8/8/2019 The Business Magazine OCT 2010

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 The Business Magazine:Digital - October 2010

Lending to SMEs There is plenty of evidence to showthat businesses are seeking out

alternatives to bank funding, writes

Richard Willsher

In its August “Trends in Lending” report

the Bank of England states: “Contacts

of the Bank’s network of Agents

[throughout the UK] noted that credit

conditions for smaller businesses

remained tighter than for larger

corporates...” A two-tier market in bank funding is very real. “Some major UK 

lenders,” the Bank adds, “reported that

spreads on lending to larger corporates

continued to fall, but by a diminishing

amount. Spreads on lending to small

and medium-sized enterprises were

little changed.” This explains why small

businesses are finding their funding

where they can, away from traditional

overdrafts and term loans.

A spokesperson for the Federation

of Small Businesses says that many

smaller businesses are put off goingto banks for credit because of extra

charges that may be levied, such as

arrangement fees or set up charges.

 This serves to increase the real cost

of borrowing. “Our members [also]

say that they fear that if they go to

their bank to ask for a new loan or an

extension to their overdraft it may

trigger a review of all of their financing

arrangements.”

Keeping it personal

Instead, small businesses often fund

their businesses out of personal

savings, with many new businesses

being set up with redundancy money.

 This is a trend that may well increase

in coming months of austerity. In a

recent episode of BBC’s Dragons’ Den

one of the founders of Zigo, a bicycle-

mounted baby carrier business, said he

had invested $1.3 million of his own

money in thebusiness. The

Dragons were

dumbfounded. Not

every entrepreneur

has that much personal

wealth to put in, most need

to look elsewhere, but where?

 The FSB says that friends and family

are a very common source of working

capital as well as equity. Credit cardsare also commonly used as a ready

source of cash, though it can turn out

to be very expensive.

Joining the crowd

Another small scale source of 

borrowing, though that is not what it

was set up to do, is the online lending

and borrowing exchange Zopa, http:// 

uk.zopa.com/ZopaWeb/. Giles Andrews

Zopa’s CEO says: “It is almost certain

that some borrowers are using their

Zopa

borrowings

in this way.” He adds

not necessarily of gre

Zopa because borrow

on their ability to rep

regardless of what th

do with the funds. T

Zopa are easy to see.

can probably borrow

cheaply than throug

only up to £15,000 an

the idea that the fun

Continued on to ne

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 The Business Magazine:Digital - October 2010

Lending to SMEs

...is directly supplied by a range of small

depositors, not by a large bank.

 There is definite appeal to what in

the US has come to be called “crowd-

funding.” Zopa-like but recently set up

to provide business funding is Funding

Circle, http://www.fundingcircle.

com/. It provides unsecured loans of 

between £5,000 and £50,000 at fixed

rates for up to three years.

 Traditional but alternative

Although invoice discounting and

factoring accounts for something in

region of £14 billion of outstanding

advances at any one time, as Kate

Sharp, chief executive of the Asset

Based Finance Association, the

invoice discounters and factors trade

association, explains it is still perceived

as being an “alternative” source of 

business funding especially amongthose “brought up on overdrafts and

business loans.” However she goes

on to point out that in providing

finance directly linked to the sales of 

a business, invoice discounting maps

the ebbs and flows in fortunes of a

business.

Another source of financing is Finance

South East (FSE). With offices across

the South East of England, chief 

executive Sally Goodsell explains,

“Many of our borrowers are young

entrepreneurial companies and

technology businesses that are looking

to grow. We are open for business and

we do some of the lending that the

banks have simply stopped doing; for

example, cash flow lending to growth

hungry businesses. We are not here

to finance lifestyle or steady state

businesses. We are looking to lend

to and invest in companies that are

ambitious… They are

often knowledge

based business

that are scalable and

are looking to expand

beyond their home markets.”

Such funding may also attract

additional funding from the banks

once FSE is seen to be involved.

Don’t forget the angels

Although they are mainly interested in

equity investing, business angels often

provide more than just that. Angel

investing expert Chris Clegg, who

provides training for business angels,

notes that many provide debt as well

as equity. Indeed when a BBC Dragon

says he is prepared to put a sum of 

money into a business, those funds

may be partly in the form of equity and

partly in the form of debt. Angel debt

funding

may take the

form of preference s

may be convertible t

given circumstances

 There are several no

of funding which ca

circumstances of pa

What may worry the

when a business tap

sources of funding it

question just how m

need banks involved

in the future, when t

high and the terms s

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