BQ tackles the question on every business leader's mind - where's the finance and how do I access it?
The issue: It is undeniable that companies large and small are finding it more difficult than ever to access finance for start-ups, growth and development. How do businesses best position themselves to attract finance and investment in today’s economic environment?
Put a bunch of business leaders, advisers and bankers together for a discussion in a place like the Leeds Malmaison on a Thursday night, and it doesn’t take long to reach a consensus that there is indeed a problem about companies getting access to finance.
It’s a view held by many companies too, not just start-ups.
In our discussion, chaired by Caroline Theobald of the Bridge Club and sponsored by Deloitte and Eversheds, we had two companies who could hardly have come from more different ends of the spectrum.
But both had tales to tell of frustrations in finding funding.
First was Sarah Dunwell, chief executive of Leeds-based social enterprise Create, which aims to get rough sleepers back into work by training them to get jobs in the catering industry.
Unlike Jamie Oliver’s Fifteen Foundation, it aims to get a large number in at entry level, rather than train up a smaller number for much more senior roles.
As a result, the organisation, which was founded four years ago and is backed by Yorkshire Bank, has opened a restaurant in Leeds on the corner of King Street and St Paul’s Street.
But it is currently looking to expand into four more cities in Yorkshire.
Chief executive Sarah Dunwell said she had found looking for backing for such a venture quite hard work.
She admitted that, being a social enterprise, she was limited in what she could offer potential investors as a return – although social enterprises by law are allowed to share out up to 35% of profits.
She was hoping to find an investor “with a portfolio that is big enough and just wants a bit of social investment to add on”.
But at one point in the discussion she admitted there were many things she had wished she had known before starting out.
“I wish I had known how long it takes to get your company ready for getting finance,” she said, “so we could prepare ourselves and get ahead of that curve by strengthening our board and management team, and so that I could start that readiness process early enough.
If it takes nine months it’s worth knowing that’s how long it takes.” At the other extreme was Stuart Paver, managing director of family-run Pavers, a Yorkshire-based shoe store chain that has more than 100 branches in the UK and a joint venture in India.
He said his company was in the lucky position of not needing any extra finance – but that didn’t mean he hadn’t had recent experience of other companies trying to access finance.
“The UK banks claim they are open for business,” he said, “but if we turned away customers as good as the banks are currently turning away, we wouldn’t be still in business.
Paver revealed that in the past two years the company had actually been lending to developers through an agent.
“We would receive 12% interest, and the agent gets 5%, and the developer still gets money at the end.
And yet before he comes to us he has been to every single bank in the UK for a loan, and they won’t lend it.
And yet these developers will never borrow more than 50% of the asset value, and not one of the 30 or so opportunities we have taken up have ever had any difficulty paying it back.
In fact, some of them have been back to us two or three times during this period.
They can afford to pay effectively 17% interest.” He thought the problem was essentially one of credibility.
“The banks too easily say no to credible propositions,” he said.
“We have also just put some other money into a different venture for photovoltaic (PV) panels.
They were willing to pay 20% over a six-month period.
And even in the worst fallback they would still end up with getting income off Government-subsidised PV panels, but still they couldn’t get a bank interested.” Faced with that barrage, how would banks respond? Over the course of the evening many of those represented, including Santander, HSBC, Lloyds Banking Group and Yorkshire Bank, were keen to stress that situation was not as bad as all that.
Martyn Kendrick, area director for Lloyds TSB, wanted to challenge some of the assumptions that had been put out by the press.
“Reports say our balance sheets are eroding,” he said, “when ours actually grew by 4% last year.
The key piece is having confidence in business.
How can the press help us stimulate that confidence?” Jason Trigg, regional director for HSBC, said he certainly didn’t want to put out the message that banks weren’t lending, and had seen first-hand the effect that such reports had on business.
“Banks do want to lend money,” he said.
“If we ever stop doing so, we won’t survive.
I do come across, for example, a customer who is impeccable and who has a brand-new machine in the corner of his factory which has been paid for out of valuable cashflow because they have seen on the TV that banks are not lending.” And Neil Williams, regional director from Santander, said it wasn’t so much a change of heart on the part of the banks as a return to more conventional situation than had existed in the middle of the last decade.
“In the early 1980s when I started in banking, banks would typically loan only up to 60% on any deal,” he said.
“But over the past decade they have been going over each other so much to lend that they have been willing to put 85% or even 90% in.
All that has happened is that the banks have tried to redress that, although they have had to do so very quickly.
It’s just that the market hasn’t adapted to the new environment.” He felt businesses would have to “selfgenerate” the rest.
But how could this be done? Was it possible, said Dan Renton, a director at Deloitte, to “focus more on growth from cashflow”, and was it healthy to do so in the current climate? Kerry Swain, an investment manager from Leeds-based Endless, said cash supply was indeed something her turnaround looked at with each new company it invested in.
“We often spend the first 100 days looking at finance, looking at funding shortfalls, and short-term funding, and things like that,” she said.
Stuart Paver said that if anyone wanted to see how this might work very effectively in practice, they only had to see how Amazon behaved.
