Some of our experts in the field have given their thoughts on the Debate Piece Can small business avoid a credit crunch? by Ciarán Mac An Bhaird. If you would like to join the debate please email chris@isbe.org.uk and your comments will be placed on the website.
Responses by:
Richard Roberts
Adrian Ashton
Paul Jennings
Response to Can small businesses avoid a credit crunch?
By Richard Roberts
Small business finance is definitely on the policy and research agenda again. Indeed, for some of us it never went away. I have a couple of comments to add – although obviously these are primarily from a UK perspective.
First, although I don’t want to reopen the debate about a supply or demand led fall in small business credit in the last few years, I would like a greater emphasis on regulatory change on both the supply and price of credit. The changing capital requirements to cover credit risk on the price of small business lending often gets overlooked. The same applies to the higher premium charge to meet changing Bank of England liquidity levels. These factors make the base rate almost meaningless as a reference rate for loan margins. They also make some lending products almost uneconomic for banks to supply (although we still do).
Second, I think the discussion about the role of collateral and property in bank lending practices is too outdated now. Over 75% of bank loans by volume at Barclays are unsecured anyway. Also, all UK banks have moved to risk adjusted pricing over the last decade and the first element of the lending decision is ability to pay, not collateral. Indeed, normally the main cause of disagreement between a bank and a customer when an application is rejected is because the bank cannot see sufficient source of income to fund repayments. It is rarely the lack of collateral (that may come later when we begin to consider price).
Richard Roberts, SME Market Analysis Director, Barclays – Business Banking
Response to Can small businesses avoid a credit crunch?
By Adrian Ashton
The article by Dr Bhaird is a timely contribution at a time when we read that bank lending to SMEs is at almost record lows and the trust that we as a society have in their [the banks’] ability to manage their affairs in our interests is correspondingly weakened.
The argument made that the current model of bank lending is increasingly untenable is perhaps the single most important aspect of this article: it is increasingly accepted that the way we do business in all aspects of commerce is, and needs to, change owing to the rise of social media, the changing dynamics in not only supply chain relationships but also with customers and the expectation that employees are no longer there to do the business owners’ bidding, but also be actively engaged in the business more holistically. And yet the banking sector stubbornly clings to its outdated models of lending that are increasingly untenable.
As an advisor to small and start-up enterprises (amongst other things), I also notice that businesses are increasingly unwilling to explore debt financing as a means to provide working capital to their businesses. This is due to a mixture of the increasing mistrust of banks, their perceptions of the lack of security they might be able to offer, and because of their desire to minimise their personal exposure – but in doing so, they limit their business’ potential to grow and contribute to the wider benefit of the economy and society as a whole. This only re-enforces the conditions that have led to banks offering poor terms on loans to begin with...
The only aspect of this article that I would specifically wish to draw attention to is the alternatives to raising finance beyond the banks and Angel investor networks that can allow small businesses to avoid a credit crunch.
Many local authorities operate business loan schemes, and often on terms that not only mitigate the business owners’ personal risk, but also make the repayment schedule extremely attractive and manageable. And to return to my earlier reference to the rise of social media – such technologies have also created a range of new financing programmes, including “Funding Circle” which sees people wishing to invest in small businesses paired with businesses seeking investors and allows them to negotiate their own respective terms and expected returns - a more attractive proposition to small businesses with modest aspirations than approaching Angel Investors who would expect greater returns and involvement which the owner may not be willing to cede.
Adrian Ashton, www.adrianashton.co.uk
Response to Can small businesses avoid a credit crunch?
By Paul Jennings
Small businesses often find themselves in a uniquely vulnerable financial position. Squeezed between suppliers and customers, managers are obliged to devote a significant amount of time not to running their business but to running their finances. A simple delay in payment or a small increase in interest rates can produce a gap in funding that a small business is simply unable to fill at short notice and with few resources to call upon.
The small business owner has plenty of reasons to be worried. An alarming rise in the cost of living, barely hinted at by official inflation figures, is making consumers reluctant to spend. (Small business owners know this since, they as individuals, experience price rises and tax rises at first hand.) Business customers are angling for price reductions and suppliers are trying to pass on increases in their own costs.
However, even in difficult times, opportunities abound. Small businesses can be particularly flexible and responsive to changes in the environment and now is as good a time as any to take advantage of the chance to grow a business, as resources such as property and labour are more keenly priced. As Ciarán Mac an Bhaird says, it may be difficult to avoid increases in the costs of financing, now is a good time for small business owners and managers to hone their skills in financial management and identify new opportunities in both financing and business development.
Paul Jennings, Senior Lecturer, Winchester Business School