April 15, 2008
Are small companies finding it harder to borrow?
Entrepreneurs should not start to see risk as a “four-letter word” because they are worried about the credit crunch, John Hutton will say in a speech later today.
The business secretary will tell a CBI audience that business people should not lose their nerve despite the well-publicised difficulties facing lenders and borrowers.
Mr Hutton will concede that fears over liquidity have spread from the stock market to “workplaces and homes” around the world. Tougher lending conditions are already having an impact - in particular on the retail, real estate and leisure sectors - he will say.
But he will emphasise the UK’s strong business growth and the trend for new companies to last longer.
Mr Hutton will tell the CBI Entrepreneurs Conference in London that business people will receive support from the government to keep on taking risks in order to benefit the economy.
The various schemes set up to aid entrepreneurs - such as the small firms loan guarantee, which was recently expanded - will help provide that support, he will add. Banks remain “ready and willing to lend to small and medium businesses”, the minister will maintain.
The fact that he needs to address the issue at all, however, is a tacit acknowledgement that this is a growing worry.
Despite the credit crunch causing global chaos for banks and corporate borrowers we are seeing little impact on the appetite for ‘small business’ lending. The main effect of the credit crunch appears to be two fold for SME’s: Firstly a restructuring / realigning of facilities with many businesses moving from overdrafts or loans to more flexible ‘asset based lending’ facilities, such as factoring, invoice discounting, stock finance, equipment refinance and property refinance. These facilities provide a better match between SME’s working capital requirements and the assets used to finance them. Typically they also provide a lot more leverage than traditional bank facilities and can therefore create a substantial injection of working capital into a business. Secondly, the SME lending market has shifted from a buyers to a seller’s market, with many businesses seeing a ‘repricing’ of risk to reflect the banks higher borrowing costs. That said there are still many financiers willing to look at fixed deals as low as 1% over base rate. SME’s should look beyond the high street to find competitive facilities or use a specialist broker to assist them in securing the most appropriate facilities at the best rates possible.
Posted by: Mr Alex Hilton-Baird | April 15th, 2008 at 2:41 pm | Report this commentGood businesses (although there will always be a divergence of view as to what is a “good business”) are always able to borrow. Where there is an increasing problem is with marginally less good businesses. A slowing economy and tighter credit makes debt servicing more difficult, and banks, recognizing the risk, are less willing to lend. Entrepreneurs may still be prepared to take risks, but in the real world whether banks remain “ready and willing to lend to small and medium businesses” is much more debatable.
Posted by: George Wilkinson | April 15th, 2008 at 3:47 pm | Report this comment