Improved access to more varied sources of finance would help small and medium-sized enterprises (SMEs) and the wider economy, but barriers to increasing non-bank lending also need to be tackled, says the CBI.

In its submission to the review led by Tim Breedon into alternative sources of debt, the UK’s leading business group suggests ways to boost the supply of non-bank finance, as well as solutions to the current lack of demand.

Although businesses are understandably more risk-averse because of the fragile state of the economy, making sure firms have greater access to alternative sources of finance will be vital when it comes to securing growth and supporting the recovery.

John Cridland, CBI director-general, said: “For too long, the UK’s small and medium-sized companies have relied heavily on banks for most of their credit. If we do not act quickly to increase the range of available finance, other countries will steal a march on the UK.

“While banks will remain an important part of the funding landscape, growing firms also need ‘patient’ capital, with a longer investment return horizon. To deliver this, we need to give our firms access to new sources of funding, such as by opening UK bond markets to medium-sized businesses. The Government’s £1 billion of Business Finance Partnerships will also help stimulate investment in these companies.

“This is as much a problem of demand as supply. Firms need independent help and support to locate the finance that’s right for them. So we must cut through the red tape and complexity surrounding non-bank finance to make it more easily understood by small and mid-sized businesses, which often lack the resources of a larger company. We also need to make it simpler for alternative lenders to judge the credit worthiness of SMEs.”

To increase the amount of funding available for medium-sized businesses, the CBI recommends that the Government establishes a mid-sized bond market in the UK, using a mix of new infrastructure and tax incentives. Retail interest can then be stimulated in mid-sized businesses’ bonds through new tax-free savings in an ISA.

Short-term tax incentives, similar to Venture Capital Trusts, could be used to encourage investment in the new bonds, as well as exempting certain investments from tax.

Combatting a lack of awareness among SMEs about sources of non-bank finance will be vital to help stimulate demand, according to the CBI.

It proposes the existing programme of Independent Financial Advisers (IFAs), which serves consumers, is expanded to meet the needs of SMEs. It also calls on the Government to work with the financial services sector to help make non-bank finance, such as bonds and private placements, much less complex and bureaucratic.

The Local Data Company’s latest Shop Vacancy report, titled ‘Good and Bad News!’ shows shop vacancies remain high, but the rate remains relatively stable.

Whilst the national rate has been stable at 14.3 per cent the wide differences in vacancy rates (from zero per cent to 36 per cent) continue to affect an increasing number of centres, with prime centre ‘core’ areas remaining healthy but secondary centres and outlying areas struggling as multiple retailers exit for larger centres, out of town locations or as a result of business failure. The extremes in the changing fortunes of towns with regards vacancy are from decreases of -12 per cent to increases +15 per cent.

The report highlights the key structural issues driving vacancy rates and provides unique evidence of the reality of many town centres up and down the country. Weak consumer confidence, rising unemployment, the growth in retail sales by supermarkets and the internet, a significant number of retail leases coming to an end and the uncertainty in the banking sector, all leads to the view that shop vacancy rates are set to rise in 2012. Underpinning the majority of town centres are independents (>5 outlets) who are now 66 per cent (+1 per cent) of most town centres.

Reacting to the figures, the British Retail Consortium (BRC) said long-term plans for reviving high streets are good but recent retail failures show real damage is being done now.

Stephen Robertson British Retail Consortium director general said: “It’s a small mercy that shop vacancy rates are not rising but they are still worryingly high in many locations.

“Long-term plans for reviving our high streets are good but real damage is being done now and needs to be addressed now.

“The scale of retail failures since Christmas and number of shops standing empty show the effects of high costs and weak demand on retail businesses and the people and places that rely on them.

“Recommendations on town centre management, investment and access which have come from the BRC and the Portas’ review can help but they are not enough.

“The Government should be keeping down the cost pressures it is responsible for. Most urgently, it should reduce the eye-watering 5.6 per cent business rates increase it plans to impose in April.”

Following the credit easing initiatives announced in last week’s Autumn Statement, new research from borro reveals that small business owners have been locked in a capital battle which has resulted in lost opportunities to grow their business. 
Almost a quarter of SME owners (24 per cent) say they have missed out on a growth opportunity due to a lack of accessible finance. One in 10 (11 per cent) small business owners have also said that the inability to raise cash has even made them consider closing their business.

With bank confidence still at an all-time low, small business owners have turned to their personal funds to boost their businesses. Over half (57 per cent) of small business owners have used their personal funds to inject capital into their business and 17 per cent have asked friends and family for additional funds. With over 70 per cent of borro’s customers being small business owners it is not surprising that 16 per cent of SME owners have also used their personal assets to secure finance over the past 12 months.

Two thirds (66 per cent) of small and medium sized business owners  lack confidence in their bank, and are unsure of whether their bank will lend to them. As a result only one in five (19 per cent) of SMEs have attempted to secure bank finance for their business in the past year and only a third (31 per cent) of this group have been successful in securing the finance in full.

Over two thirds (67 per cent) of small to medium sized business owners believe that banks should relax their lending criteria as those seeking finance are denied due to credit checks and not fitting the lenders profile.

