As a rate rise looms, time's running out for firms to rethink their aversion to debt

Small Talk

David Prosser
Monday 20 July 2015 01:12 BST

Is a window of opportunity for small firms about to close? The public disclosure by Mark Carney, Governor of the Bank of England, that he expects interest rates to begin rising around the turn of the year has important implications for business borrowers – including those that are leaving it late to take advantage of the rock-bottom cost of credit.

It has been more than six years since the Bank’s Monetary Policy Committee cut base rates to an all-time low of 0.5 per cent. In the immediate aftermath of the credit crunch, the cost of borrowing was largely irrelevant for small businesses, since banks were extremely reluctant to lend to them. But more recently, for the past two years at least, the lenders have loosened their purse strings.

Those firms that have wanted to take on new borrowing have very often found banks willing to accommodate them – and at a cost that reflects the unprecedented base-rate environment. All the more so given initiatives, such as the Funding for Lending Scheme (FLS), which have made it easier for banks to lend cheaply.

Most small businesses, however, have not wanted to borrow. Quite the opposite: scarred by the recession and nervous about the banks pulling the rug from beneath them, they’ve concentrated on paying down debt.

That’s understandable but unfortunate. For in a recovering economy, small firms have all sorts of opportunities for growth. Many recognise that. This year alone, for example, business optimism in the sector has more than doubled, according to recent research from the accountancy firm BDO. The Federation of Small Businesses says a net positive balance of 14 per cent of small businesses intend to take on staff over the next three months.

However, with so little new finance flowing into the sector, many firms will struggle to find the money they need to invest in new opportunities. That will limit their growth potential.

There has been some evidence of increased appetite for borrowing in recent months. The Bank of England’s latest Credit Conditions Survey, published last week, suggested demand for credit among small businesses rose during the second quarter of the year. Net lending under the FLS was also positive during the first quarter, for the first time ever.

We’ve also seen rapid growth in non-bank lending. The Asset Based Finance Association says facilities in the UK are now at a record high of £9bn, the equivalent of 6 per cent of the stock of bank lending to smaller firms. And the peer-to-peer sector lent a record £500m during the second quarter of the year, according to the Peer-to-Peer Finance Association, most of it to small businesses.

Nevertheless, most small firms are steering clear of debt. The Bank is expecting only a slight increase in demand over the third quarter of the year. No wonder – the most recent SME Finance Monitor found that almost four in five businesses regard themselves as “happy non-seekers” of credit. They’re not borrowing because they don’t want to, in other words.

There’s little reason to think this will change in the short period now before Mr Carney expects interest rates to begin rising. So if and when small businesses do finally get round to taking on capital, they’ll pay more for it.

To make matters worse, by the way, this final period of ultra-low rates coincides with the final few months of the annual investment allowance standing at £500,000. From January, this allowance – the amount of capital investment that businesses may set against their tax bills – will more than halve, to £200,000.

All is not lost, for the cost of borrowing is not going to rocket overnight. Mr Carney predicts only a gradual increase in the base rate, though it is hard to assess how that might translate through to the prices that small firms will have to pay. Nevertheless, this feels like a moment of inflection. Small businesses that don’t take advantage of the current favourable credit conditions in order to invest for their future may live to regret their inaction.

Late payments are down but there’s no thrill in the chase

Yet more damning figures on late payments. Bacs, the organisation that runs the UK’s direct debit system, says that while the total amount of late payments owed to smaller companies has fallen over the past 12 months, this has been almost entirely cancelled out by a significant rise in the cost of chasing overdue bills.

Bacs’s research suggest smaller firms are now owed £26.8bn in late payments, down from £32.4bn in July 2014. However, the cost of recovery has risen from £8.2bn to £10.8bn. That’s an average cost of £11,000 for every small firm in the country.

Business rate challenges show reform is vital

As the Government’s review of the business rates system labours on, new data underlines the scale of the challenge facing reformers. Seven in 10 business rate payers in London have challenged their bills since April 2010, according to the independent property consultancy Daniel Watney, with more than a third of these challenges still to be decided upon by the Valuation Office Agency.

In the capital alone, there have been 188,620 business rate appeals over the past five years, with 898,000 businesses challenging their bills across England and Wales as a whole. Some 31 per cent of these claims are still outstanding – rising to 34 per cent in London.

Debbie Warwick, a partner at Daniel Watney, says the current system is not sustainable. “The Valuation Office Agency has had a mammoth task in resolving the enormous number of appeals it receives, and has managed to work its way through a substantial portion of that backlog. However, we need a reform of the system – to reduce the number of appeals, which squanders time and resources at the Valuation Office Agency – and to make the system considerably fairer.”

Small business person of the week

Lachlan Faulkner; Co-Founder, Stiltz

“We manufacture and install lifts for domestic properties – we’ll literally come to your home, cut an aperture in the ceiling and fit a lift that will get you from one floor to another. I founded the business in 2010 with three friends, including someone I’d met at university, whose family was in the lifts industry. That’s where the idea came from.

“Our lift is a better solution than a stairlift, which is the sort of device normally fitted in someone’s home when they need help getting up or down stairs. There is a bit of a stigma attached to a stairlift, which doesn’t seem to apply to our product. Also, you can put other things in our lift – a vacuum cleaner, or a cup of tea, say. And a vertical journey is always going to be quicker.

“Inevitably, we get asked questions about the practicalities of a lift. It’s very easy to install and doesn’t even need a load-bearing wall. It’s also very reliable because the mechanism is simple with few moving parts – though there is a battery back-up if something does go wrong, which will get the lift back down to the ground floor.

“The thing we’re working on now is price: we are more expensive than a conventional stairlift, but we think we can get prices down as volumes increase – we’re already manufacturing in Shanghai, which helps with costs.

“We’re a high-growth firm that now sells through partners in 20 countries, so we can achieve those volumes. We employ over 50 people, and while we took on a small amount of strategic investment last year, we have bootstrapped this business on sales and hard work.”

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