ICAS webinar on SME finance
ICAS hosted a webinar on SME funding with the British Business Bank (BBB) in January 2023. We shared key messages from CAs and the BBB outlined new funding initiatives. We invite you to watch the presentations online.
The chair Gary Connel CA, Chief Financial Officer at Fotech and ICAS Business Policy Panel member, introduced the discussion. He noted that raising finance can be challenging for SMEs, particularly those in the technology or service sectors where holding assets that can be readily transformed into cash and demonstrating strong future cash flows for lending applications can be a struggle.
The range of lending products and providers has grown. There are new opportunities for borrowers and with the development of challenger banks, lending platforms and peer-to-peer lenders, there is also a wider range of lender risk appetites.
Lending options range from secured finance (for example asset or invoice based) which is limited in scope but relatively cheap, to the more expensive but flexible overdraft. At the larger more expensive end of the spectrum, unitranche and mezzanine finance options may involve specialist providers.
Alan Hamilton CA, Corporate Finance at Johnston Carmichael set out his key messages for businesses seeking finance and how to approach lenders. Alex Smith CA, Finance Director at Dickson Minto and member of the ICAS Business Policy Panel shared her views on points to consider when selecting the best funding for your business needs and green finance.
Finding the best option
Assess your business strategy, the funding you need and why. The most appropriate funding solution should align with your strategy. The cheapest option is not necessarily the best fit for your business.
For example, if you have a funding gap, assess how the business is generating cash and what is driving the shortage in cash. Evaluate whether funding is to support working capital needs, growth, capital expenditure or other needs.
Identify how long will you need the funding and try to match the product type and maturity horizons of your lending with your business needs.
Flexibility may be important so you can react to changes such as cost spikes or a key customer account closing. Sometimes extending existing facilities may be cheaper for short-term adjustments than interest payments on a short-term loan.
Prepare well to get the best out of your discussions with lenders
Lenders need to understand your business so will ask to see the business plan, P&L, balance sheet and cash flow. They will also need to see how your business performance is tracking against plans.
Plan ahead with robust management information, this also gives your lender confidence that management is on top of their business and has risk mitigation strategies in place. It will also expedite the funding approval process and help lenders assess the debt risk profile.
Financial forecasts showing cash flows are an important tool, especially if supported by sensitivity analysis to test the effect of changes (such as cancelled orders, delayed receipt of income or further increases in interest costs), to help show the effects from unexpected events or risks and help you plan how to manage these.
Show awareness of current challenges and opportunities for example, cost increases, uncertainty in an inflationary environment or working capital requirements and how they are being managed.
Build positive relationships
Onboarding can take time so longer-term, trusted relationships with your lender/ investor can better position you for help in times of need, especially when risk appetites may be diminishing as the economic context becomes more challenging.
Short-term cash flow improvements may be possible by negotiating with your lender capital holidays on existing debt or a temporary easing of conditions to manage liquidity tensions.
Open communication with lenders/ investors is important but make sure you demonstrate an understanding of the issues, what can be done to mitigate losses, and your action plan to resolve them.
This area offers new funding sources. They typically link to sustainability performance objectives. Be aware of compliance costs if there are changes in business circumstances that may risk the achievement of these.
British Business Bank
Barry McCulloch, Senior Manager at the British Business Bank (BBB) provided an introduction to the BBB and their debt finance offerings. Across the UK, BBB work with over 200 finance partners to enable smaller businesses to access finance.
Debt finance options focus on start-up and scale-up businesses. Key initiatives include:
- Start Up Loans – for companies trading for at least 3 years, offering competitive interest rates, no fees and wrap-around support.
- Recovery Loan Scheme – the new iteration of RLS is designed to support access to finance for UK businesses looking to invest and grow. SMEs can borrow up to £2m, across a range of facilities, with flexible payment terms. This is also available to those with Covid-19 loan debt. Accredited lenders can be found here.
- Direct investments with alternative lenders:
- Investment programmes run by British Business Investments include the new Foresight Scotland Fund, a £60m fund targeting debt and equity investments of £1m to £5m in established SMEs with growth potential.
- Launching later this year, BBB is bringing to market a new Investment Fund for Scotland. This is a £150m fund to support the growth of smaller businesses and provide access to capital. Funds will cover multiple stages of business growth and will be offered across Scotland. Loans will range from £25k - £2m and for equity investments, up to £5m.
The BBB offers an online resource to help businesses find appropriate finance options – check out their Finance hub.
Find out more