base rate as it’s designed to address the availability of finance rather than cost. This should be the last port of call. This isn’t about bailing out businesses but addressing finance issues.”
Because of European Community rules areas, sectors as agriculture, coal, steel and shipbuilding are exempt from these schemes: rather they are focused on manufacturing, bioscience and healthcare, food and drink, construction and transport equipment.
Emda is supporting the Enterprise Loans East Midlands scheme that lends between £3,000 and £20,000, and which was set up in response to demand from small companies the banks were not financing.
Lowe says: “RDAs are in new territory. They were never intended to take the place of banks. We’re looking to address – in a fairly modest way – the failings of the market, but we need to be realistic about the extent to which an RDA can solve a banking crisis.”
Business Link should be the first port of call for any business planning to access these funds, according to the RDAs. It will be able to help companies get in touch with the right fund and advise on the application process.
Anthony Andrews, head of access to finance at Business Link, says: “Before you make a decision you need all the information. You need to talk through the issues with an adviser and form a plan. Presenting a better case, with experienced personnel, is vital, as are monthly management figures. A full order book used to be enough, but not anymore.”
Business Link can contribute up to half the cost of consultations and made 50 grants in the 2008/09 financial year. The organisation is also running workshops and seminars in both regions and has produced a “How to…” series of guides with advice on managing cash flow, saving money on suppliers and dealing with redundancy.
These schemes are just some of those on offer in the Midlands. There are also a number of venture capital (VC) options available.
Lowe says: “It’s a harsh fact that VCs invest in just one-in-a-100 opportunities, but improving that rate is about increasing the capabilities of businesses. This could be through improvements in networking or improving the quality of the pitch.”
Graham Mold, director with Midlands-based Catapult Venture Managers, adds: “We’re still doing deals and so too are other private equity players in the market. Money is definitely in the pot for the right businesses.
“Some well-run businesses are finding overdraft limits cut, leaving them exposed through no fault of their own. In the harsh environment there has to be a sense of realism by owners as to the valuation placed on their businesses and projected growth.”
Regional equity investment schemes work on a matched investment basis and business angels tend to be the most popular and traditional source. While there have been reports that business angels are “keeping their hands in their pockets”, Andrew Durban, partner in the corporate finance unit at accountancy firm Smith Cooper, says investors are still “banding together to raise capital”.
He adds: “Due diligence is tougher and more questions are being asked. It’s about checking the projections and challenging the delivery of those projections, especially if the business was to lose a key customer. There’s more of a defensive strategy and a requirement to be pessimistic about prospects.”
There are, allegedly, some green shoots of recovery for bank lending. In February 2009 The Royal Bank of Scotland announced a £250m fund for SMEs in the East and West Midlands; Barclays Bank in Birmingham says it is sanctioning four out of every five small business plans submitted; while The Co-operative Bank appears to be the institution most pundits claim is still open for business.
Durban adds: “There’s much less lending than nine months ago. We look at the overall finance requirement, the individual parts and how they can be solved. Asset-based lending (ABL) funding is out there, and stock financing and invoice discounting is still an option.”
Peter Flynn, commercial director at Close Invoice Finance, says: “Invoice finance is just as available as it always has been because the credit and debt it is worked from is still there and our criteria has not changed.”
Sources say lenders are generally keen to see opportunities involving oil, gas, public finance initiatives (including education, health and waste), recruitment agencies and franchises for fast-food chains. Commercial property, the automotive industry, housebuilding and retail are all perceived negatively, although there are niche lenders out there.
Birmingham ABL house Moneyway is still providing finance for the motor industry while Bibby Financial Services retains its appetite for construction with a fund of £30m per year available. Jason Heath, product director Construction Finance, Bibby Financial Services, says: “Everyone’s a bit risk averse at the moment. What you cannot do is tar everyone with the same brush because there are fundable businesses out there.”
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