Last month I attended an interesting presentation by Tim Breedon, CEO of Legal & General, who chaired a taskforce appointed by Vince Cable to explore boosting finance options for business. The taskforce included the CEOs of HSBC and the London Stock Exchange, the deputy president of the CBI, a partner at Deloitte, a director at McKinsey and a professor at the London Business School. The taskforce’s recommendations were formally presented at the event I attended to a prestigious audience which included MPs and members of the House of Lords.
Thankfully for most of our clients the taskforce focused on SMEs. It identified that ‘UK finance’ does not fully serve the needs of SMEs due to both a lack of supply (banks not lending) and a lack of demand (SMEs not applying for finance, possibly because they believe none is available or that they will be refused). Unfortunately, the remit of the taskforce did not include anything on equity finance, and the scope of the review was restricted to debt finance. Clearly equity finance plays a role and the taskforce did recommend that the government should explore making commercially attractive investments in, inter alia, mezzanine finance.
The taskforce came up with 11 recommendations in five areas and these are summarised as follows:
Increasing awareness and demand for alternative forms of finance
The first recommendation was to introduce a Business Finance Advice scheme so that SMEs will have a recognised source of business finance advice. The main accountancy bodies have agreed to work together to create a “kitemark” for the provision of business finance advice.
The taskforce also identified an alphabet soup of acronyms for sources of finance (e.g. EFG, ECF, EIS, BFP etc.) and suggested that government support programs should be communicated through a single brand, and via a single delivery agency.
In my view there is a danger that any new delivery agency will merely be a BusinessLink mark 2, though I do agree that there is a need to increase awareness and make government supported initiatives more accessible.
Improving access to capital markets financing for UK companies
The next recommendation was to launch a feasibility study to explore the creation of an aggregation agency to lend directly to SMEs and/or support SME loans to facilitate SME access to the public corporate bond markets. The idea is simple (although the execution would be complex): large companies can raise finance fairly easily by issuing debt which is traded on the public markets, yet small companies cannot access such debt – partly due to the high fixed costs, the lack of information about SMEs and the higher risks in investing in SMEs. If SMEs could aggregate their debt into pools which could be traded on the capital markets, and assuming that investors’ risk expectations can be met, potentially by government support, then SMEs can access the corporate bond market in the same way that their larger counterparts do. In my view this was the most interesting recommendation of the taskforce.
The other recommendation in this area more relevant to SMEs was a call for additional tax incentives for investing in SMEs.
Stimulating growth through supporting smaller companies
The taskforce identified that the cashflow of SMEs would be significantly improved if large customers could be encouraged to pay smaller suppliers more quickly. Recommendations encourage the government to explore practical ways to encourage faster payments by large companies. The recommendations also called for an acceleration of the adoption of Supply Chain Finance.
Developing new financial products
The taskforce called on the government to explore making commercially attractive investments in online receivables exchanges, mezzanine finance and P2P (peer-to-peer) lending platforms. Proposals also included an extension of the ABL (asset based lending) market, as ABL products attract lower capital requirements than unsecured lending by banks.
Evolving regulatory environment
The final recommendations were designed to protect against reckless prudence, improve the sharing of information, and improve the UK’s export performance.
This is only a brief summary of the recommendations, which are interesting and thought provoking. I hope they will spur the government into action and that debt financing options will be enhanced in the short to medium term.