Rod Wilkinson, KPMG

Member Article

Maximising the likelihood of successfully accessing finance

Rod Wilkinson, Head of Corporate Finance at KPMG in Newcastle explores how to successfully access finance.

Post recession, access to finance has become a mainstream business concern, especially for SMEs.

The vast majority of lending to SMEs comes from banks, whose appetite for lending has been reduced, initially by the effects of the credit crunch, and more recently compounded by the impact of the Eurozone sovereign debt crisis on the financial market and regulatory pressures on European Banks to recapitalise their balance sheets.

These factors are causing banks to seek the safest homes for lending. As a generalisation this does no favours to the SME end of the market which is traditionally viewed as more risky than larger corporates.

On the other hand, banks are responding to the government’s urging to provide credit in order to support growth. Consequently they are still lending but businesses must respond to the fact that the debt market has fundamentally changed.

For one thing, the cost of debt has soared in the last 18 months; as the CEO of the British Bankers Association said; “the cheap money era is over”. Secondly, the process of accessing finance has changed dramatically.

A key pitfall is not realising how challenging securing finance is likely to be. Even profitable businesses must now work hard, even when approaching funders they have been doing business with for years.

Management teams must focus hard on what their ‘credit story’ is, to demonstrate to funders that their business is credible and stable, with forecasts that correlate to recent trading and a team capable of delivering the budgeted results.

They should expect funders to scrutinise their numbers and may benefit from bringing in an adviser to challenge and make suggestions early in the process to ensure that by the time the funding ‘pitch’ is delivered to the bank, it is clear and robust.

The tighter parameters being used by lenders now can be particularly stressful given most businesses have experienced relatively weaker trading in the last 24 months or so than during the good times. Engaging in open communication with lenders early- even if the outlook is not good - creates a platform for constructive discussions, avoiding last minute surprises and increasing the likelihood of support.

So, a key message is to start planning for securing funding well in advance. This will not only prove tactically beneficial but goes some way to mitigating the risk that the market gets even more difficult due to demand outstripping supply by an increasing margin. It also puts a time and resource intensive process behind them, enabling management to focus on achieving its growth strategy and exploiting the opportunities that lie ahead.

Of course, there are other routes that SMEs might pursue in order to access finance, from private investors to government funds.

The £2.5bn Business Growth Fund, for example, has a £95m SME tranche, which should act as a stimulus for some regional entrepreneurs. This fund and other government interventions such as Project Merlin and the focus by BIS on aiding smaller businesses to export, are all steps in the right direction to supporting SME access to finance and ultimately business growth.

This was posted in Bdaily's Members' News section by KPMG .

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