Small Talk: Inadequate investment forces companies to turn down work

It's unfortunate that SMEs are not borrowing to invest as costs have rarely been lower

Here's a shocking statistic: British businesses will miss out on £2.3bn worth of sales this year because they don't have the equipment they need to produce the goods or services required by potential customers. That figure comes from Lombard, the business finance venture owned by Royal Bank of Scotland. It also claims that four in 10 businesses have had to turn away orders because they lack the capacity to fulfil them.

Even during a boom time for the economy, those figures would be disappointing. But during a recession, they make thoroughly depressing reading. If businesses hadn't been saying no to work during the first quarter of this year, maybe the growth figures would actually have been positive.

When the credit crunch began in 2007, businesses slashed their investment spending. Five years later, many are still unwilling or unable to invest – the most recent Office of National Statistics figures reveal that business investment during the first three months of this year was actually lower than, for example, during the same quarter of 2009.

For smaller businesses, the problem is especially acute. Not only does the evidence suggest that small and medium-sized enterprises are particularly reluctant to invest, but also, they have smaller client bases and can ill afford to turn away new business.

In part, the issue may be availability of credit but it's also a matter of confidence. And for SMEs where credit is available, it's unfortunate they're choosing not to borrow in order to invest, because the cost of doing so has rarely been lower than it is today.

We are also seeing another trend in the SME community. Without too many people noticing, asset finance is becoming the default option for businesses that are prepared to undertake capital investment. Data from the EEF, the manufacturers' association, suggests that eight in 10 loans taken out by businesses for investment purposes are asset finance of one type or another.

Now, asset finance, where the lending is secured on the value of the assets being purchased, has certain advantages. Not least, lenders are not entitled to call in such debts within a fixed-term period. Costs tend to be fixed, the money is effectively drawn down over the life of the asset, and – useful for small businesses in particular – you may get access to professional buyers' specialist expertise.

Still, it's not all upside. Above all, asset finance is likely to prove more expensive than buying the asset outright, even if the business uses a loan for the purchase. It's also possible that businesses using asset finance may miss out on valuable capital allowances. And the administrative burden of operating this way is undoubtedly higher too.

The EEF's research suggests that the main reason businesses are overlooking those downsides is that they want the certainty of total cost that asset finance generally provides. That brings us back to the question of confidence. It appears that even those businesses that are prepared to update their equipment are likely to rank certainty about the cost of doing so ahead of the desire to pay less.

If that's the case – and it's not necessarily a bad thing – we may need to readdress the tax treatment of some of these lending products, to encourage more businesses to take a leap of faith. For the rustier that the out-of-date equipment in use at many firms becomes, the more business they'll be forced to turn away. And that's a prospect the economy really can't afford.

Fairy Fox targets spending power of China's youth

Global retailers are racing to capture a share of the growing spending power of China's middle class – but they shouldn't discount domestic competition. One such business is Fairy Fox International, which is focused on the Chinese youth market. It will today announce plans to float on the Alternative Investment Market.

Fairy Fox already has more than 800 branded shops across China and profits last year of £12m on revenues of £51m. It targets 16- to 28-year-olds in China's smaller cities, where growth in the next few years is most likely to be found.

Almost all of Fairy Fox's stores are owned and operated by third-party distributors – the company is now seeking £13m to roll out its own outlets, which it hopes will eventually account for 20 per cent of the network. Some of the cash will also be invested in e-commerce, as well as a second production facility.

Growth on cards for tarot firm

Look out for an unusual Alternative Investment Market IPO on Thursday, the first day of dealings for Singapore-based New Trend Lifestyle. NTL is a feng shui consultant offering advice on building and design, a well as astrology readings, marriage matching services and even tarot card sessions.

Sceptics in the Aim community should note that the company is already profitable – it made £1.4m on a turnover of £6m last year – and has a string of blue-chip clients, including Citibank and Standard Chartered.

Organisations across Asia take feng shui very seriously. Disney, for example, redesigned the entrance to its Disneyland park in Hong Kong (left) following advice from a feng shui master, while the Hong Kong government has paid £6m in compensation to local residents for disturbing the feng shui in areas where construction has been taking place.

NTL is raising £1.5m in this week's IPO and has plans to open 50 new shops in China over the next three years – a major expansion on its current network of six retail outlets.

Small business man of the week: Jeff Lynn, founder, Seedrs

My background is as a corporate lawyer and one of the things corporate lawyers spend a lot of time doing is fielding calls from friends seeking free advice on setting up their new ventures – so much so that I became convinced value creation in the 21st century would be driven by the smallest start-ups.

"The trouble is that in this country there is just no ideas-based capital out there, except for people with wealthy friends and family – it's very difficult to find even small amounts of capital before you've actually done something.

"We're launching Seedrs next month with about 15 to 20 entrepreneurs seeking to raise sums of up to £150,000 from investors who'll be able to come on to our site and review these projects in one place. We think there will be a tremendous appetite for good ideas – people are looking for new ways to allocate their capital and they like the idea of supporting these young and potentially high-growth businesses.

"We are FSA-registered and we will do some basic due diligence to make sure investors are being told the truth and if the business gets all the funding it needs we'll do further legal work. But we're not taking a view on their prospects – that's for investors to decide.

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