Small Talk: Failing to borrow for growth can be just as damaging as borrowing too much

We have reached a situation that is almost the opposite of conditions prevailing in the run-up to the credit crisis of 2007 and 2008

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The Independent Online

The latest data on lending to small businesses makes depressing reading – but not in the way you might think. For while we’ve got used to the failure of banks to lend to small and medium-sized enterprises, the latest SME Finance Monitor from BDRC Continental suggests another reason to get frustrated. Debt has become a dirty word – and many businesses are being held back by that.

The business intelligence group BDRC, which conducts its research into small business finance every quarter, says that almost half of all small and medium-sized enterprises now meet its definition of a “permanent non-borrower”. That is, they are not currently using external finance, and have not done so in the past five years, they have not applied or wanted to apply for finance over the past 12 months, and they have no plans or desire to apply in the next three months.

BDRC also asked businesses whether they would be prepared to take on debt if doing so might help them to grow. More than one in four said they would not borrow even in these circumstances.

In other words, we have reached a situation that is almost the opposite of conditions prevailing in the run-up to the credit crisis of 2007 and 2008. In those years, when banks were lending money with little regard to borrowers’ ability to service (let alone repay) debt, many small businesses raised finance simply because they could, rather than to underpin well-planned growth ambitions. Today, many businesses that would have no problem obtaining finance are refusing to apply for it, even where that debt could take their companies to the next level of growth.

Both extremes are damaging. It’s true that many over-borrowed businesses went bust in the wake of the credit crisis and recession. Equally, however, businesses refusing to borrow for growth today risk being left behind by less risk-averse competitors. They will eventually suffer the same fate as their indebted predecessors.

It’s not all bad news. BDRC’s data suggests that once you strip out the permanent non-borrowers, lending to small businesses is on the increase. A third of the remaining companies have taken on funding over the past year, while 27 per cent intend to apply for finance over the next three months. There is also evidence to support the banks’ contention that they are making every effort to lend: 76 per cent of applications made over the past 18 months succeeded. A year ago, the equivalent figure was just 66 per cent.

But too many small businesses will simply not countenance taking on any type of borrowing.

It is not difficult to see why. The crisis poisoned attitudes towards borrowing, and its fall-out continues to pollute every debate about debt. In the public sector, arguments about the timetable for deficit reduction have no space for the more nuanced conversation about the extent to which Britain borrows to invest, rather than to fund a spending shortfall. No wonder that debate has been crowded out in the private sector, too.

Many small businesses will come to regret their lack of ambition. The recovery does looks established. The climate for small businesses is encouraging: the fair wind of government support is in their favour, while the clouds on the economic horizon are largely international, and thus less worrying for more domestically focused enterprises. Now is the time to capitalise on this outlook. There is nothing wrong with sensible borrowing as part of a business plan that aims to enhance profitable growth. Indeed, the opportunity cost of not doing so represents a business failure in its own right.

Junior market suffers pre-election jitters

The Alternative Investment Market recorded its best month of the year for fundraising so far during April – and looks to have made further progress during May – but nevertheless remains well down on 2014.

Data from the broker Allenby Capital shows that Aim-listed companies raised £502m during April – including IPOs and fundraisings from listed firms – more than in any month of the year. But while that took the total amount raised on Aim to £1.348bn over the first four months, this was 47 per cent down on the same period of last year.

Six new Aim IPOs were announced in May, prompting speculation that the slower start to the year may have been a result of pre-election uncertainty.

Firm offers way for retailers to give credit without licence

The finance specialist Pay4Later is launching a service that enables businesses such as retailers to offer interest-free finance for up to 12 months to customers, without first having to apply for a consumer credit licence.

The launch reflects frustration about the time it can take to get a licence from the Financial Conduct Authority, with some applications taking six months to process. Pay4Later said delays were costing retailers £400m a month in sales for which they are unable to offer finance.

Pay4Later (which is itself regulated by the FCA) works with a panel of lenders, including the crowdfunding platform Ratesetter and the small business bank Shawbrook.

Small Business Person of the Week: Frederik Carling, CEO, Hovding

“We’re the first manufacturer of airbags for cyclists – rather than wearing a traditional cycling helmet, cyclists wear our devices as a loose-fitting garment around the neck. Not only can the look be changed according to fashion, but more importantly, independent tests show our airbag provides three times as much protection as a conventional helmet.

“We’ve been selling the Hovding since 2011, but the company is actually 10 years old. Our founders were inspired by a debate in Sweden over whether cyclists should be legally bound to wear a helmet – they argued that if it takes a law to force everyone to use a particular product, there is probably something wrong with the product that stops people using it of their own accord.

“People associate cycling with freedom – and the idea of wearing a hard helmet on your head doesn’t fit with that. It took seven years to come up with our airbag alternative, but it really tackles that problem.

“I came on board in 2012 and the challenge has been to develop a sales structure so that we can really commercialise the product – until then, we were very much an engineering business focused on product development. We’ve worked hard at that – the product is now available from 400 stockists in 15 markets – mostly in northern Europe, but also in Japan, where we launched three months ago. We’ve sold 14,000 so far, but half of that has been in the last eight months.

“We’re now in the process of an IPO. We’ve already raised around £10m from business angels and other investors, but we need to continue to invest in the product and in building a commercial structure, so we’re taking on a further £3m or so, partly from existing investors but also from the public.”

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