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John Nelson, Managing Director of IGF Asset Based Lending, discusses how the Bank Referral Scheme can help smaller TMT companies accelerate growth.
The traditional high street banks have controlled lending to SMEs for decades and are still responsible for approximately 80% of all funding to smaller businesses today. Despite this clear dominance of the SME lending market, many smaller and medium-sized enterprises in the Technology, Media and Telecommunications (TMT) sector find themselves turned down by mainstream banks for failing to meet bank lending criteria.
More recently, Government has acknowledged that bank financing is not always suitable for small businesses. Its commitment to act on this situation began in 2014 with the announcement of the Bank Referral Scheme, which aims to pair SMEs that have been turned down for credit with one of three alternative lenders. This scheme is finally due to be implemented in early 2017 and means that smaller firms in the TMT sector will be able to get the finance they need to expand, grow and invest in their own businesses.
Is there still a place for bank financing in the TMT industry?
Whilst the Bank Referral Scheme is a step in the right direction, it highlights the fact that many SMEs are still going to banks in the first instance for funding, rather than speaking to a specialist alternative lender.
One of the most negative experiences for a small business is being rejected for much-needed funding, so it is imperative for these organisations to explore all of the options available to them. Smaller enterprises aren’t just looking to finance solutions to stabilise cashflow in the short term, but also to make big business decisions such as M&A, management buy ins and buy outs, and even nationwide expansion.
However, mainstream banks often have difficulty – or are in fact unable – to finance certain business models altogether due to the strict lending criteria they have in place for SMEs. Start-ups, in particular, often find bank finance tricky to attain due to their lack of financial history, and a lower level of cash on their books compared to larger, more established firms.
This problem is especially prevalent in the TMT sector, where businesses often have irregular patterns of cash generation and whose assets do not always fit a traditional approach to lending. In many cases, a specialist will look more favourably on the assets including trade debtors such as technology and other machinery, and commercial property.
When it comes to the TMT sectors, technology has had the highest appetite for M&A activity in recent months, with a number of British technology firms conducting deals. One noteworthy deal is from Berkshire-based tech firm Micro Focus, after its purchase of Hewlett Packard’s software business which marked the largest post-Brexit deal by a UK company.
The uncertainty following June’s referendum has left many businesses unsure of how, or indeed when, to begin raising investment again, leading many firms to press the pause button. Business growth plans should absolutely remain on the agenda, however. There is an opportunity for firms in the media and telecoms sectors to follow in the footsteps of their technology counterparts to un-pause growth strategies, and indeed look to fast forward these given the months of ceased activity post-referendum.
Funding renewed growth plans
When firms are looking to kick-start growth plans, there will be questions as to how to fund this activity. Asset based lending (ABL) is another option for TMT businesses to consider when it comes to finance. ABL is a form of financial support based on the value of any unencumbered assets on a firm’s balance sheet. These assets then can be used as collateral to help a firm’s cash position when looking to fund M&A activity, an exit strategy or alternative growth plans.
This method of borrowing often appeals to SMEs in particular, as not only can it provide funds to finance the transaction, but also ongoing working capital. In some cases the value generated against the assets can be supplemented by a cash flow loan, which will help to reach the level required for a larger deal.
The importance of alternative options for SMEs
Crucial parts of an SME’s lifecycle such as an expansion or acquisition require a bespoke financing plan to suit the particular needs of the business, as opposed to an ‘off the shelf’ solution from a mainstream bank.
A trusted alternative finance provider will be able to work with a business to find a solution to suit its immediate and long-term needs. Any hurdles which the banks could find difficult to deal with such as a lack of financial history or a poor financial performance can be discussed and considered in person, by a team experienced in funding particular sectors. This tailored service and deep sector understanding enable alternative lenders to partner with an SME to ensure its financial requirements are being met, both now and in the future.
Despite the fact that banks have previously dominated the SME lending market, the changing economy has brought a clear opportunity for TMT firms requiring financial support to look to more alternative options to drive growth within their businesses. Growth activity in any sector can create unforeseen problems, but the flexibility afforded by focusing on assets and creating a close working relationship should enable an ABL provider to help absorb any bumps in the road. If a business in the TMT sector is considering re-starting its growth plans post-Brexit, alternative finance should be considered a flexible, fast option for funding any big business decisions.
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