Growth Capital Review. | Knutsford Times

Growth Capital Review.

By on July 1, 2009

On Wednesday, 1 July 2009 the FPB will attend the Government’s ‘Growth Capital Review’ workshop in order to explore long-term commercial lending and private investment – and the Government’s role in facilitating both. In addition, the not-for-profit organisation is advising business owners on how best to secure funding.

“Commercial lenders such as banks, HP companies and trade finance companies are fundamentally looking to lend money in the certainty of getting it back. That means that their risk profile is very risk averse,” said the FPB’s National Chairman, Noel Guilford, speaking on www.smallbusinesschannel.co.uk, the FPB’s new video advice service.

“Investors, on the other hand, are prepared to take greater risks. But, obviously, in return they are looking for greater reward. So, whilst an investor will be prepared to invest money over a longer term, they will be looking for a greater return if the business is successful.”

The Growth Capital Review workshop follows a dispute between the banks and the Chancellor of the Exchequer, Alistair Darling. The Governor of the Bank of England, Mervyn King, has argued that the Government’s existing strategy – providing short-term fiscal stimuli and guaranteeing bank lending – is inadequate.

At the Lord Mayor’s banquet for bankers and merchants of the City of London at the Mansion House on Wednesday 17 June 2009, Mr King insisted: “In due course, a strategy will be needed to exit from that temporary support, and from the extensive bank guarantees, to the permanent regime for liquidity insurance that the Bank announced last year.”

Further, a row has erupted between the Government and banks over the possible impact that moves to regulate lenders would have on the availability of credit.

The Financial Services Authority’s (FSA’s) Turner Review into the banking system was published in March 2009. It proposed that lenders should be forced to build up greater capital reserves, particularly during boom periods. The British Bankers’ Association (BBA) is arguing that this would “constrain banks’ ability to support lending to business and personal customers”.

The Government has responded by issuing a code of practice on banks aimed at minimising “tax avoidance that goes well beyond reasonable tax planning,” according to Stephen Timms, the Financial Secretary to the Treasury.

Amid this turmoil, the Growth Capital Review is being led by venture capital expert Christopher Rowlands and will consider a modern-day version of the Industrial and Commercial Finance Corporation, or 3i, which was set up in 1945 to provide long-term investment funding for small businesses.
The Review is one of the first actions to emerge from the Government’s ‘New Industry, New Jobs’ plan for the UK’s economic recovery. The call for evidence is open until 17 July 2009.
The workshop, which is being held by the Department of Business, Innovation and Skills (BIS), will focus on four key questions:
– Is there is a failure in the supply of long term finance to support growth of SMEs?
– What is the size and nature of the gap in financing (if it exists), and which SMEs does it affect?
– Should Government seek to intervene, and if so, what are the options for doing so?
– What would be the appropriate approach to the delivery of any Government interventions?
Research – including the FPB’s latest Economic Downturn Panel (EDP) survey, in which only 12% of respondents said bank support had improved over the previous month – shows lenders continue to impose restrictions on credit at a time when businesses need it most. Mr Guilford a five-stage process for accessing finance:

“The first stage is to identify the vision you’ve got for your business and your strategy and to document that – where you are looking to be in, say, five years time and how you are going to get there,” he said. “The second stage is to prepare a business plan and financial projections; the third stage is to use that business plan to approach investors and lenders. It is fundamentally important to identify the difference between the two – in many cases you’ll need to approach both.”

He continued: “The fourth stage is to carry out due diligence with your investors and lenders, and the final stage is to put together the deal legally – what we call the legal completion.”

According to the FPB’s EDP survey, the relationships between businesses and their banks remained as poor as in previous months for the majority of respondents. Further, more said bank support had deteriorated (18%) than reported an improvement (12%).

However, the latter figure reflects the highest level of satisfaction with the banks since November 2008, when the Panel was launched, and 26% saw an improvement in the ‘viability’ of their businesses – double the number experiencing a decline.

After a slow start at the beginning of the year, the increase in the number of lending applications being processed under the Government’s Enterprise Finance Guarantee (EFG) scheme is likely to be a factor behind this upturn in confidence.

While negotiating with business groups and banking representatives over the possible creation of a permanent capital growth fund, the Government remains intent on introducing further short-term lending schemes.

The Financial Services Secretary, Paul Myners, expects banks to sign up to the Asset Protection Scheme (APS) by the end of the summer. Under the scheme, ‘toxic assets’ – portfolios of lending deemed to be high risk which have severely restricted the flow of credit – will be insured against losses. Lord Myners insisted banks would be prevented from forcing companies into liquidation in order to claim compensation on defaulted loans.

“We will make crystal clear in the rules of the scheme that this is not the case,” said Lord Myners at an event held by the Association of Foreign Banks recently. “The APS has also been criticised for not being a clean break, as the assets remain on bank balance sheets. We do not accept this argument. The APS allows us to rapidly implement support for bank balance sheets, allowing banks to maintain lending.”

The FPB is advising business owners to prepare properly – combining watertight processes with a working knowledge of the raft of EU and Government schemes – before putting lenders to the test.

“There’s less finance available, and that means some businesses are going to be unsuccessful in raising finance,” said Mr Guilford. “The important thing to do is ensure that your business is one of those that gets finance rather than one that’s turned down. To do that, your business plan and your presentation must be even better than they would have needed to be in the past.”

He added: “Increasingly, [information on the Government’s support schemes] will be available and accessible from advisers and on websites, so really it’s a question of understanding the process, and, when you get to the point of deciding who to approach, and specifically for what, that you understand the variety of products that are out there.”

For more information about debt and equity finance, and other online support and advice for small businesses, visit www.smallbusinesschannel.co.uk.

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