Small Talk: Storm clouds on the Aim market may at last be clearing away

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The Independent Online

We keep being told that the worst of the economic malaise of recent years is over. Yes, the cuts that are on the way in the autumn may cause one or two problems (even some of the Osbornites say that), but on the whole they will be good for the long-term economic outlook and won't send us back into recession (and even some of the Liberal Democrats say that now).

But many a small-cap business could be forgiven for thinking that we are still living in an economic nuclear winter. Much ink has been spilled on the question of whether or not the banks are lending to small companies; but regardless of the availability or otherwise of credit, plenty of those listed on the Alternative Investment Market (Aim) are still finding life as a listed company very tough, as shown by the fact that the number listed on the market continues to fall.

But it is just possible that there is some light at the end of the tunnel, even for the UK's smallest listed groups. Richard Thornhill, capital markets director at the consultancy group Deloitte, predicts today that the number of companies listed on Aim will fall to a low of 1,200 during the next six months, before beginning to grow again with a kick-start at the beginning of 2011.

"The past six months have displayed positive characteristics compared with those seen this time a year ago, with a definite uptick" in the numbers of companies listing for the first time, says Mr Thornhill. "There has been a steady increase in the levels of activity, with the second quarter of this year seeing 18 new listings, compared with just eight in the same period last year.

"This is an increase from the 16 new admissions we saw [during the first quarter]. This has coincided with the rate of companies leaving the market slowing in recent times, meaning that we may shortly see an end to the long decline in the number of listed companies on Aim."

Good news indeed, but the effect of the downturn has been truly savage on Aim. The 1,200 floor, if Mr Thornhill has got his sums right, is just about a 30 per cent drop on the halcyon days of December 2007, when the number of companies listed on Aim reached 1,694.

Loans against sales look fishy

But anyway, back to the topic of our time: small business lending. The banks are not lending, say small companies, who argue that a lack of funds is starving them, and by extension the broader economy, of much needed growth. Or, the banks are lending – and at competitive rates too, say the banks – but the small groups are just not interested in borrowing. The truth, no doubt, is somewhere in the middle.

Nonetheless, those at Clifton Asset Management reckon they may have hit on a reason for the row. The firm says that its clients believe that the banks have launched a "target-driven" campaign to persuade them to borrow money against sales invoices; such funding, unsurprisingly, tends to come at a much stiffer interest rate than ordinary loans.

Under these lending facilities, known as invoice discounting, banks typically advance 80 per cent of the value of each sales invoice. About a quarter of the small companies surveyed by Clifton say their banks have suggested using such an invoice discounting facility in the past six months. Of that number, the vast majority – 88 per cent – said they felt this was driven simply by the bank trying to meet targets, regardless of whether the facility was appropriate for their needs.

Anthony Carty, a director at Clifton, argues that banks are promoting invoice finance aggressively in an attempt to improve their security and to raise margins, as well as it being a means of whittling down customers' overdrafts. "With a conventional overdraft you will be paying 3 to 4 percentage points over base rates," he says. "But with invoice financing you are looking at 10 to 15 per cent a year when you include the totality of charges, and the arrangement can then be difficult to get out of.

"There is clearly a widespread perception among business owners that the banks are promoting invoice discounting purely in their own interests. Against that, however, there is no doubt that these arrangements do suit other businesses, for example in terms of helping to improving cash flow."



Lombard Medical justifies the spin

One recognisable tactic of many a corporate spinner is to rave about the quality of a client's management team. This is most often done in the presence of the said management team, and is very often unjustified, beyond retaining the business. The exercise is repeated wholesale when a new management team comes in.

But in some cases it is a bit like the boy who cried wolf, because sometimes the quality of a management team is indeed worth raving about. Take, for example, Lombard Medical, an Aim-listed company, which makes Aorfix, a stent graft used to treat abdominal aortic aneurysms.

Until recently, Lombard Medical was one of a number of Aim-listed biotech companies that could be put firmly in the basket-case category – not because it was necessarily badly run, but because it often failed when it came to actually doing what it had told the market it was going to do.

Enter, in October last year, John Rush as the new chief executive. Mr Rush, a no-nonsense American, has got the company, based in Didcot, Oxfordshire, back on track, to the extent that today's numbers are likely to show a significant uptick in revenues after a big sales and marketing push in Europe.

There is also good news ahead, as the group confidently predicts Aorfix will be given the thumbs up by US regulators in the first six months of next year, with a launch expected by the end of 2011.

That's the claim, and Mr Rush will be judged on it.

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