Meanwhile, the Daily Mail has launched a charter of eight measures designed to protect small companies, including a 2% cut in corporation tax; a six-month deferral of VAT, national insurance and PAYE payments; and a promise from banks to stop increasing charges and interest rates on small business accounts and not to call in loans at short notice.
The trouble is that only the last of these ideas - arguably the least realistic - really touches on the fundamental problem: the way the credit crunch has hardened many banks' attitudes to small businesses.
One non-executive director who sits on the boards of several small businesses - and who did not wish to be named - told New Business about the banking problems endured by one of the companies with which he is involved. The company in question is in the furniture business - traditionally one of the first sectors to be affected when economic conditions worsen - but most of its recent financial troubles have been caused by bankers.
"This is an extremely well run company, with no debts. We had no overdraft facility, we were turning over about £5m and we had a large amount of money placed on deposit with the bank to guarantee the credit card payments on a monthly basis," our source explains. "Then they came to us about 12 months ago and said that they'd decided to get out of companies involved in furniture. They gave us a week or so to get everything sorted out, but they wanted an extra £150,000 put on deposit to guarantee the credit card payments; 75% more than we already had for that purpose.
"We did find another bank but all the information from the last bank was passed on and, as they're all working on a cartel on the credit card side, the same amount had to be deposited as with the previous bank. So we've got a whole lot of money that we could really use in the company being taken out, that we can't have the benefit of in any way."
‘The bank decided they wanted to keep a close eye on the business, so
put it into the hands of a particular office and charged us a sum of
£500 a month. They didn't even tell us about it until we noticed the
charges going through'
Of course, most entrepreneurs have at least one story about being stitched up by a bank, and when you consider the financial turmoil of the autumn perhaps it's not surprising this sort of thing should be happening. But the upshot is that more small business owners are now reluctantly looking outside the banking arena towards less conventional methods of finance to expand, or simply to survive.
No guarantees
Some are turning to the Business Link network, which offers advice and support including access to local advisers and a range of development grants, for help. Samee Mian, managing director of Delta Club, a small business that provides advice and training services to other businesses in north-east London, has been working with Business Link for 18 months. "I've had a lot of support on our business plan and cashflow, and I'm very pleased with that," he says. But he paints a less rosy picture of the general climate: "We work with a lot of small businesses that are looking for finance, and getting funds even through the government schemes set up to support businesses has been very difficult."
A number of businesses report problems with the government's Small Firms Loan Guarantee (SFLG) scheme, which provides guarantees against default, in certain circumstances, to companies unwilling to lend to small businesses because of a lack of security. The guarantee covers 75% of the loan amount, in return for which the borrower pays a 2% premium on the outstanding balance of the loan to the Department for Business, Enterprise and Regulatory Reform (BERR). It applies on loans of up to £250,000, on agreements running for up to 10 years and is available to businesses with an annual turnover of up to £5.6m.
But some banks now appear to have effectively stopped supporting the SFLG. "[SFLG-backed loans] are of no interest to the banks at the moment," says our anonymous non-executive director. "They don't want to do them. That's been the situation for the last nine months."
Stephen Pegge, communications director of Lloyds TSB Commercial, says this is not the case at his bank. "We are active users of SFLG where it's appropriate," he responds. "You've got to distinguish situations where it's just not a viable proposition and the risk is too high. Six months ago the government announced a relaxation of the scheme, because it had been limited to businesses under five years old. We welcomed that, and since then our lending by volume has increased by 34% and by value by 45%."
Other options include corporate venturing, in which another company - usually a larger rival - takes a stake in your business, or working with business angels, who also usually invest in the company in return for equity. Patricia Sutton, marketing director at the business angel network Advantage Business Angels (ABA), says just as many deals as before are being made, but that she's also writing more letters telling companies the organisation won't be able to help them. "Those are cases where it's almost desperation and they're just looking for anything they can get," she says. "They'll use business angels as a last resort, which is not what you should do."
On the other hand, Bill Morrow, founder of another business angel network Angels Den, believes the financial crisis is changing the way investors assess the risks of working with entrepreneurs. "Business angels are liquidating their equities and looking for a home for their capital," he says. Roughly 55% of the businesses that come to Angels Den seeking finance are existing businesses rather than start-ups, and Morrow says the network has facilitated 122 deals in the last year.
‘Any business angel who's invested would want equity. That would bring
in another person and the quick decision-making could stop if I had to
consult with an outside investor before I did anything'
Those who represent the angels would respond by saying that not every investor wants to act like an interfering football club chairman. "The downside is that you have to sell some of your shares, but if you go and get a big loan from the bank you're selling your soul to the devil anyway," says ABA's Sutton. Nor is it always necessary to give external investors any equity. For example, a new online service, FortuneNation, suggests that investors and entrepreneurs share future sales revenues instead.
Flexible funding
You can also access finance through other better established methods such as factoring and invoice discounting services, or asset-based loans which are secured against tangible assets such as property, stock or even a company's brand. Factoring providers, meanwhile, buy debts owed to the business for a fee and pay 80% or more of the value of the debt upfront, with the rest following when they receive payment from the end-client. It's a good way of increasing cashflow and means you don't have to worry about chasing the money yourself but fees do vary so it's worth shopping around, and you should also make sure the provider you use is a member of the Asset Based Finance Association (ABFA).
Invoice discounting - when you retain the chasing of debt in-house - is usually only an option for profitable businesses with a turnover of at least £500,000 and which are willing to subject themselves to scrutiny by the discounter. If it is satisfied by the state of the business and the nature of the debt, it advances a percentage of the company's approved outstanding invoices. The company also pays a monthly fee and interest on the net amount advanced by the discounter, then either makes more payments or receives further advances, depending on whether the debt owed to the business by its customers falls or rises. This is another effective way of increasing cashflow, but can also be expensive and may entail signing a long-term contract.
"The world has suffered in the last few years because people have forgotten the first principle of lending: understand the risk," says Kate Sharp, chief executive at ABFA. "We allow the way your business is working to determine levels of finance. If you're growing, you will get more funding. If you're not, your funding is going to be maintained at the same level and if your business is contracting then your finance is going to contract with it. That's good, because you're always on top of the debt. It all comes back to sensible financial practice."
AJ Moran, a dry-lining and plastering contractor based in Berkshire that works with major construction companies, started using an invoice discounting service provided by Centric Commercial Finance at the end of September. "Although we'd been with our bank for two-and-a-half years and there had been no problems, they made it clear they were no longer interested in small firms in our sector," says Peter Melton, managing director.
"The advantage of this type of funding is it's flexible, particularly in our industry, where certain people sometimes hold onto their money longer than they ought," he says. "For businesses like ours it's crucial that companies like these are around, because they seem to be prepared to look after small businesses and the banks don't."
Lloyds TSB's Pegge is still at pains to stress that this is an inaccurate generalisation. He admits that some banks, particularly smaller providers, have moved away from small businesses operating in riskier sectors, but believes those that remain still offer a competitive service. "We support customers whatever the conditions," he says. "It's crazy to damage your customer base like that because you're going to lose more money than if you help customers." He advises businesses to speak to banks early, before problems get out of hand, and to make financial contingency plans.
But our anonymous non-executive director is unconvinced. "The days of asking for a loan for your small business are gone," he says. "The banks are happy to lend you the money if you will put your house up, but not on the strength of what the business is doing. And with small businesses the house is usually guaranteed to somebody else already." If he's right, ever more small firms will be using alternative sources of finance in future. Arming yourself with the knowledge you need to do so could prove vital to your company's future.
