Staying alive!

Let's drain the bile first. Having lent unsustainably for years to people without an earthly chance of ever paying it back, granting themselves obscene bonuses in the process, banks are now going to the other extreme by making it difficult for even mildly risky enterprises – which might once have been labelled entrepreneurial – to raise capital to generate real, not paper wealth. Despite we taxpayers owning nearly 70% of some banks, there is no sign that the massive injection of our funds is being used to cure the economic ills affecting us all. According to the CBI, three in 10 businesses have had existing credit lines reduced or removed. Of those that sought new and renewed credit lines, 63% said availability had deteriorated and there have been sharply increased costs. It's not much of a deal, is it? We give you more money than we – though not you – have ever seen. In return, you use it to restore your own stability instead of unlocking the paralysis threatening ours. Shouting may make us feel better but it's temporary relief. We are where we are. Times are tough, credit is limited and the best course of action is to suspend the fury and plot a practical route for survival, using whatever lifebelts are on offer. Unsurprisingly, the two banks figuring most prominently in manufacturing, Lloyds Banking Group and Barclays, both deny the situation is anywhere near as desperate as commonly perceived. Stephen Pegge at Lloyds TSB Commercial (for SMEs with turnovers up to £15million) says lending in this sector was up nearly 20% last year and lending to large businesses grew at a similar rate. Over 100,000 new customers joined it in 2008 including a record number of switchers: "Around a third of our lending is currently to customers previously banking elsewhere," asserts Trevor Pound, relationship director from Lloyds TSB Commercial Markets (for companies turning over £15 million-plus). "We would never withdraw an overdraft from a viable business. Fewer of the companies that bank with us have failed than the market average and we believe this reflects the quality of our customers and the support we provide." Credit where credit is due (pun intended), Lloyds is one of the rare banks to commit to passing on base rate reductions in full to SMEs and has not tied its borrowing rate to LIBOR (the rate at which banks borrow from each other). On the downside, unlike Barclays, it no longer has a specific focus on manufacturing although it maintains the sector is "more important than ever." Ray O'Donoghue, head of UK manufacturing at Barclays, perceives a disconnect between press reports and what is actually happening: "All our recent figures show that our lending is up, both to SMEs and our larger businesses. We are seeing, however, that foreign banks and the niche players – the high risk lenders – are disappearing from the market and it is taking liquidity out of the sector. The contraction of the credit insurance market is also having a major impact." He maintains that one of the reasons for increased demand upon the banks is the retreat of private equity, making it much harder for businesses to raise investment through the capital market. Companies are also suffering because their own terms of trade are being stretched – customers are just not paying up as fast. But he is adamant that, contrary to the widely held view, the basics of the credit analysis Barclays applies to its customers haven't changed: "The way in which we deal with our customers is consistent and our commitment to lending to the UK is clear from the figures. Our primary focus is supporting our existing customers – but are we taking on new business? Yes we are." Both banks say that good business propositions can still find a home with them. The CBI and Federation of Small Businesses (FSB) clearly disagree. The government recently announced two major initiatives to get business credit flowing again. The Enterprise Finance Guarantee (EFG) guarantees bank loans between £1,000 and £1 million to businesses with turnover up to £25 million. The government guarantees 75% of the loan, the banks the remaining 25%, although the banks make the lending decisions. The Working Capital Scheme (WCS) aims to release bank capital by giving them guarantees of up to £10 billion to support their own lending of up to £20 billion. Both Lloyds and Barclays are firm supporters; according to BERR, Lloyds is already one of the most active banks in lending under EFG. Yet FSB recently stated that only 8% of small businesses said their banks were making EFG available and over half doubted it would actually compel the banks to start lending again. So what's the truth? Business Link gives sage advice. John Grange, business advisor in Sussex, is encouraging clients to use EFG as a lever even though none has yet had a loan covered this way. "If you start talking about it to the bank, you are on the front foot. It shows you are more knowledgeable than most and it may well make the crucial difference to your application." What about the common alternative of asset-based lending? Some financiers have suggested it has all but disappeared, firstly because the specialist lenders are also short of funds and, secondly, because of the uncertain resale value of capital equipment into a supposedly declining manufacturing base. Steve Websdale, MD of Venture Structured Finance, strongly disputes this. He says his company's appetite for deals remains robust and, furthermore, it has the liquidity to be a strong partner: "The only changes Venture is experiencing are to do with the frequency of valuations of which there is an increase. Currently we are lending up to 80% of the liquidation value based on fixed assets such as plant and machinery on a three-year loan." If, however, a recent bruising from your existing lender is making you grit your teeth, it's worth looking outside the traditional 'borrowing envelope'. First of all, government can still produce a few free gifts. Under the Business Payment Support Service programme, firms can apply to delay any VAT, NI or