Paul Aitken, CEO of borro, commented: “A dramatic shift is needed for smaller business owners to feel they can gain access to much needed finance. While some of the initiatives introduced by the Government may ease the capital battle that has taken place over the past year; there is still a demand for small business owners to access finance quickly. This may be to ensure the business is able to take advantage of growth opportunities or address cash flow problems before they escalate. Our research demonstrates that this demand is not being met by banks and other traditional lenders.”

 

Debt held against UK commercial property fell again during the first half of 2011 as the property finance market continued to show resilience in the face of global economic turmoil and stagnant UK growth.

The influential UK Commercial Property Lending Market mid-year report by De Montfort University, published today, found that the value of outstanding, on-balance-sheet debt fell from £208.4 billion to £201.3 billion in the six months to June 2011, a reduction of 3.4 per cent.

However, it also delivered a stark warning of the scale of the challenge facing property lenders, revealing that around a half of this debt, in a range of £85 billion-£114 billion, could not be refinanced on current market terms and that one quarter was secured on a loan-to-value ratio of more than 100 per cent.

The study, the largest of its kind to look at UK commercial property debt, estimated total UK debt of between £280 billion and £292 billion at mid-year 2011 (down from £288 billion to £298 billion at the end of 2010) including £46bn outstanding in the CMBS market and an estimated £19.9bn held by NAMA – Ireland’s “bad bank”.

This continued the measured reduction in debt seen during 2010 that has so far avoided a fire sale of property assets and a collapse in capital values. Report joint author Bill Maxted said the “process of deleveraging continued at a modest pace during the first half of 2011″.

However, the report found that the uncertainty triggered by the deepening Eurozone crisis and the lack of growth in the UK economy had exacerbated the ongoing lack of liquidity and increasing costs of capital in the property lending market.

Investigating the loan-to-value ratios of lenders’ loan books for the first time, the report found that 41 per cent – 56 per cent, or £84 to £114 billion, of loans “may not be refinancable on lending terms available in the market at mid-year 2011″.

Falling investment values meant that one quarter of this debt (24 per cent) had a LTV ratio of above 100 per cent, while just one fifth (21 per cent) had an LTV ratio of less than 60 per cent.

Lenders have been willing to extend maturing debt on non-market terms, with £48.4 billion of these loan extensions recorded by the research since 2009.  Consistent with that, a recent FSA survey found around 33 per cent of commercial property loans, representing £66 billion, to be in some form of forbearance.

The lending market also continued to contract. Two-thirds of lenders (66 per cent) said commercial property was an asset class against which they were willing to lend, but the proportion intending to increase the size of their loan books fell from around half (46 per cent) to one third (35 per cent) at mid-year 2011.

Almost all of those willing to lend (64 per cent of respondents) would do so against a prime office property, compared with just 29 per cent for a loan secured by a secondary office.

And further regional disparities were also highlighted by respondents. London and the South East were seen as being in “recovery mode” while “recovery in the provincial markets could take six years or perhaps longer to achieve with much pain during this period” – a gap described as “enormous” and “unbelievable” by respondents.

Development finance remained challenging. Those willing to lend against a fully pre-let development fell from 52 per cent to 31 per cent, and those willing to lend against speculative development fell from 17 per cent to 15 per cent.

Bill Maxted said: “Lending organisations commented that the existing liquidity crisis had been made more acute by the problems of European sovereign debt and the unknown extent of contagion between banks.

“Respondents have suggested that only an increase in confidence in the UK economy, demonstrated by a number of quarters of sustained growth in UK GDP, would signal a recovery in the commercial property market in the UK.”

Liz Peace, chief executive of the British Property Federation, the leading body representing developers and investors, said: “These figures underline how critically important it is for government to use all of the tools at its disposal to help tackle this overhanging property debt.

“This means encouraging new debt buyers in to the market – something that we think reform of the real estate investment trust regime to allow the creation of mortgage reits would help to achieve.

“It also means finding ways to encourage new investment and spur economic growth. One easy way would be to stop charging full business rates on empty commercial properties, something that is a considerable disincentive for landlords who wish to invest in premises for small and medium firms.”

Barclays is launching a new national series of business lending clinics designed to bolster business lending by getting small businesses to think about borrowing and give them the confidence to invest for growth.

The clinics launch as recent statistics show that only 15 per cent of businesses applied for borrowing in the last year, reflecting a crisis of confidence among businesses. The research also reveals that while 42 per cent of businesses think they will get a business loan before they apply, 75 per cent actually succeed, indicating that many businesses don’t believe they can get finance.

The first clinic launched by Barclays Retail and Business Banking chief executive Antony Jenkins in Manchester kick started 85 UK-wide clinics, which aim to reach around 1,600 businesses.

Barclays business people will answer key questions on lending and walk businesses through the loan application process, with alternative finance providers on-hand to provide a fully rounded picture of all the financial options available. At the same time, local businesses will have the opportunity to tackle senior bank leaders head-on about the barriers to borrowing that they feel they face.

Antony Jenkins, chief executive, Barclays Retail and Business Banking said: “Barclays is committed to helping revitalise the UK economy which is dependent on small businesses having the confidence to invest and grow.

“Confidence will begin to be restored when businesses are equipped with the belief to make informed decisions about their future.

“Every day Barclays is committed to helping small businesses grow. From the top to the bottom of the UK, our lending clinics will take the mystery out of borrowing for thousands of businesses.”