Breaking the finance lockdown

'Jilted by my bank manager' hasn't appeared as a title section on the Jeremy Kyle show yet. But, judging from the research for this finance article, it's only a matter of time. "When are the banks going to piss in the pot or get off it?" says Jonathan Eddy, CEO at industrial windscreen unit manufacturer, B Hepworth. "There's a lot of demand out there. I can think of ten different businesses looking to grow. If eight of those were successful and two failed, wouldn't the bank still make lots of money?" Manufacturers bemoan a banking sector that is extinguishing entrepreneurialism. "If you want to borrow £100,000 then you've got to loan the bank £95,000 first," adds Eddy, whose company, an SME with a hefty export book, should be the darling of UK financiers. Instead, growth capital for B Hepworth and its manufacturing peers is being wrapped up in impenetrable securities as the banks, shell-shocked by the financial crash, desperately look to minimise risk. It's leaving the economy in the midst of a Mexican stand-off. Manufacturers refusing to stake the personal possessions often needed to secure funding and banks refusing to relinquish their demands for personal guarantees. Just 40% of SME manufacturers now use any kind of external finance, according to an SME Finance Monitor report. The UK also suffers from one of the highest loan rejection rates for SMEs in Europe, EEF research shows. Throw in discontent about the emasculation of branch managers and you have a relationship at rock bottom. "At the beginning of the year our bankers said 'we'll give you a facility for asset finance'," says Gill Croasdale, FD at playground equipment manufacturer, Playdale Playgrounds. "I thought great, I need to replace a large machine. We put the facility in place and then we filed some management accounts, which were realigned with budget to show a downturn this year. The bank withdrew the facility overnight. I was really quite shocked. It's made me very wary about how fickle the banks are." But Playdale banked on. "Well, better the devil you know," says Croasdale when asked why she didn't move her business to another bank. It's a telling and largely typical mindset of most SMEs. On the one hand there's much to admire in manufacturers' loyalty. But a grin-and-bear-it attitude hardly spurs the advances in banking service we're crying out for. The uncomfortable truth might just be that manufacturers have been complicit in the current financial malaise. It's all very well the government deregulating the banking sector to stimulate greater competition in SME banking as recommended by the EEF, but you need to have businesses with the confidence to switch. "There are lots of lenders out there," says John Nelson, commercial leader at GE Capital UK, the finance arm of General Electric. "But by and large those lenders aren't high street banks. What we'd like to see is an increase in the publically available information on companies who are looking to borrow." A Moneysupermarket-style website to match lenders to manufacturers is worth investigating. Certainly the idea was backed by SMEs at a recent finance roundtable held by accountancy firm MHA MacIntyre Hudson. However, existing lending routes also deserve a second look. The much maligned high street big five, for example – Barclays, Lloyds, HSBC, Santander and RBS – all claim a burgeoning appetite to do business with manufacturers. Schemes like Funding for Lending (see box below) may not be the silver bullet for SME lending, but it's another lever for building bridges. "We have a dedicated fund for manufacturing and want to increase our lending by £1 billion by September 2013," says Richard Holden, head of manufacturing at Lloyds TSB (pictured). Lloyds has sent more than 100 relationship managers on manufacturing training courses run by Warwick Manufacturing Group. The week-long course includes introductions to 5S, Six Sigma and ringfenced time on the factory floor, explains Holden. "The aim of this course is to produce a relationship manager who understands manufacturers and is supported by the approval powers to make lending decisions [sums up to £500,000 depending on experience]. We don't see manufacturing as a flavour of the month – it's going to be on the agenda for us for years to come." Challenger banks are hot on the heels of the high street giants on the courting trail. These smaller scale providers like Aldermore Bank and Handelsbanken claim to offer a more intimate and flexible service than the big boys. In return, you can expect to pay a slightly higher APR for financial products. But, says Rob Lankey, managing director of commercial mortgages at Aldermore, you get what you pay for. "If you want to speak to someone on a commercial matter then, as a busy MD, do you really want to dial a call centre in a far flung land? We give you a local phone number and a fast track to the person you want to speak to." The challengers might proclaim a new era in customer service but that can't prevent the conversation eventually returning to the thorny issue