staff income tax payments due to HMRC without penalties. HMRC says most callers get a decision within 10 minutes over the phone (dedicated phone line 0845 302 1435). A small word of warning: one company accepted under this scheme got court summons a month later for non-payment. Right hand and left hand? It's also worth taking a look at under-exploited grants and tax credits. Alistair Davies, UK lead for a global Deloitte programme to help manufacturers access finance, says that although the same money is still available through the regional development authorities (RDAs), there has been a surprising reduction in applications. "People forget grant support can be available in a downturn even when there has been a headcount reduction or the closure of a facility, especially if the alternative is the company ceasing trading or the jobs moving out of the UK completely." The sites need to be RDA assisted areas but that covers most traditional manufacturing locations. Grant sizes have recently increased: up to 40% for mid-sized companies and up to 50% for small ones. Many regions will now even accept applications from SMEs outside grant areas although the maximum is less, 10-20%. How long does it take? "Typically 8-12 weeks but it does depend on how ready the company is to make an application. Some have been submitted and approved in 3-4 weeks." Companies won't succeed in sectors with excess capacity. For example, says Davies, specialist security printing would have a much better chance than general printing: "The government is keenest to support ones deemed to have long-term potential for the UK economy. We are seeing a lot of activity from companies geared to the healthcare market." "Being able to tap into this type of aid potentially makes it easier to acquire bank finance," he continues. "The amount needed is reduced and grant money can almost be treated as equity in the business rather than a liability to be repaid. Therefore the overall risk from a lending position can be considered to be lower." Companies can handle the applications themselves or firms like Deloitte will investigate the opportunities and support formal submissions. Charges vary from a fixed fee, a proportion of the grant secured or a mixture of the two. Davies says it usually works out at around 10%. Grants can't solve working capital issues – probably the biggest problem at the moment. Companies can, perhaps, gain some measure of relief through better use of R&D tax credits. Davies points out that, on top of R&D grants, the government also puts in somewhere near £700 million a year via these credits. If companies have already incurred qualifying expenditure, it can be redeemed now rather than carrying the tax loss forward – in effect, providing an immediate cash boost. It might be worth going back to revisit previous expenditure to see if it qualifies. It is even possible that recipients of R&D grants may still be able to claim a tax credit for the remaining portion they themselves funded provided it is clear there is no double accounting. The RDAs also manage the Transitional Loan Fund (TLF) which provides funding of £50,000 to £250,000 to established SMEs facing a temporary shortfall in their working capital. It is not intended to replace traditional borrowing but is available at commercial rates to companies who are finding it difficult to obtain working capital in the current climate. The fund is emphatically not available to prop up unsustainable businesses; borrowers must demonstrate viable business plans and the ability to service the loan. Norlec Engineering, based in Leyland, Lancs, was one of the first to receive TLF funding of £250,000 through the North West Development Association. It supplies sheet metal components and – like so many – has recently taken a severe hit in sales to its traditional markets of transport, automotive and construction. The TLF has saved 94 jobs. Norlec had successfully been taking steps to bring new customers on board since mid-2008 but needed new finance to support it during the transition. "The NWDA provided this finance with a minimum of paperwork and within a short timescale, enabling us to safeguard jobs not only here but at our suppliers as well," says FD Martin Clifford. According to Business Link's John Grange, the answer often lies within your existing business rather than external funding: "I have one business with big orders coming from a much larger company; there is no way he can fund that himself. I am suggesting he goes back to his customer to ask if they can help through a combination of prepayment, payment on the nail and free issue in materials." There are no magic solutions to the credit crunch. "Stories are certainly emerging of good businesses which still have overdraft problems, but I don't feel that banks have it in for manufacturing. Lending is difficult for all sectors; it is not a good time to put ill thought out proposals in front of a bank. Work with them, get them involved ahead of time." He is not against bashing banks when it's justified but businesses shouldn't point the gun at the wrong target. "If you are a business with a £50k overdraft and you are losing money, you need a pretty strong case to get that increased. Businesses have got to shoulder their part of the bargain by putting forward coherent plans that say I need this much for this long; I am taking the following actions; from this I will be generating more profit and so I will be able to service the loan." Then don't be afraid to shop around for a bank and "make sure you talk to the organ grinder, not the monkey." He sees a common thread between many of those having trouble raising finance: "They have stuck their head in the sand. I know that sounds harsh because things have happened very quickly but businesses have got to control their costs. Think where can you go to find customers and, if there aren't any or they are decreasing, what can you change in your products or services to fulfil markets? The bank will understand arguments like that and, indeed, I hope they would be looking for them."