Watch the webinar
- Chris Wilford, Head of Financial Services Policy, CBI (Chair)
- Dierk Brandenburg, Analyst, Financial Institutions, Scope Ratings GmbH
- Stephen Pegge, Managing Director, Commercial Finance, UK Finance
- Andy Gregory, Head of Investments, UK & Ireland, BGF.
- There’s a lot of discussion at present on how to structure UK SME support. This is not confined to the UK and is a wide-spread problem.
- So far, the UK has provided about £43bn – rising to £100bn by the time all of the announced support is rolled out.
- However, by the beginning of 2021 (when temporary measures are being phased out) there will likely be widespread bankruptcies and business failures when the ‘shock’ of paying it back becomes apparent. We could be looking at more than 2m businesses going under (and up to 3m employees). The problem is not just the volume of debt, but also the sheer size of companies and the havoc caused by trying to recapitalise.
- The task set by the Bank of England was to see how the financial burden could be stretched out over time.
- The key proposal for smaller SMEs is restructuring all the existing loans around a student loan type model, where repayment is tied to hitting certain benchmarks.
- Are these measures not sufficient due to low cashflow? Could they be a significant burden on future growth?
- This is quite a change for SME companies. Most polling shows they don’t like external equity or stakeholders.
- It’s just over four months since lockdown and we’ve seen the launch of various iterations and extensions of the government’s support schemes.
- There’s been an immediate surge in borrowing. SME lending began to take off in May/June and is continuing to grow. 1.4m businesses have borrowed under these schemes (about 14 times the normal rate of ‘lending flow’) and double this number are planning to.
- However, half of businesses have decided not to borrow.
- Late payment is always a concern in times of stress. We’ve seen an increase in ‘debtor days’ but this has settled down back to an average level.
- We need to move away from one-size-fits-all products. In the next phase there needs to be more revolving credit, asset-based finance, equity for growth and development, and finance for ‘big opportunities’ that will be important for longer term ‘build back better’ initiatives.
- We also need to see equity finance spread beyond London and the South East.
- There’s been a massive range of the impact by sector. Some are doing remarkable trade (e-commerce, IT, e-marketing, health technology) whilst others are beginning to suffer (hospitality, automotive manufacturing).
- We’ve seen a fantastic response from most SMEs. Repositioning/flexing their model has helped many firms to come through the crisis.
- It’s critical that entrepreneurs can access capital to grow. We’re seeing ‘exit activity’ holding up, with a reasonable pipeline of this still coming. We believe there is cause for optimism for the SME sector.
Key questions we answered:
- Dierk, what is a credit rating and how is it used?
- For SMEs the main rating usually comes from the bank that lends to them. A lot of rating SMEs is monitoring payment behaviour, benchmarked against similar firms in the same sector/industry and their behaviours.
- Credit ratings are affected by how smooth the payment process and interactions between business and customers are.
- The UK differs from other countries in that our central bank does less assessment analysis on smaller firms.
- Stephen, how does support need to change as we enter the next phase in the Autumn?
- We’re seeing a confluence of cashflow challenges coming through. As some businesses pick up their trading activity, capital repayment holidays are coming to an end. We need to see overdrafts/invoice finance/supply chain finance/traditional loans come to the fore.
- Businesses will need to start managing their finances more actively and planning for the next phase.
- Most schemes required the business to be viable before getting support. Inevitably though things change, and a period of restructuring is possible.
- Presently, the emphasis is that ‘loans are debt’. At this stage it should be considered as debt as no change in repayment terms is guaranteed.
- We’re keen to see HMRC thinking about less immediate repayment terms/taxes accrued, possibly staggered/phased over time.
- Andy and Stephen, what is the wider outlook for working with SMEs, and will Brexit have an impact and cause more need for additional finance?
- Andy – We’re cautiously optimistic. We only work with a particular subset of businesses that have taken on equity, but they are very positive about those in their portfolio. Businesses are ‘flexing’ and recognise the need to bring in expertise. With Brexit, there are a few specific sub-sectors where we’ve seen challenges. In the grand scheme of things this fades into insignificance. The most important things are to get the right platform, people and structure of your business.
- Stephen – On exports, we’re probably moving from the period when the norm was trading on an open accounts basis with Europe, to global markets that require documentation. We’re currently still practising bad habits in this area, as we’re very paper based. Technology and UK Export Finance schemes will help with this. It will cause the UK to think more about exporting (and financing of it) and regulatory items like declarations and customs.
- Dierk and Stephen, would we need a new body to administer the proposed student loan type repayment terms?
- Dierk – One of the themes of the debate is “what is the grey area between debt and equity?” The student loan idea has certain advantages around practicability, but it does bare the risk of the repayments being drawn out as a liability on your record. It will not be sufficient to recapitalise the sector.
- Stephen – It’s an interesting idea and much work needs to be done on it. There’s a certain degree of operational complexity to be worked through for this to be an option. It could be a way they ‘lose less’ than they would if a swathe of businesses went into default. At the larger end, equity needs to be part of the solution. Even for a minority of SMEs with high growth potential ‘early stages’ finance needs to be thought about now.