During the last few weeks the focus of media reports on the financial markets crisis has very much turned to the plight of the SME sector. It has been claimed that the ‘rescue package’ for banks has done little or nothing to facilitate the provision of funding to the smaller sized enterprise, which in many cases require immediate help to alleviate cash-flow pressure.
In his recent address to the commons, Business Secretary, Lord Mandelson announced: “The government will monitor how the recapitalised banks are delivering their commitments to small businesses” and that he would like to see “the active marketing of competitively priced lending to small businesses at a level at least equivalent to 2007.” The subsequent announcement that a special forum of banks and business groups will be set up to ensure credit availability underlines the seriousness with which the government is taking this issue.
This is indeed as it should be. Ultimately, cash-flow difficulties are the catalyst to business insolvency – but at an earlier stage, one of the first effects of restricted credit is that firms begin to defer investments in equipment, technology and plants which are so crucial for maintaining competitive advantage. Our new research puts some metrics on this. It shows that UK business investment in the second half of this year is likely to be two per cent down on the same period last year, representing the second consecutive six-month period of negative growth.
In essence, this means that there will be a £1.5 billion shortfall in business investment over the second six months of 2008. More worryingly, in light of the current debate, are the findings that small and medium sized businesses are making the vast majority of investment reductions – small companies (50-199 employees) seeing a 2.54 per cent fall, medium sized companies (200-2499 employees) a 2.42 per cent drop, and large companies (2500+ employees) only a 0.9 per cent fall, which suggests that larger corporations have been better able to manage their balance sheets.
SMEs putting off important business investment decisions is a classic reaction to financial pressure, but one with a hugely detrimental impact on long-term commercial performance. However, our research highlighted the dilemma facing SMEs, showing that despite investment cut-backs, firms clearly realise the importance of an up-to-date technology and equipment base. Half of the surveyed firms claim that IT software and hardware are top priorities for business investment in the next 3 years. But if they are to realise these investment plans, then there is evidently immediate pressure on them to find highly efficient funding techniques, without placing burdens on earnings and liquidity.
Asset finance, such as leasing, will be fundamental to firms seeking to successfully reconcile this apparent conflict between the financial and commercial requirements of a business. A leasing plan, for instance, helps SMEs avoid the need for a large upfront payment, spreads costs and brings a much-needed transparency to their financial planning. Modern financing contracts have developed to a level of sophistication where ‘soft’ costs such as training can be integrated in the monthly payment plan.
On a general note, a key reason that SMEs are feeling so affected by the financial markets crisis and are consequently putting back investment/ procurement plans, is because they are overly reliant on bank finance which we know is the subject of major credit limit revisions and cost increases. Historically, the UK’s reliance on bank finance is reflective of an ownership mentality that has become ingrained during the years of inexpensive credit. For SMEs to battle through the current economic downturn and ensure that their business investment does not slide, it is imperative that they diversify their mix of funding tools that will help them become less reliant on bank credit.
Kevin Reed is National Sales Manager – Vending with Siemens Financial Services.
