Posted on Friday 16 September 2011 by Ulster Business

Searching for working capital

The Scottish Government has acted to improve the supply of banking services to SMEs

Access to finance continues to be a major problem for many local businesses. John Simpson investigates whether alternative approaches to funding adopted elsewhere could be applied here

Prior to the current financial crisis, Northern Ireland had a competitive banking sector, where lending was usually readily available for businesses. Most flexible business finance came through the banking sector.

Consequently the more recent tightening of the financial environment in the banks has hit Northern Ireland businesses particularly hard.

Many businesses are finding difficulty in gaining access to adequate funds to sustain and expand their activity. The existence of a problem is no real surprise. The main local banks are each trading in dramatically changed circumstances. They are under strain from two directions. Bank funds for lending have been squeezed as bank liquidity requirements have become more demanding. At the same time, the banks have each faced punishing effects on their balance sheets as large sums are written off reflecting non-performing (mainly property) loans.

Northern Ireland Evidence

Joanne Stuart, who was then Chairman of the Institute of Directors in Northern Ireland, made these issues a particular focus for that organisation and heard first-hand reports from senior business managers. “Over the last three years, dealing with the banks, businesses have faced reduced availability of finance, rising costs, increased information requirements, reduced local decision making and increased time for decisions to be made. Combined with the recession this has created a very challenging environment for many companies,” she said.

“Contradictory opinions are being reported. Banks claim that they are ready and willing to extend lending to viable propositions. Customers argue that they have not been able to secure adequate funding.

“The impact of these tensions is seen in the growing number of compulsory company liquidations and creditors voluntary liquidations. In the three year period 2008 to 2010 Northern Ireland had over double the number of liquidations compared to the previous three years. There are suggestions that some companies which could survive given the right financial support are failing for lack of the necessary finance from the banking sector and are being forced into administration.”

At round table conversations, senior figures in the business community have asked the banks for evidence that funds to allow more lending are available. Minister of Finance, Sammy Wilson, has hosted talks to try to understand and ease the problems.

Joanne Stuart has monitored the discussions. “Early in 2010, in a response to the negative feedback about the lack of lending to business by banks, six of the largest banks in the UK under the aegis of the British Bankers Association (BBA) set up a Taskforce and published their report, ‘Supporting UK Business’ in October. The report set out 17 actions which the banks committed to implementing. These included an Independent Appeals Process, bank lending data, Better Business Finance Outreach programme and a quarterly independent SME survey.

“Locally, these actions would go some way to provide confidence to businesses in their dealings with the banks. Ten months on and there is little evidence of real progress on the implementation of the actions locally,” she said.

Despite requests, through the BBA, for the publication of evidence, little information has been published. The local banks are reluctant to answer questions to illustrate quantitatively whether or where there are major funding shortfalls.

Sammy Wilson has taken an active part in direct contact with the BBA as well as the Treasury. His Department offered a Northern Ireland input to the consultative paper on ‘Financing a Private Sector Recovery.’

In addition, the chair of the Independent Commission on Banking has been asked to ensure that the particular banking finance challenges faced here are understood and that the Commission should consider an appropriate tailored regional response. Along with these UK issues, the Minister has been active in monitoring and influencing the cross-border impact of NAMA.

Experience in Scotland

Interestingly, the problems of securing satisfactory co-operation with the banks are also on record in Scotland. The Scottish Council of Economic Advisers, backed by the Scottish Government, has asked the UK-wide Independent Commission on Banking to ensure that “data on Personal Current Accounts, mortgage lending to households and lending to SMEs is collated at individual country level in the UK, including Scotland.” Presumably the business community in Northern Ireland would echo this request.

The Scottish authorities have gone further with their reservations. The referral to the Independent Commission on Banking was backed by a request for a formal investigation into competition in the whole banking sector in Scotland.

In a related response, the Scottish Government has acted to improve the supply of banking-type services to SMEs and, working through the Business Finance Taskforce, led by the British Banking Association, tries to ensure that Scotland benefits from all policies and measures to help improve banking services for SMEs.

A major development in Scotland has been the launch and funding of the Scottish Loan Fund which now has a capital of £95m.An initial £50m was assembled from official and EU sources by Scottish Enterprise, the Scottish equivalent of Invest NI. Then this was supplemented by £40m from the main banks and a further £5m from the Highlands and Islands agency.

The Scottish Loan Fund will lend, on commercial terms and conditions, to SMEs who need sums between £250,000 and £5m. Scottish Enterprise has appointed a specialist fund manager, Maven Capital Partners. The first loan offers were made in the late Spring this year, 2011.

The debate in Scotland on the funding gap is still evolving. A joint submission from the Scottish Federation of Small Businesses, the Institute of Directors (in Scotland), the Chartered Accountants of Scotland and the Scottish Chamber of Commerce has asked the Scottish Government to do even more to help companies get better access to finance.

They have suggested a tax concession for wealthy individuals who are prepared to lend funds to businesses. In addition, they ask for better information on the available financial guarantees from the UK Government and steps to make small businesses eligible for the Business Growth Fund which allows banks to take an equity stake even where annual turnover is below the existing £10m limit.

A Northern Ireland Initiative

Even if the local banks produce better answers to the questions about their current lending patterns, the question has to be asked whether all (and each) of the local banks have the capacity to lend more to businesses. Is our banking sector sufficiently competitive and is bank finance the only option for businesses or should alternative sources be identified?

Those issues are on the agenda for people like Joanne Stuart. “There are alternative financing options available but this will require a change in the mind-set of our businesses particularly in regard to using equity. The Finance Minister is currently working through proposals for a ‘bank of last resort’ and if we are to ensure that we do not lose those businesses who can make it through these challenging times we need to do something now,” she said.

Where will the initiative come from that offers Northern Ireland smaller businesses a convenient and practical lender of last resort?

Invest NI is considering a scheme similar to the Scottish Loans Fund from Scottish Enterprise. Locally a fund of some £40m may be arranged, with contributions from the banks, pension funds and other private sources. The lending limits in Northern Ireland may start at a lower level of £50,000 (compared to Scotland’s £250,000) with a proposed maximum of £500,000.

The scheme should, desirably, be operational within weeks, rather than months.

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