of security. "If you are more on the small side of SME you may have to provide a guarantee," explains Lankey. "That's because lenders have been left high and dry by directors who've walked away. It doesn't have to be very much: if you're asking us to take 70% of the risk, is it so bad for us to ask you to put in 30%?" If those odds still don't appeal then you'd be wrong to think the funding trail stops there. Manufacturers are attracting the lustful eye of the exotically termed 'boutique lenders' according to financial experts. "Boutiques have a funding line to an investment bank which has money surplus to its balance sheet," explains Atul Kariya of MHA MacIntyre Hudson. "It's really not that expensive... only marginally more expensive than a mainstream bank." Boutiques can be found via independent brokers or business advisors, adds Kariya. Funding Circle is another left-field finance method. The service runs as a type of virtual Dragons Den to raise SME finance, explains David de Koning, spokesperson for Funding Circle. "A business completes an initial application, which is assessed by our team of underwriters. If you're successful, you enter the online marketplace and make the case for support. We have over 10,000 private investors who can pledge anything from £20 to £50,000 or more." The investors receive interest on their investment but don't take any equity in your business, says de Koning. "On average [interest is] around 9%, which we believe is very competitive with what the banks are charging." And that's just the private sector. There are well over 1,000 government-subsidised schemes for SMEs, such as the Business Growth Fund, which provides long-term capital investments of £2m to £10m for ambitious businesses turning over £5m to £100m. Manufacturers are once again cited as a target lend. So, as we enter this new year, it's high time that some auld acquaintances be forgot. Securities, personal guarantees and the emasculation of the bank manager remain hugely frustrating, but we can't let them derail our growth plans. Look hard enough and you'll find a financial sector showing the same innovative streak that shines through on many a shopfloor. All you need is the confidence to grasp it with both hands. WM's finance sat nav Find the fastest route to affordable finance with our one-stop guide to funding support in 2013 1 High street banks Banking's big five have made a very public play for manufacturing business earmarked as the engine room of the UK's economic recovery. Here's what they say about you: Barclays: "Our appetite to lend into the manufacturing sector remains strong. It is a key sector for Barclays and we are committed to supporting the industry… Barclays has committed to passing on all the benefit we derive from the FLS to our customers. As part of this, we have launched Cashback for Business, offering 2% cashback on loans for small and medium-sized enterprises in the UK." Mike Rigby, head of manufacturing, transport & logistics, Barclays RBS: "Mid-sized manufacturers are key in helping the UK grow and export out of recession. Through Funding for Lending, these are the most competitive terms that we have been able to offer manufacturers for several years." Peter Russell, RBS head of manufacturing Lloyds: "We're developing relationship managers who understand manufacturers and are supported by the approval powers to make lending decisions. We don't see manufacturing as a flavour of the month – it's going to be on the agenda for us for years to come." Richard Holden, head of manufacturing, Lloyds Santander: "We support what the government wants to achieve in putting more capital into the economy. We've grown our lending book by 20% year on year and manufacturing is a key sector. We want to understand manufacturers' needs." Lindsey Rix, regional MD, Santander HSBC: Launched a £4b funding pot for SMEs looking to cash in on export trade in 2012.The fund aims to ensure British firms capitalise on a predicated 60% rise in international trade over the next 15 years. WM verdict: With so many manufacturing funds and widespread flattery, there's never been a better time to drop in on your relationship manager for a chat. Just be prepared for the conversation to move on to securities at some point though. Find out more: www.rbs.co.uk; www.hsbc.com; www.barclays.co.uk; www.santander.co.uk; www.lloydstsb.com. 2 Challenger/specialist banks Challenger banks are bidding to break the hegemony of the big five. The newbies claim their smaller scale allows for a more intimate and responsive service. Lending books have been boosted by FLS. Alongside the challengers are specialist providers such as Lombard, which focuses on providing asset finance for manufacturers. "Our overall volumes to manufacturing businesses have grown 77% in 2012," says Ian Isaac, MD of Lombard's business and commercial division. "We feel the time is right for SMEs to invest." WM verdict: Challenger banks and specialists have to be a good thing as they drive greater competition into SME banking services. Securities are still going to