As 2011 starts, corporate finance activity does seem to be increasing. The past two years were very quiet in terms of completed acquisitions and disposals but 2011 has started in a much more buoyant mood – we have completed as many transactions in the last two weeks as in the previous two years. As the UK economy moves slowly towards recovery, there is likely to be increased appetite to making acquisitions, and hence more demand for finance in 2011. The key question, as ever, is sourcing the finance.
The banks have endured their share of criticism for failing to lend enough to small firms, but it is also true that far fewer clients were seeking finance in the first place during 2009 and 2010. Where clients were looking to borrow, banks were generally taking a harder look at each proposal and seeking more protection in the form of covenants and security, including personal guarantees. This resulted in lower lending multiples, higher costs and a higher refusal rate – particularly in those sectors considered to be risky.
While significant headwinds remain, there is likely to be some improvement in 2011, not least because the banks do need to lend in order to make a profit, while more entrepreneurs and companies are likely to be planning to grow their businesses and make acquisitions as the economy recovers.
Against all this, the banks are facing enormous borrowing repayments in 2012, which will drive any downward pressure on lending. As a result margins are likely to increase. With the record low interest rates of 0.5%, even a large margin makes bank debt relatively cheap at present, but as interest rates start to rise – and they are bound to do so in 2011 even if only by 0.5% by the end of the year – then the cost of bank borrowing could eventually become prohibitively expensive
Nonetheless, the banks are not the only option for securing funding and we are advising clients to look at alternative sources where appropriate. Within the SME sector, vendor finance often plays a significant role in the sale of a business, with banks nowadays unlikely to provide the full amount. There is also likely to be an increased role for private equity finance, as many funds are currently well-financed and are looking for somewhere new to place their cash.
As ever, businesses that can provide timely and accurate financial information are likely to find it easier to access finance, and accountants have an important role to play in assisting clients to provide this. Having worked through difficult times, most businesses should have a better idea than ever about the effectiveness of all aspects of their operations, leaving them in a good position to work with their advisors to provide the best information possible to potential lenders. My colleagues at BKL Business Support (outsourcing) are ideally placed to assist in improving your management reporting processes whilst we at BKL Corporate Finance can assist you in preparing your business plan for the banks.
