How challenging is it for businesses to get their hands on finance?
The reason I ask this question is because I have nagging doubts about the recurring media headlines reporting that large numbers of SMEs are being denied the necessary credit to expand, and that the only way to create employment and return to economic prosperity is to force banks to ‘get lending again’.
No doubt the government subscribes to this view. It’s why only last week they extended the Funding for Lending scheme to 2015, and revised its terms to include more generous incentives for banks to dish out loans to their business customers. And on the face of it moves such as these are understandable. Research released this week by the Business Finance Taskforce, for instance, indicate that only 45 per cent of small firms received the funding they asked for from banks. Other surveys say much the same thing.
So why the scepticism? It’s not that I don’t think firms couldn’t benefit from finance – many no doubt would. Rather it’s that large numbers of businesses don’t have the confidence and ambition to expand their operations. In other words, the problem isn’t so much supply as it is demand. As the Barclays economist, Simon Hayes, said in response to the FLS expansion, “confidence is the elusive factor.”
Yet it's not just cautiousness among CEOs and entrepreneurs that has cut back the demand for finance. Many of the young entrepreneurs we interviewed as part of our Disrupt Inc. research told us of how they wanted to grow their business but were reticent about relying on external finance, in part because they thought they could achieve their ambitions slowly but surely on minimum costs. Savings were often the preferable source of income. The same reasoning could be holding more experienced entrepreneurs back from applying for finance.
Finally, isn’t one of the biggest problems simply a lack of good ideas? When we hear stories of businesses being rejected by bank managers there can be an implicit assumption that the entrepreneur in question was entitled to the loan. But what if the business idea didn’t have any legs? It’s sounds obvious, but sometimes we have to remind ourselves that the supply of finance is dependent upon an equally good supply of feasible business propositions that deserve access to it.
Having interacted with lots of managers who run grant and equity programmes, one of the key challenges facing them is a set of poor, half-baked ideas. Indeed, it’s one of the biggest obstacles that will face the Big Society Bank. What we don't want to see - but what is already happening in the third sector - is funding bodies giving money to ventures that have no chance of succeeding. That is neither good for the entrepreneur or the institution dishing out the capital.
So while we rightly lament cases where growing SMEs genuinely can’t get access to the funds needed to grow, create jobs and compete on the world stage, we should try and bear in mind that not everyone wants more capital, nor be in a position to use it effectively.