Mike Conroy, HSBC commercial bank strategy department

Finance and access to finance for small and medium-sized enterprises (SMEs) continue to attract attention, excite debate, generate different opinions, which are often anecdotal, and provide an endless stream of initiatives, fora and reports. By "access to finance" I mean the availability and cost of finance. So is there a problem or not?

According to the independent SME Finance Monitor quarterly survey, the overwhelming number of SMEs looking for overdraft or loan finance are, in fact, successful.

The survey shows that banks do continue to have funds available to lend to businesses with a viable plan, a good track record and an existing relationship with their bank. However, what the research also reveals is that uncertainty about the economic climate is putting increasing numbers of business off applying, so demand for finance has continued to fall.

There appears to be little evidence of a shortage of lending supply but, over time, small firms have become less dependent on external conventional bank finance. In fact, only 50% of SMEs now use external finance, compared with nearly 80% some years ago.

At HSBC, we have made a commitment to lend more to SMEs this year than we did in 2011. We are on track to do so – we provided £3.1bn of gross lending to UK SMEs in the first quarter, an increase close to 7% on the same period in 2011.

We also launched HSBC’s International SME Fund at the start of the year and have lent more than £1.3bn in the first quarter to SMEs that trade or aspire to trade internationally.

So, if the evidence suggests that access to finance is not an issue for most small and medium-sized businesses even in today’s economic climate, why is it still regarded a problem?

In the mid-1990s, bank lending to UK businesses grew at a rapid rate. The most buoyant period was in the five years immediately before the financial crisis. Since 2008 we have returned to a more sustainable state of lending, where risk and affordability are at the centre of any decision.

I would summarise by making the following points:

  • banks are open for business so don’t be discouraged by what you read and hear;
  • to help you prepare to approach your bank and understand what they are looking for, you can download our Guide to Business Borrowing (www.business.hsbc.co.uk/1/2/borrowingguide) or ask for the leaflet in your local HSBC branch;
  • if you’ve been turned down and feel you have a good case, you should appeal. All major banks operate an SME lending appeals process and details of ours are in our Guide to Business Borrowing.

HSBC funds P&A expansion

P&A Group, a timber packaging and garden products specialist supplying around 450 garden centres throughout the UK, is looking to boost sales by 30% after expanding its premises, backed by a £1.5m finance package from HSBC.

The Mold-based company used the funds to help buy the 4.5-acre site, and its two 26,000ft2 warehouses, next to its existing premises. One building will be used to expand garden product manufacture, the other to offer serviced storage to a pallet client.

As well as increasing its £5m turnover, the expansion will create new jobs, said P&A managing director Steve Morgan.

HSBC said that P&A secured its latest funding by "consistently looking for new markets and delivering a clear vision of how it wants to expand".

Ian Issac, managing director, Business and Commercial, Lombard

Regular investment in new technology is central to running a successful timber business, and recently it has been even more important, as the UK timber sector has bucked general economic trends and grown market share.

And, despite some reports to the contrary, the industry can be confident that there are funding options available to source the ongoing investment it needs to maintain growth and competitiveness in the global arena.

Accessing bank finance has changed in recent years, as banks have had to revise their lending policies. But this has led to increased awareness of alternative funding options. One example is asset finance, which offers a flexible, accessible means of raising funds, while protecting vital cash flow.

There are also now funders with specialists operating in the agricultural and timber sectors. They have developed an understanding of the industry’s specific needs and work closely with timber businesses to ensure funding options are tailored to meet them.

These developments are also set against a backdrop of more than three years of record low interest rates, which, if IMF recommendations are followed, could fall further still. The current rate for borrowing reflects the base rate and is set at a sensible, competitive level. In this respect, there’s actually never been a better time to invest.

Today, borrowing costs can also be reduced through government initiatives, such as the National Loan Guarantee Scheme (NLGS). This can offer either lower interest, or cashback upfront.

In terms of our overall lending in May 2012, 80% was through NLGS, as more businesses used the scheme and undertook investment they might otherwise have postponed.

The experience of Even Forestry with ! " Lombard underlines the options and flexibility available in today’s finance market. Even Forestry views keeping upto-date with the most advanced technology as key to achieving growth plans. But new equipment is costly and, with a strict yearly budget and the need to retain cash flow, the company also needed a good rate of external funding to finance its investment.

After winning several new contracts, Even had to acquire new machinery quickly, so Lombard recommended hire purchase, enabling it to acquire the technology without borrowing or using working capital.

In this instance, Lombard structured a bespoke asset funding solution. Consequently, the new equipment enabled Even to take on the new business, and retain cash flow. Since then, the machinery has saved time, cut fuel costs, boosted loads per day and increased overall profitability.

Even’s example highlights that asset finance can be a valuable solution for meeting SMEs’ funding needs, including those in the timber sector, and for helping businesses adapt, develop and grow in challenging market conditions.

Our message is that asset finance companies, like Lombard, are ready to lend to the timber community, helping SMEs in the sector to thrive and, in turn, play their part in boosting the UK economy.

  • The Bank of England and treasury have just jointly launched an £80bn "funding for lending" programme to incentivise banks to boost lending to consumers and businesses. Banks will be able to access finance at rates from 0.75%, including fees, compared with the market rate of between 1.25-2.5%.

Mark Bryant, business director at the Business Growth Fund

According to the Timber Trade Federation, the UK timber sector comprises 8,000 businesses, employs 65,000 people and turns over £7bn a year. It supplies timber and panel products to over 60 countries worldwide, and production and consumption are rising year on year.

In fact, timber manufacturing is one of the UK’s most successful SME industries and its raw material sourcing, milling and manufacturing processes rank among the most efficient and innovative of any sector in the country.

So what is stopping good mid-sized businesses in this high growth sector becoming great companies?

Access to finance provides some of the answers, but there are also other factors.

For one, there are too many good excuses for deferring investment. The state of the global economy, the eurozone crises or domestic inflation, can all provide a seemingly good reason to wait another year.
But history shows that many major companies were created in downturns – this can actually be a good time to invest.

Business owners also don’t like the idea of increasing debt in the current climate. Why would they risk it?

A tough market can also stall ambition. It can lead to businesses settling for ‘good’ rather than run possible extra risks in pushing for ‘great’ to reach their full potential.

Taking a company to the next stage can be daunting. Running a bigger company requires more resources, more support and more advice and puts even greater onus on knowing where to turn for backing and who to trust.

The Business Growth Fund (BGF) was created to respond to these concerns. It is an independent company with capital of up to £2.5bn, backed by Barclays, HSBC, Lloyds, RBS, and Standard Chartered, but managed autonomously with an independent management team.! It works with the British Bankers Association to forge a new relationship between the banking sector and UK businesses.

We help businesses find the most appropriate way to fund growth, but it is about more than just money. In addition to long-term capital investment, we offer companies a partnership approach and sharing of expertise, guidance and contacts, which are almost as valuable as the capital we provide.

We invest £2-10m in businesses with a turnover between £5-100m, which can demonstrate a proper business plan, a clear idea of how BGF investment could be used and a desire to grow rapidly. Our investment can be used to make strategic acquisitions, to boost sales and marketing, develop new products or fund exports. We only ever take a minority stake and are building, not buying businesses.

This is a tough environment for any business, but history shows that it is in such times that great companies emerge. Now is the time to ensure all opportunities are realised and not lost to overseas competitors.

  • If you’re ambitious for your business, believe it meets our criteria, and would benefit from BGF capital and support, contact us at www.businessgrowthfund.co.uk.