Why ‘access to finance’ has many meanings for SMEs

The government, through new legislation and raising awareness through the media, is focusing on how SMEs can release their own cash more quickly, rather than relying upon raising new finance

In the world of business, the words “access to finance” have taken on different meanings, for different entities, in different scenarios.
Depending on the structure and life cycle of a business, the words could signify, for example:
  • access to lending from a bank or financial institution;
  • access to additional funding from their shareholder base (or new investors);
  • access to intra group finance facilities,
  • or, simply the ability for a business to have a better “cashflow” of its existing financial resources.
But why is it topical now? Because the government, through new legislation and raising awareness through the media, is focussing on how SMEs can release their own cash more quickly, rather than relying upon raising new finance.
Bank or other financial institution lending was, historically, the place to start if an SME needed access to finance. This allowed a business to speculate/accumulate, whilst borrowing funds at a sensible rate of interest with no hidden traps. With interest rates being so low and capital adequacy of financial institutions being tested by various market disasters, bank lending has become a luxury for some SMEs, and a pipe dream for others.
More modern forms of lending (peer to peer, crowdfunding etc) have recently become commonplace for access to finance, in particular for the startup and growth companies.
These, together with the government backed initiatives (which include initial grants, or low interest seed funding, or vouchers for advice), provide fledgling and growth companies with access to finance at a time when they really need it.
With the Financial Conduct Authority providing authorisation to certain crowd funding platforms and the FCA Handbook now recognising the online offerings, these may also become popular with the more established business, alongside new companies.
Access to finance is also achieved through a company offering an equity investment, for example, to new investors (business angels, venture capital etc) or to existing shareholders, possibly via a rights issue. This could bring in well needed funds for the next stage of the business’ journey. Crowdfunding again can be used for equity finance raising.
These are your typical debt and equity finance raising for the SME world. As mentioned above, these are not the scenarios that the Department of Business Innovation and Skills (BIS) are referring to in the latest legislation, nor, the current consultation papers which refer to “access to finance”.
In recent political times, BIS has been concentrating less on how businesses raise new money and more on providing a legislative platform for businesses to free up their existing financial resources. This makes sense, given the strain on liquidity that banks appear still to be struggling with. Why not use what you’ve got?
This form of “access to finance” for SMEs is high on the government’s agenda, demonstrated by the recent release (26 October 2015) of a Consultation Paper by BIS entitled “Late Payments: Challenges to Grossly Unfair Terms”.
The pre-amble to the paper refers to SMEs being owed a total of £26.8 billion, and small businesses waiting, on average, for £31,901 of overdue payments. This is serious money sitting in the wrong bank account.
Amongst other matters, the paper includes proposals for the introduction of an alternative dispute arena for small businesses who are not being paid, and, a Small Business Commissioner to complain to regarding “grossly” unfair terms (thus avoiding costly court fees).
This Consultation Paper stems from a long line of legislation, consultation and regulation where the UK government has tried to “help” a small business get paid by a large business in a timely manner. These are some of a number of new measures that are aimed at making sure the small business gets access to its well-earned cash soonest.
Recently enacted legislation (through the Small Business, Enterprise and Employment Act 2015) focusses on making certain sized businesses publish their payment terms and how well they perform against them.
The idea is to shame them into providing better terms or at least sticking to the terms they agree. The new rules are also focussing on making sure the SME is not contractually embargoed from using invoice discounting facilities, by allowing assignment of receivables to be carved out of a general non-assignment clause; again, a neat way of providing earlier “access to finance”.
Another tactic being offered is to make credit data that has already been gathered by a Bank on an SME looking for a loan available to alternative lenders with less stringent credit committee criteria, if the Bank is not willing to lend. This should provide for a quicker solution (or at least a quicker decision) for the SME to gain access to finance.
Below is brief outline of the aptly named “Access to Finance” section (Part 1) of the Small Business, Enterprise and Employment Act 2015 and what it contains:
  • a prohibition on contractual terms purporting to veto the assignment of receivables – giving a small business more opportunity to enter into factoring arrangements;
  • compulsory public reporting by companies of a certain size of their payment practices and performance against those practices;
  • providing that certain designated banks most share information about SME business customers to designated credit reference agencies;
  • providing that certain designated banks share information with finance platforms on any unsuccessful SME loan or credit applicant;
  • a process to make cheque clearance quicker;
  • VAT records are to be available to designated credit agencies, the idea being that businesses contracting with SMEs can check the creditworthiness, legal and regulatory compliance of that entity through a search of this nature and move to contract more quickly.
Not all of these provisions are in force at this time, but at least the SME’s can see additional help to “access to finance” on the horizon.
It is anticipated that BIS will continue to push the idea of SMEs working to free up their cash quicker, by being able to use the new rules to do so. With the introduction of a Small Business Commissioner, it is hoped the small business will feel more comfortable in demanding to be paid by their biggest customer!
For more information on the Small Business, Enterprise and Employment Act 2015, contact me at Oswalds on 0131 226 8282 or at andrew_cockburn@oswalds.co.uk

20151005 Oswalds support banner NEW LOGO

Sponsored by
Andrew Cockburn is based in Edinburgh. As part of the Jordans Group, he provides clients within the SME, legal, accountancy and wider professional communities with access to a comprehensive range of corporate legal services, including company formation, company law advice and general company compliance throughout the UK.