The future of borrowing. How more flexible funding can help businesses grow

The future of borrowing How more flexible funding can help businesses grow Lessons from the SME lending market The conditions are right for business...
Author: Pamela Shaw
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The future of borrowing How more flexible funding can help businesses grow

Lessons from the SME lending market The conditions are right for businesses to move from growth planning to action, but many companies are holding back from investing. While concern about a consistent business environment being maintained is one reason, the other is a misconception about the availability of finance. This article explores how innovative funding ideas are providing new options for SMEs and how these developments are also generating new approaches for lenders to larger corporates. Moving strongly and boldly out of the recession is what’s needed if companies are to get ahead of their competitors. And that means looking beyond the UK’s more saturated market as statistics show that businesses that fail to export in their first four years reach a plateau. Innovations in lending processes and alternatives to traditional debt finance could also give companies the support and the confidence they need to stimulate growth. A number of developments in the SME lending market have been seen recently and, although they are not always directly applicable to the multi-bank lending market, there are synergies and learning points. 2015 should see lenders going further in making it easier and faster for growth-hungry corporates of all sizes to get access to funding. Market-leading lenders will combine automation for speed, and personalisation for best-fit financing options.

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Moving from optimism to action The confidence and optimism is there, but something is holding UK companies back from committing to growth. There’s a sense that companies of all sizes still don’t quite trust the business environment, as stability is punctuated by a series of disruptions. Rebecca McNeil, Head of SME Lending at Barclays says: “The companies that come out of the recession boldly, take advantage of the market and make the first move will be the ones that succeed the most. I wouldn’t say this is quite a once-in-a-lifetime chance, but it’s certainly a once-in-a-cycle opportunity to scale up your business.”

much as they were pre-crisis. Despite access to cash reserves, companies aren’t making the investment that will set them on track for expansion and development.” Meanwhile, the continual pushing back of an interest rate rise has created a static situation where businesses are driven neither to fix nor to step up borrowing.

Translate confidence into growth UK output growth has recently cooled a little – the latest official estimates suggest that the pace eased to 0.5% in the final quarter of last year – but the 2.6% increase achieved in 2014 as whole was still a respectable performance, not equalled since 2007. A sluggish eurozone may have made exporting more difficult, but the UK has had some success in redirecting trade towards betterperforming areas of the world. Home sales are likely to benefit from a continuing recovery in business investment and the boost to spending power provided by the sharp fall in oil prices, which is reducing inflationary pressures and relieving the squeeze on household budgets.

Nick Rusling, Debt Finance Director at Barclays, says the dynamics were similar in the large corporate world: “However, after caution being shown earlier in 2014, every finance director I’ve spoken to in recent months is increasingly confident about the outlook, and that’s transferring into action faster than amongst SMEs. The first half of 2014 was fairly slow, but over the autumn and winter there was a rise in event-driven deals, mergers and acquisitions, investments and general corporate activity.”

“The companies that come out of the recession boldly, take advantage of the market and make the first move will be the ones that succeed the most.” Rebecca McNeil, Head of SME Lending

The lending myth So how do you stimulate growth? McNeil and Rusling agree that there are some misconceptions around funding for expansion, and that innovations in lending processes promise to give companies the flexibility and diversity they need.

Sharply lower oil prices should provide a welcome fillip to the consumer and reduce business costs, says McNeil, helping companies to translate their confidence into real growth. “SMEs are telling us that they expect to grow strongly and significantly in 2015, but we’re not seeing that play through to progress yet. There’s a high level of cash on deposit and overdraft balances are not being used as

Growth needs investment but, says McNeil, many businesses have the view that finance isn’t available to them.

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“Over the last three years, there’s been a theme in the press that the banks aren’t lending. In fact, there’s normally around £100bn of main UK bank funding in the market and that varies up and down by only around 4%. Even during the recession, that was true,” explains McNeil. “The misconception comes from overseas and peripheral lenders pulling out of the higher risk end of the market.”

Perception versus reality The gap these lenders previously filled could, she says, be replaced by equity or risk capital – something that a stronger venture capital market in the UK and better access to private equity can make possible. “We’ve got work to do in debunking the myth that it’s hard to get finance. Interestingly, the SME Finance Monitor tells us that customers’ perception of whether they’ll get accepted is far lower than the reality,” says McNeil. “When companies are discouraged from approaching a lender for fear of refusal, it can only hinder growth.”

“The new lenders available to SMEs tend to be nimble and fast,” says McNeil. “Crowdfunders have slick online processes that mean customers get their money very quickly. We’ve learnt from their experiences and moved ahead of the game.” In the larger corporate space a number of direct lenders have come into the market. These are providing complementary options alongside traditional bank lending and Barclays works with a number of them. An example is Barclays’ partnership with Bluebay Asset Management to provide blended funding, or unitranche loans, of up to £120m, designed to fill a gap in the market, targeting businesses that aren’t yet big enough to access the capital markets.

As another example, Barclays introduces direct lenders, such as pension funds, into deals where they can provide longer term capital than the bank. “They’re not always competition for the banks,” says Rusling. “It’s about complementing each other. The bank’s strength comes from being able to work with customers to design the funding strategy that fits them perfectly, presenting a range of options available to the business and how the bank can help support.”

