Raising Finance

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Poor trading during downturn prevents SMEs from accessing finance

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It’s one of those mean Catch 22 situations: recession trading triggers poor business performance; turnover is falling; and that makes finance providers reluctant to lend.

Consequently, SMEs can’t find the capital to dig themselves out of the mess they’re in (which, in turn, would help the economy to recover). It’s a bleak outlook for business.

“Many good businesses suffered tough trading during the recession, but when this starts to affect access to finance it is a big problem,” so Peter Ewen, managing director of asset-based lender ABN AMRO Commercial Finance.

“Most traditional lenders are still assessing businesses based wholly on their past performance, but this approach is increasingly irrelevant today.”

ABN AMRO has conducted research revealing that over half of SMEs have a poor performance record resulting from recession trading and almost two thirds (65 per cent) report being penalised by traditional finance providers as a result.

Poor cash flow and dropping turnover is making the UK’s small and mid-sized businesses’ balance sheets looks weak. Over half (57 per cent) of businesses have also paid suppliers late in the last 12 months, according to the research.

Light at the end of the tunnel

Despite this damage caused, about a third of business owners say that their company’s poor trading during the recession does not reflect its potential today.

It’s fair to say that a backwards-looking assessment of any business’ financial position fails to acknowledge their current activity, and likely underestimates their future potential. In fact, the majority of SMEs (83 per cent) expect their performance to improve next year.

But this optimism may be short lived if businesses fail to access the finance needed to support growth. A poor trading record could still easily prohibit any optimistic SME from accessing finance.

A recent report announced the lowest levels of SMEs using any form of external finance since early 2010. ABN AMRO’s research confirms that 30 per cent of businesses questioned feel discouraged from seeking any form of finance, and two thirds report that they refrain from seeking an overdraft as a result of their poor trading during the downturn.

A third (32 per cent) even state that their bank’s attitude has discouraged them from pursuing growth altogether.

Peter Ewen comments: “We can’t miss this opportunity to support businesses just when they need it most. If SMEs aren’t able to grab growth opportunities when they arrive, then the finance industry has failed them.

“We need to take a long hard look at alternative finance available and the way in which businesses are being assessed for that funding. If we restrict businesses for surviving the global economic meltdown, then the future of British business is bleak indeed.”

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