be a sticking point, although asset-based finance provides a bypass to the PG. More info: www.aldermore.co.uk; www.gecapital.co.uk; www.lombard.co.uk; www.handelsbanken.co.uk. 3 Alternative lenders No mascara or facial piercings necessary to go alternative here. From community investment schemes to online private investment auctions and boutique lending houses, there are plenty of ways to raise investment outside of a meeting with the bank manager. The best starting point might be an independent broker who can give you more in-depth advice on the options. WM verdict: Something out of left field might be just the tonic for a sector on poor terms with traditional lenders. Alternative doesn't necessarily mean expensive either – providers say they can match bank prices on loans with far greater leeway on securities. For more info: www.fundingcircle.com. 4 Industry bank/grant support Vince Cable has vowed a new industry bank as part of the government's industrial strategy. The institution would be a one-stop shop for central funding support, as well as creating up to £10bn in fresh lending. There's also a plethora of government support aids including National Loan Guarantees, the Business Growth Fund and more. WM verdict: The devil promises to be in the detail. The principle of using government muscle to make it easier for SMEs to access capital is sound. In practice, a state-backed institution will need to bring something new to the party. One key benefit could be unifying the disparate government support mechanisms. For more: www.hm-treasury.gov.uk/financial services/credit easing;www.bis.gov.uk/efg;www.businessgrowthfund.co.uk Funding for Lending: our knight in shining armour? Funding for Lending (FLS) is a government-backed scheme to inject affordable growth capital into SME businesses. Almost 40 of the UK's biggest lenders have signed up to the scheme, which will see banks draw discounted capital from the Bank of England under the proviso the discount is passed on to customers. But will it actually help? Yes FLS will act like a shot of adrenaline to SME growth, according to its supporters. Businesses will be inundated with the cheap finance, which will power growth. Advocates point to the billions upon billions being chalked up on the lending books of major banks and building societies which have signed up. Manufacturers have plenty to smile about as they are earmarked as key borrowers by the banks. RBS has launched a manufacturing fund comprising cut-price fixed and variable rate loans for mid-sized businesses with annual sales of £25m to £500m. Loans will be available over three to five years with fixed rates of 2.7% or 3.2% compared to 3.45% and 4.25%. Lloyds is also pledging a £1bn war chest to support manufacturing this year and has discounted its standard rates by 1%. Bedazzled by the explosion in cheap borrowing, manufacturers will find financial aid hard to refuse, the theory follows. FLS is very much the Ronseal of funding mechanisms: the market needed affordable finance and, through this scheme, borrowing is about to get cheaper. No Creating a scheme to deliver subsidised funding is a white elephant, according to critics. There's no point flooding the market with cheap funds if most SMEs can't satisfy the securities needed to get hold of it, opponents point out. "Unless banks change their lending criteria, it will have no impact whatsoever," says Keith Widdicks, former relationship director at NatWest, now at business advisory firm Moore and Smalley. "All it's doing is making cheaper finance available for propositions that all banks would support anyway." FLS may be brandishing billions but the sums are still small change compared to the balance sheet fatigue some banks carry from the financial crisis, say experts. "The big banks' balance sheets don't allow them to be fleet of foot," explains Rob Lankey of Aldermore Bank. "It's a bit like asking someone to get up and run a world record 100 metres after a big meal. It can't be done." Helping SMEs with securities would be a far smarter use of government resource than FLS, says the 'no' camp. A beefed up National Loan Guarantee Scheme or more direct support through Vince Cable's industry bank is what's really going to get SMEs borrowing. FLS is, in essence, just a convoluted way of throwing good money after bad. Finance by numbers 1 the process of borrowing is the top deterrent preventing manufacturers using more financial services 34% the loan rejection rate for UK SMEs. By contrast Germany, France and Italy all have loan rejection levels of under 10%. 37% of manufacturers believe they have viable investments going unfunded because of problems accessing finance 61% of SME manufacturers use their loan facility all or most of the time 65% of SME manufacturers don't use any kind of external finance 44% of SMEs have seen an injection of personal funds from the owners/directors in the past 12 months £10bn potential funding boost promised by a new government-led industry bank £2-10m the shortage in growth capital for firms with a turnover of under £100m