David Prosser: The new way to borrow that's proving a big boon for small fry

Small talk: £25m is small beer. But every little helps and the innovation is to be applauded

David Prosser
Monday 05 March 2012 01:00 GMT

Most small and medium-sized enterprises that applied for finance during the final quarter of last year were successful. That's the conclusion of the SME Finance Monitor, a quarterly survey which investigates the availability of finance for SMEs. Its latest research, out today, reveals that 79 per cent of SME applications for overdrafts were approved in the final quarter while 63 per cent of loan requests were granted.

If that sounds surprising given the background noise on credit for small businesses, it's important to present a couple of caveats. First, the survey also reveals that fewer SMEs applied for credit in the final three months of last year than in the same period of 2010 – and one reason for that was an expectation, realistic or not, of rejection. Second, the smallest businesses – those with fewer than 10 employees – appear to feel especially discouraged about their prospects of getting funding.

This month's Budget may yet provide some help, with details expected of the Chancellor's long-awaited credit easing scheme. In the meantime, an increasing number of entrepreneurs are interested in stepping into the vacuum. As well as new banks such as Aldermore, which specialises in lending to SMEs, we've seen the emergence of new business models.

Funding Circle has adopted the peer-to-peer lending model pioneered in the UK by Zopa. But unlike Zopa, which only offers credit to individuals, it lends to corporate borrowers – almost entirely SMEs. The idea is to pool the savings of investors, who are paid a return on their money, to provide loans to SMEs. Investors get to pick and choose which SMEs they lend to, and to spread their lending across a range of companies.

Funding Circle has lent more than £25m to businesses since its launch in August 2010, with loans averaging around £40,000. Investors have earned an average yield of 8.3 per cent and the service's bad debt ratio, at just 0.3 per cent, is pretty healthy. Funding Circle is choosy about the SMEs it deals with, and £25m is small beer. But every little helps and the innovation is to be applauded.

Funding Circle's success has prompted interest in the banking sector, which could set up its own platform, and business finance is also recognised as an opportunity for other technology-focused entrepreneurs.

For example, Jeff Lynn, best-known as the chairman of the Coalition for a Digital Economy, a lobbying group, is working on Seedrs, a new online venture that aims to give investors access to start-up business. There will be other ventures too because the experience of both Funding Circle and its investors suggests that lending to SMEs is a productive way to use spare cash.

In the end, it's not a bad lesson in free market economics. Businesses complaining that they have been denied credit by the banks are proving such rejections unfair by borrowing elsewhere and repaying their loans – to the benefit of themselves and investors prepared to step where the banks seem to fear to tread.

Profits leap is just the job for Hydrogen

In a global economic downturn where employment is stagnant, recruitment isn't the most obviously attractive business. Expect Michael Page and Sthree, two of Britain's biggest recruiters, to be relatively downbeat when they report later this week.

One recruitment business bucking the trend, however, is Alternative Investment Market-listed Hydrogen. Its full-year results, to be declared today, will show the company made profits of getting on for £4m last year, almost 50 per cent more than in 2010. Investments in new sectors, particularly pharmaceuticals and oil and gas, have helped Hydrogen ride out tough conditions in finance.

So too has an international expansion, particularly into Hong Kong. Even in the financial sector, it has benefited from having more clients on regular contracts.

Brokers tip the company for greater things. With the shares now at 84.5p – a rating of only 6.5 times prospective earnings, compared to an average of 9.5 times in its peer group – Seymour Pierce is targeting a price of 150p.

Small Businessman of the Week: Charlie Bigham, founder of Charlie Bigham's, manufacturer of ready-to-cook fresh meals.

I started the business 15 years ago because I liked food and I loved cooking, and I had a hunch that many people felt like me – if you wanted a quick meal, there wasn't anything available that wasn't rubbish. The idea was to take a restaurant-type approach to prepared food and I started on my kitchen table – we began by selling to a few delis. Now we're available in all Waitrose stores as well as Ocado, Booth's and many branches of Sainsbury's.

The downturn has been brilliant for us and I think it will continue to be – what we all focus on when times are tough is not so much price but value for money. We may be a little more expensive but the premium you pay is more than justified by what you get. So far, people seem to agree with us, because our growth continues to be phenomenal.

Our best marketing is word of mouth – I'd love to be telling more people our story but the economics of marketing and advertising are very tough for small businesses.

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