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UK Growth Needs An Alternative

UK Growth Needs An Alternative

Growth is progressing nicely and business-asset worth has increased significantly, but problems with cash flow remain, according to reports. Does that mean that businesses are being savvier with their funding, or is there a basic lack of knowledge when it comes to asset finance?

Growing faster than ever

Germany is the next economic powerhouse in our sights and with a troubled euro-zone, the UK could be the world’s fourth-largest economy within a decade.

In its latest 'Business in Britain' report, Lloyds Bank found that hiring staff and investment in assets remain a focus for UK businesses in the next 12 months. The Office for National Statistics has backed this up, stating that investment in fixed assets alone has risen by a third since 2009. This is a staggering increase in little more than six years.

Alongside UK unemployment being at its lowest for seven years – almost at its lowest level since 2004/05 and thanks in part to the 35,000 new businesses employing staff since 2014 – the UK’s small- and medium-sized enterprises (SMEs) now account for £1.8 trillion of the UK’s £4 trillion GDP.

In terms of finance, the British Bankers' Association (BBA) says that 80% to 90% of all lending applications are approved.  Bank of England (BoE) quarterly data show demand for debt by SMEs was rising at 10% per quarter in 2014/15 and availability of SME credit was growing while the cost of it was decreasing.

Everything looks rosy, or does it?

Looking beyond the headlines reveals a different picture: the stifling of the availability of credit.  It seems that there are some conflicting comments in the data available.

While the BoE says demand is rising for debt, the BBA states that higher cash deposits by SMEs are forcing down demand levels for debt.  The BoE shows that debt levels have fallen at a rate of 7.5% a year since 2009, mainly in term debt, but also a £2 billion reduction in working-capital facilities for SMEs in just two years.

Tighter capital rules under Basel III regulations mean that SME term debt is expensive for banks and on-demand credit such as overdrafts are even more expensive.  While there is a willingness from the banks to lend, they will restrict how just much in order to manage their own liquidity.

If working-capital facilities are falling, then cash deposits have to rise to offset the availability of credit.  If a business needs to have a rolling float of £500,000, but its bank provides an overdraft of £250,000, then the cash needed reduces to £250,000.  A reduction in working-capital facilities will lead to a rise in cash deposits. The question is: how are businesses funding this?

BoE statistics show that after the 2009 global financial collapse, equity investment into SMEs rose substantially, as this was the simplest, easiest and most liquid way to fund businesses.  What we are also seeing is a degree of difference between the growth rate of turnover and purchases.  A widening of gross margins increases cash back into the business, as long as turnover continues to rise.

There is another route, though.  Businesses are no longer wedded to their bank, or, at least, they don’t have to be.  The rise of non-bank finance demonstrates this.  There are around two million hire-purchase (HP) or leasing contracts for UK SMEs, according to the Finance and Leasing Association, which together fund £60 billion of business assets.

In the past five years, peer-to-peer (P2P) or marketplace-lending platforms have risen from zero to over £4.4 billion of funding for SMEs.  These statistics are never reported by the BBA or BoE, the former having a vested interest in promoting its members, i.e. banks.

Businesses need to open their eyes to alternative sources of funding, otherwise, the strong growth we’re seeing here in the UK may be starved, due to lack of corporate investment.

RISK WARNING: "As with most forms of investment, peer-to-peer lending carries a degree of risk to your capital; in this case, if borrowers were unable to repay their loans. At Assetz Capital, we seek to reduce this risk to our investors by taking asset security on every loan, with the added benefit of a discretionary Provision Fund for some of our investment accounts."

- June 14, 2016

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