SME Access to Finance
Introduction
Clive Lewis, Head of Enterprise
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SME Access to Finance - Basic Rules
• UK Clearing banks do not offer Risk (also called Equity)
Finance
• Banks lend on the premise that all finance will be repaid
•
Comfort to bankers
- Security from the business’ assets
- Future profitability (increase in net assets) and cashflow
- Security from outside the business
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SME Access to Finance - The Basic Balance
Sheet
LIABILITIES
ASSETS
Long Term
Fixed Assets
Owners Interest
Property, Plant& Machinery, Goodwill
Accumulated Profits
Current Assets
& Losses
Short Term
Stock & WIP
Creditors
Debtors
Taxes
Cash
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SME Access To Finance - Long Term Finance
• Debentures - a document that either creates a debt or
acknowledges it. The term is used for a medium- to long-term
debt instrument used by larger companies to borrow money.
Debentures are generally freely transferable by the debenture
holder. Debenture holders have no rights to vote in the
company's general meetings of shareholders, but they may
have separate meetings or votes e.g. on changes to the rights
attached to the debentures. The interest paid to them is a
charge against profit.
• Loans and Mortgages – offered by a bank usually with
undertakings called covenants
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SME Access To Finance - Short Term Finance
• Bank loans – fixed repayment terms
• Overdraft facilities – flexible lending but repayable on demand
• Trade Credit – suppliers
• Factoring and Invoice Discounting advances secured on sales
invoices to pre-approved (by factor) customers.
• Leasing & Hire Purchase – lending against assets such as
motor vehicles, equipment and computers
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SME Access To Finance - Equity (Risk) Finance
• Proprietor and Friends and Family
• Business Angels (up to £100,000) – wealthy entrepreneurs
• Business Angel Syndicates (up to £1M) – groups of BAs
• Enterprise Capital Funds (£500k to £1m) – government schemes
• Small Scale Venture Capital (up to £2m) • Venture Capital (£2m to £20m) – high risk/ potential high reward
• Floatation on public markets (UK – AIM, OFEX or Main Market)
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icaew.com
SME Access To Finance
What banks look for:
1. Cashflow forecasts
• Evidence to support the turnover forecast
• Historic trading accounts
• Details of potential income and how calculated
• Details of loan repayments and interest, dividends, taxes, etc
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icaew.com
SME Access To Finance
What banks look for:
2. Aged Debtors & Creditors Lists
• What are payment terms are they in writing?
• Any trends towards late payment?
• Comparison with previous months?
• Explanations of changing trends?
• Do you do credit checks?
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SME Access To Finance
What banks look for:
3. Management Accounts and KPIs
• How is business performing compared with past trends?
• Up-to-date figures essential
• Indicators of future trends such as orders, enquiries, etc
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icaew.com
SME Access To Finance
What banks look for:
4. Historic Trading accounts for 3 years
• Trends in sales, gross margin, overheads, profits
• Owners remuneration/ dividends
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icaew.com
SME Access To Finance
Current situation re bank finance in the UK :
• Banks are more risk averse and want greater visibility of
business performance
• Banks are seeking an open and honest relationship that
can help resolve a business problems
• Banks are now charging higher margins on interest,
higher arrangement fees and monitoring costs
• SMEs must understand their risk profile and how they
might improve it
• If refused finance appeal to a higher authority in bank
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SME Access To Finance
Current situation re bank finance in the UK continued:
• Be aware of what deals other banks might offer
• Improve financial management such as reducing working
capital, focussing on cashflow, etc
• Consider raising more equity finance to supplement debt
finance
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SME Access To Finance
Raising outside equity:
• Business Plan is the key and must be credible
• Equity investors know the sector they are investing in
• Essential you demonstrate that you know the market the
business operates in
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icaew.com
SME Access To Finance
The business plan must include:
• An executive summary showing the capital required, the
business idea & a summary of the profit and cashflow
forecasts
• A history of the company
• Current and future products or services
• Description of the market and sector, the marketing strategy
and the sales and distribution process
• Full details of the management
• Detailed financial information
• A risk analysis
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icaew.com
SME Access To Finance
Issues for SMEs in UK
• Appropriate mix of equity and debt finance
• Cost of finance – interest rates historically low but likely to
start rising in 2011
• Greater emphasis on strong financial management
• Good relationship with finance providers can help
• Ensure an adequate supply of finance available for growth
plans
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A world leader of the
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