“They reduce the cash to cash time,” he said. “If you compete with them it is a waste of time. They are not interested in generating a profit on sales. They buy product with the intention of paying for it on day 65 and selling it on day 32 on average. So the more business they generate, the more cash they have got. They don’t care if they are making a profit.
They start discounting and discounting, so it becomes uncompetitive for everybody else.” Yet Tim Simpson, managing director of Leedsbased Park Place Corporate Finance, was more sceptical of the need to manipulate the balance sheet like that.
“I know a company that likes to take the linear approach,” he said, “They always require customers to pay before. How can they do that? Because they have a bloody good product. That is the point. You need to produce value to the world. Look at what value your activity is creating. This company is lending money to others, and buying stock in advance.
All good businesses do that.” There was a general feeling that finance was not the only issue either.
Many felt relations between banks and companies looking for funding could be more effectively managed as well.
Simpson felt the process had become far too bureaucratic, with prospective borrowers being asked to fill out forms that were in some cases 90 pages long.
“The big issue is getting the money to flow between the two,” he said.
“Dealmaking has become far too bureaucratic and expensive. We need to find a way of short-circuiting dealmaking bureaucracy.
“Rather like criminals being made to visit victims of crime,” he said, “if you are borrowing from an individual, you are much more likely to repay them. There was a time when a bank manager had a much better role in society than he does now. Bringing that personal interaction back is absolutely critical.” Williams said the banks were only acting on the advice of lawyers in demanding such supplementary documentation.
“But I can’t remember any case we have lost because the documents weren’t right,” he said.
“Only a small percentage of problems get to court anyway.” In defence of lawyers, Peter Cranston, head of restructuring in the north at Eversheds, said the lengthy forms companies needed to fill in were partly the result of a risk-averse culture trickling down from bigger to smaller deals.
“Everything starts with investment grade amounts,” he said.
“What we do is too heavy duty, and that comes from a riskaverse environment, which is fed down from investment grade into every grade.” But it was by no means only professionals and funders who were felt to be the problem.
Many around the table felt companies applying for funding also needed to be better educated, and more realistic about what they were likely to get. Many of the bankers around the table agreed with Williams who said he had come across too many cases of, for example, restaurant owners applying for finance who couldn’t even say what their average number of covers a night was.
Gary Lumby, director of small business at Yorkshire and Clydesdale Banks, said he feared such a situation would only get worse with the loss of a proactive Business Link in the region.
“On November 25 this year it becomes a website and call centre only,” he said.
Paver said he wished banks would create more packs for borrowers that were tailored to specific industries – something most of the banks said they were already doing.
And while Matthew Hughes, an audit partner at Deloitte, said he felt more support should be given to mentoring networks to educate businesses, or to non-executive directors, Lumby was not so sure.
“Not everyone can afford non-executives,” he said. “And we have a mentor programme through the Clydesdale Bank that was free, but our customers just don’t use it – even though we use only proven mentors.” Mike Reynolds, a former finance director at Cosalt who is now building up a care home business, said he felt many businesses were overcautious and overprotective when it came to working with mentors.
“There’s certainly a case of, ‘I don’t want them to know how much we turn over,’” he said. So what, then, would they all say to Sarah Dunwell’s predicament in getting funding, mentioned at the start? How would they advise her to proceed? Swain agreed that early intervention was always a good strategy. She said it was the major failing of many of the companies who came knocking at Endless’s door.
“You look a lot more credible going in early to talk about your finance issues than if you go and say, ‘Next month I am going to run out of cash,’” she said. Peter Cranston, who works in restructuring, agreed.
“It’s the discipline of information that is important,” he said. “By the time problem situations get around to me the financial information is often disarrayed by organisational disarray. Something which is unravelling scares people off.” So to avoid such issues, many agreed with Dan Renton that the most important thing to come equipped with was a credible business plan.
His Deloitte colleague Matthew Hughes went further: “If you don’t know your own business plan, how can someone invest in you? You have to remember that people invest because they want to make money. You need to understand your risk and your weaknesses, and then we can have a conversation.”
Thoughts from the BQ round table debate
Dan Renton, director in corporate finance for Deloitte in Yorkshire “In my opinion, the most important item discussed was how we bring entrepreneurs together with funders in a way that fosters trust, builds a relationship and ultimately a business solution.
Many entrepreneurs complain that finance simply isn’t available; conversely, many banks complain that they would welcome further opportunities to lend, so something isn’t working in the right way all of the time. To start that conversation those looking to raise finance must be well prepared and have a thorough, well thought-through business plan. That business plan should articulate opportunity, but also be honest enough to consider risks and challenges.
Above all, the proposition should be based on delivering something stronger, better, more compelling than existing competition. A strong plan will attract strong interest. For their part, funders need to continue to invest time as well as money building business relationships with the very many talented and ambitious business leaders we have in our region.
The financial community holds commercial experience that many companies would find simply invaluable and a richer business conversation will drive opportunity for lender and company alike. Today’s younger, entrepreneurial businesses are tomorrow’s PLCs and we simply must support them in these difficult economic times.”
BQ Live is a series of informative debates designed to further contribute to the success and prosperity of our regional economy through the debate, discussion and feedback of a range of key business topics and issues.