A more fluid approach to lending Barclays has a proven track record in innovation in how it does business, for example, launching the Pingit for Corporates mobile payment service and video banking. McNeill adds that, in the funding space, alternative lenders have provided creative ideas which are driving developments, such as the streamlining of processes around arranging finance. “In a speech recently, Vince Cable said the average SME thought about getting finance two days before they needed it. So, how do you give a business the help they need almost instantly?”

The new funding ecosystem What has changed, however, is that borrowing options have widened and become more bespoke, and this is a trend that Rusling sees developing during 2015.

One solution already being offered by Barclays to 300,000 SMEs is a pre-assessed credit limit. The company and the bank’s business manager can see online how much is available to borrow and, for amounts up to £25,000, it takes just five clicks to get that money into the company’s account within 24 hours.

“The conversations we have with our clients now encompass alternative sources of finance. It’s not all about bank lending. They should have access to what’s right for their business and their lifestage. A diverse funding ‘ecosystem’ is good for business,” he says. That ecosystem includes options for SMEs, such as crowdfunding, business angels, start-up loans, investment firms such as Business Growth Fund and venture capital. Banks like Barclays are learning from, and working with, these new lenders, introducing them to clients where they offer the right funding option.

As well as beating the crowdfunders when it comes to ease and speed, it demonstrates a more fluid approach to lending that will smooth the way to growth for larger corporates as well as the SMEs.

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Streamlining the process While McNeil and Rusling recognise the efficiencies that faster, automated services bring to businesses, they’re also strong advocates for personalising lending. As businesses grow and develop more complex needs, there will be a greater need for personalisation. They will need guidance to ensure solutions meet complex, cross-border needs, rather than ‘off-the-shelf ’ products.

Flexible financing – a case study One UK company, which manufactures materials for the engine and transmission plants of some of the world’s largest auto manufacturers, had an overdraft facility with their previous bank, but it didn’t provide the flexibility a growing company needed. They required a solution tailored to their needs and their market.

“The closest corporate equivalent of the pre-assessed credit limit for SMEs is the connection between the company and its Relationship Director in the bank,” says Rusling. “There is no one-size-fits-all for larger corporate clients and here we may have bespoke capital structures and/or large syndicated bank groups. Barclays works with clients to understand their individual borrowing needs and financial position. It means the Relationship Director, with a strong knowledge of credit capacity, can give a fast and confident ‘yes’ and then move quickly to get the lending in place.”

The company now has a trade loan facility with Barclays, designed to help them manufacture and distribute more effectively. The company can draw down 65% of a machine’s value while it’s being made and shipped and then has a credit period timed to customers’ payment schedules. If a payment comes in early, the company also benefits because credit charges stop at that point.

With most banks keen to lend, it’s the ones who differentiate themselves who have the advantage. For Rusling, that means having conversations with clients about the full range of lending options and products. It also means reacting faster and making life easier for any company, SME or corporate, when they need finance to grow. Barclays is looking at process simplification from a number of angles, including internal functions working together in a ‘one business’ structure. Streamlined internal processes should in turn reduce the time from approvals to funding.

Barclays offers a number of other flexible funding solutions, including the newly launched Advanced Overdraft.

Barclays Advanced Overdraft fills the gap between traditional overdrafts and Confidential Invoice Discounting facilities. It provides cost-effective access to working capital, and can offer a higher level of funding than a traditional overdraft. For example, a business wishing to maintain existing purchase terms, whilst sourcing higher volumes of stock during expansion, can access more working capital, with minimal maintenance and administration required.

Alongside the trade loan, the company has an overdraft facility and a government-backed Enterprise Finance Guarantee loan.

“Barclays works with clients to understand their individual borrowing needs and financial position. It means the Relationship Director can give a fast and confident ‘yes’ and then move quickly to get the lending in place.” Nick Rusling, Debt Finance Director

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Key takeaways • Many UK companies are not acting on the current potential for growth, but funding is available and can be tailored to specific business strategy

• Innovation in the SME lending market, such as flexible options, alternative lenders and pre-assessed credit limits, is providing ideas and learning points for the larger corporate market

• A ‘funding ecosystem’ is developing with an increase in alternative funding providers who can be introduced by banks

• Companies should involve their bank early in the strategic planning process to help their lender understand their business, their USP, and where they are positioned in the industry.

Find out more about how Barclays can help with funding for growth. Speak to your Relationship Director or call 0800 015 4242*.

*To maintain a high quality of service, your call may be monitored or recorded for training and security purposes. Calls to 0800 numbers are free of charge, when calling from a UK landline. Charges may apply when using a mobile phone or when calling from abroad. Lines are open from 8am to 6pm Monday to Friday. The views expressed by the author do not necessarily reflect the views of the Barclays Bank PLC Group nor should they be taken as statements of policy or intent of the Barclays Bank PLC Group. The Barclays Bank PLC Group takes no responsibility for the veracity of information contained in third-party articles and no warranties or undertakings of any kind whether express or implied, regarding the accuracy or completeness of the information is given. The Barclays Bank PLC Group takes no liability for the impact of any decisions made based on information contained and views expressed in this article. Barclays is a trading name of Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register No. 122702). Registered in England. Registered number is 1026167 with registered office at 1 Churchill Place, London E14 5HP. February 2015.

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