Economy skips to a new beat

Economy skips to a new beat

David Smith, economics editor at The Sunday Times, was the guest speaker and panel facilitator at a ‘Funding Business Growth’ event held by Barclays at The Belfry Hotel, Sutton Coldfield last month. Steve Dyson reports

Welcome,

If you’re ever wondering how the UK economy is performing, try counting the number of builders’ skips on your street. That was the light-hearted advice from David Smith, economics editor at The Sunday Times, who said: “If there are no skips, it’s a recession; if there are two, there’s a growth trend; and if there are four, it’s an unsustainable boom!”

In his opening talk at Barclay’s ‘Funding Business Growth’ event, Smith described how the UK economy was picking up after “the worst recession since post-war times”, but that it was a “stop-start recovery” as a result of many factors.

These included spending cuts driven by deficit reduction, weak credit growth, an inflationary squeeze on real income, with lower wages. There was also weakness in the main export markets, weak productivity growth, a deleveraging of household and corporate debt, and a regulatory backlash.

“All these factors have reduced the pace of recovery,” said Smith, “but undoubtedly things have started to get better… it’s just taking longer.” Other economic risks had not gone away, Smith said, including the Eurozone weakness, geopolitical crises such as the Ukraine and the Middle East, and UK political uncertainty ahead of the 2015 General Election.

Despite these hurdles, Smith pointed out that inflation was down, there had been the biggest fall in unemployment on record, and the UK’s monetary policy was working – including the 0.5% bank rate, quantitative easing, the Funding for Lending and the Help to Buy schemes. He said: “It’s like lighting a bonfire on a damp afternoon. You strike one match, a second match, a third match and a fourth, and nothing happens, but then the fifth match works and nearly takes your eyebrows off.”

Discussing probable interest rate rises in later 2015, Smith said: “Leading indicators point to a GDP growth of 2.5% or so, the Bank of England is still upbeat, and the household debt burden has fallen, so the economy can take it.”

But any interest rate growth would be gradual, he said, with small rises leading to an eventual “new normal” at somewhere like a “manageable” 2.5%.

The Debate

Ian Tetsill, Barclays’ head of debt finance in the Midlands, said the bank had a real appetite to lend. He added: “Interest rates and the cost of borrowing are at historic lows. It’s a good time to secure new borrowing, and we are getting more requests to support both organic and acquisition related growth.”

Richard Sanders, a partner of Catalyst Corporate Finance, said that M&A deals in his sector were 30% or 40% ahead of last year. The challenge, he said, was to “make sure companies make the most of their opportunity”, referring to an old saying that: “You can’t overpay for a very good business.”

Ian Downing, investment director at the Business Growth Fund (BGF), said his organisation was working with SMEs with turnovers of £5m to £100m, lending them “between £2m to £10m a time in return for an involvement and shareholding”.

He said: “We support them over the long-term, lending from five to ten years. We’ve been going for three years, and have invested £400m in 70 businesses so far.”

James Webber, Barclays’ head of trade and working capital in the Midlands, said there had been a 46% growth in exports in the West Midlands over the period 2010-2013, the highest level in the UK, largely driven by companies like Jaguar Landrover.

But Webber said: “The export market is the elephant in the room.” There was a “lack of confidence for businesses to step into export markets” because of a “fear of not being paid”, and rather than dealing with that issue firms were staying within the UK.

There were, Webber said, better opportunities within emerging markets like parts of Africa, Asia and Latin America where you will find economic growth of up to 7%, and there was “a lot of advice around” from banks, the UKTI and other organisations. Rather than seeing these advisors separately, he said: “Why not get us all in the room at the same time?
We look at the risks and can help companies to mitigate them.” He added: “We should put more (successful) exporters in front of (potential) exporters. Go into exports with your eyes open and there are big prizes.”

Sanders said there was a “great diversity in funding”, and that even crowd-funding had become successful at the £100k to £250k level. “As businesses progress through different types of ownership they’re using different pots of funding.”

Downing said the BGF was dealing “almost always” with owner-managed companies with ambitions, and with “exciting entrepreneurs”, but these were often very different. “We’ve recently helped a 214-year old family firm in its ninth generation, and another firm we’re helping is just three years old.”

Tetsill said: “The rules of banking have not changed since I started lending 25 years ago: The questions we ask are: What’s the cashflow like? How much can they afford to repay? What’s their track record? What are the contingencies? It’s about looking at the operating business first – is it growing? Is it in good health? And then overlaying the right capital structure second.

Sanders agreed and said: “Some of the banks are operating in a much more sophisticated way. Rather than saying ‘let’s grab as much as we can’, they’re saying ‘these guys here, we can work very closely with’.”

Webber said Barclays had seen a gradual move away from traditional overdrafts towards a mixture of products such as sales finance, letters of credit and trade loans. “Clients like that structured approach for flexibility in their business, and it means we can potentially leverage higher than with traditional overdrafts. But it’s an educational process, as there’s still that sharp intake of breath when ‘letters of credit’ are mentioned.”

Discussing BGF finance, Downing said: “We try to pay a fair price. We’re buying shares. If there’s a rise in value, we benefit. If there’s a drop, it’s worthless. If a business fails, we lose our money. So valuing a business is a subjective process. Whether it’s your house
or your car, you always think it’s worth more.”

Graham Nicoll, Barclays’ head of mid-corporate banking in the Midlands, said: “There’s a lot of finance out there for businesses looking to expand. But it can be confusing and complex. Where do you go? How do you find out about different funding? “The challenge for us is: how do we make sure we’re meeting your needs? We can act as that conduit to find the best sources of finance for you. Our job is to make sure we can support you, the client, to source all the different options.”