HomeArticles»Finance concerns highlight need to develop funding ecosystem
Finance concerns highlight need to develop funding ecosystem
Posted on Thursday 12 May 2011 byUlster Business
The annual survey by the Chartered Accountants Ulster Society highlights ongoing worries over access to finance and emphasises the need for an ecosystem that makes greater use of venture capital and mezzanine funds
The arguments around the availability of finance in Northern Ireland have become well practised since the financial crisis hit several years ago.
Both start-ups and established businesses have complained that banks are no longer prepared to lend to them or have changed the terms of their agreements to make them unaffordable.
Most of the banks on the other hand continue to say they are open for business and have money to lend to viable business propositions.
A recent survey of 500 Chartered Accountants in practice, industry and the public sector in Northern Ireland indicated that availability of finance continues to be a key issue, with strong views expressed that a lack of finance was suppressing economic growth and would hinder the recovery.
The Chartered Accountants Ulster Society said that compared with its 2009/10 survey, where problems around the availability of finance dominated, a whole host of issues are now having an equally significant impact on business, including rising costs, lack of demand, and pressures on cashflow – all of which left its members uncertain about both their own prospects and the wider economy.
But the availability of finance remained one of the biggest problems for the business community, with almost two in every three (64%) saying the availability of finance had continued to deteriorate.
Around 30% believed that there has been no change in the availability of finance (up from 11% during 2009/10) and a significant majority of the society's members (71%) thought this would remain the case in the coming year (only 15% expected the position to improve).
But perhaps the most telling aspect of the survey is that 83% of respondents said that a lack of alternative funding options, excluding the banks was affecting the availability of finance. Around 85% of the accounting professionals said companies were putting new investment or expansion plans on hold due to an inability to access finance.
The Society's chairman Michael Black, also CFO of technology company Aepona, said there was a greater sense among Chartered Accountants that equity finance – venture capital and private angel investment – has an increased role to play in meeting the financing needs of businesses in Northern Ireland.
Just over half of its members said they would be more willing to consider external equity finance, but the survey also showed that equity finance availability in Northern Ireland is considered to be weak.
"Members' opinions remain that the availability of bank finance is a serious problem. It would be widely recognised that there are much tighter criteria today as to what makes a client a good proposition," Mr Black told journalists at a briefing.
"The ready availability of credit caused the difficulties globally, so what we are seeing is a move back to the more prudent approach to banking of five or ten years ago. I don't think necessarily that is a bad place to be, but it highlights that we need to move to a more recognised ecosystem of funding," he added.
"(In other regions) typically early stage projects are financed through angel like investment and they move through the cycle of their business and reach a point whereby secure bank lending is the most appropriate form of finance for a particular project."
PWC's Fergus McCann, the CAUS vice-chair, said businesses needed to realise that the rules of engagement between banks and their customers had changed.
"It is clear that companies are no longer getting equity risk at secure lending costs," he said.
"The banks we speak to have told us that the rules of engagement have changed, so as a result you won't get as much money, it will cost you more for the period you are going to have it, and therefore it won't go as far in terms of the leverage you are expecting to get a project done or to purchase an asset."
Mr McCann said that the lending multiples of previous years which got banks into trouble have to be corrected and while institutions have money available to lend, they will flat refuse some propositions (such as housing developments) and require much more detail about risks such as commodity prices and energy costs from others.
That emphasised the need for businesses to be able to blend bank lending with equity finance, he added.
But the Society said that a high percentage of its members felt the seed and early stage funding market in Northern Ireland was underserved.
In particular Mr Black highlighted a gap in the market for a "mezzanine" fund to assist companies who were past the start up stage, and called for urgent action to push through a government sponsored small business loan fund first proposed in 2008.
"What's missing in the marketplace is some sort of a loan fund that would be willing to take higher risk, what we would call a mezzanine type funding vehicle, which is very common across the rest of the UK but is absent in Northern Ireland. There is a proposal to develop such a fund working its way through government... but it is moving at such a painstakingly slow pace that it is going to arrive three years later than it was needed," he said.
"There is no active mezzanine fund in Northern Ireland today, so you could say there has been a market failure. To stimulate the market, as the government has stimulated the venture capital market, we think is a very valuable thing to do. We would encourage it to happen more quickly."
Mr Black said the Society would also be encouraging its members to look beyond Northern Ireland's borders in their search for funding. He welcomed the recently launched Invest NI development fund and match-funding fund as positive steps, but noted those funds are unlikely to be able to make investments in companies this year.
"What's concerning to us is that you have very positive moves by Invest and DETI to get some funds off the ground, but we are concerned those funds won't be in a position to make investments for a considerable amount of time," he said.
"One of the things that we are going to be highlighting to our members and to the business community in general is the number of funds based in the South of Ireland that are willing and able to invest in the North of Ireland. At the InterTradeIreland Venture Capital conference there were 16 venture capital funds identified that were willing to invest in Northern Ireland-based projects," he added.
"So the message is to look outside the local area if you are looking to raise venture capital."