Archives For Access to finance

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By Sarah Hathaway, head of ACCA UK

We teamed up with the New Statesman to discuss this subject matter at the three party conferences – see a link to the report at the bottom of this blog, but here is my takeaway.

I think you would be hard pressed to find someone who does not think business cares about politics; politicians set the framework in which business operates, a working relationship is paramount. But do politicians care about business; does it only care about a certain type of business? This was the broader theme for the discussion.

The last few years have been difficult; the pressure on the public purse was always going to lead to trade-offs and some issues taking prevalence. And our members support austerity (mild or severe) if imposed at the right pace.

However if recovery is to continue, access to finance is key. As an organisation that supports members from small to large businesses, we recognise that their needs are distinct but that they are also intertwined; businesses do not operate in silos, they are party of a larger supply chain. We are keen to push all three of the parties to continue to champion alternative forms of finance and access to it. We know from our members that this is crucial and the small business bill has taken steps to improve this. There is some evidence that all parties recognise the importance of it but it’s about making sure the practical regulation works for business.

The issue of Europe was unsurprisingly part of the debate at Conservatives; as a global organisation we recognise the need for stability, that’s what our members want and that’s what is needed for businesses to attract long-term sustainable investment. Why would we cut ties with our biggest trading partner? That’s not to say reform isn’t needed, but reform from within not from the outside.

Of course discussing Europe involves a debate around immigration; that debate must be an honest one. We have a skills gap and so while we are working to plug that over the medium-term, we still need to fill it in the short-term. We believe all parties need to recognise that and taking students out of the net migration figure and treating them as a talent pipeline for business will help achieve that.

Ultimately politics involves trade-offs and risks, much in the way business does, but it is about calculated risk, evidence and taking a long-term view.

Politics is at its best when it recognises that it doesn’t have all the answers and that it shouldn’t try to. Instead as with any good relationship, the success comes through hard work, collaboration and concession on both sides.

To download a copy of the report click here.


Emmanouil Schizas-3770

By Manos Schizas, senior economic analyst, ACCA

ACCA’s Beijing office recently teamed up with the China International Center for Economic and Technical Exchanges (CICETE) and the China Association of Microfinance (CAM) to hold an excellent event on the future of small business financing in the world’s second largest economy. It was a privilege for me to address this event and to learn first-hand from some of the pioneers of small business lending in China. It was also a great opportunity to meet a 50-strong delegation from ICBC, one of ACCA’s biggest employers in the region.

One question that came up as we were planning the event was this: What does the future hold for SME financing? More specifically, does Big Data have the potential to transform the industry and extend access to the large numbers of under-served small and micro-enterprises? It’s a reasonable question. After all, here at ACCA we stress that information is one of the four key inputs into business finance – alongside control, collateral, and risk appetite. It is, in fact, the most important one, as financial systems over-reliant on the other three can become unfair, unbalanced or unsustainable.

Unfortunately, I am no expert in Big Data. I was, however, able to fall back on the work of my colleague Faye Chua, our Head of Futures Research, as well as ACCA’s Accountancy Futures Academy, who are looking into this topic regularly and published an excellent review only a few months ago. Their report on the promise and perils of Big Data for the accountancy profession can be found here. What follows is a summary of what I told our audience in Beijing based on this reading, and although I must credit my colleagues for the insights, all errors and misunderstandings are entirely my own.

It’s good to start by defining what we mean by Big Data, because the term is often misused. My colleagues adhere to Gartner’s ‘Three Vs’ condition for Big Data, which says that ‘Bigness’ comes from the high Volume, Velocity and Variety of data. Gartner’s definition adds that Big Data “demand cost-effective, innovative forms of information processing for enhanced insight and decision making.”

Thus defined, what kind of Big Data are we seeing, and what could we soon see, in SME financing? The possibilities are significant – both for ‘soft’ and ‘hard’ data.

The easiest input imaginable is real-time transaction and payment data integrated from online payment systems, card terminals, accounting software, and credit databases. Finance providers such as Kabbage are already integrating this information to inform short-term lending decisions (more on this here).

More difficult to imagine, but still within the realm of ‘hard data’, would be trade credit data along supply chains – information about which businesses owe each potential borrower money, and how many sources of finance an SME is tapping at once. Mapping the web of trade credit flows makes it easier to spot vulnerabilities that wouldn’t show up in the financials of an individual business. Credit rating agencies are already able to provide some of this information, although mapping the web of business-to-business claims in real time could be many years away. You’ll know that day has arrived when governments start pre-emptively recapitalising corporate supply chains in the same way that they do banks today.

Finance providers could source almost real-time information about business’ capacity utilisation from utilities providers (electricity, water or telecoms) – giving them great insights into the business’ performance and potential finance needs. I recall that, in China, economists already used this method back in 2010 to estimate the effect of lending constraints on SMEs – they found at the time that electricity consumption by very small industrial users was down 40% year-on-year. Similarly, tracking data from logistics companies and GPS information could also provide a clue to the efficiency and capacity utilisation of a logistics-heavy business, helping direct finance to the right ones and making it much easier for providers to provide vehicle leasing or fleet insurance services.

In the realm of soft data, the possibilities are also substantial.

Integration with social media, family records, or the archives of large employers and educational institutions, could provide finance providers with a map of any entrepreneur’s social capital – who they know and who they can call on, as well who might be able to help them when in difficulty. Online crowdfunding would benefit strongly from this type of information, but credit providers could also use it as a measure of social capital when evaluating young businesses with no track record. Social media could also provide a tangible measure of a business’ ‘word of mouth’ – its stock of loyal customers, its reputation, and the uniqueness of its brand. Not all business models depend on this, but those that do can turn it into a tangible cash equivalent.

Entrepreneurs’ own personalities could become a target for data analysts, as it they are highly relevant to financing decisions. Not that long ago, ACCA’s own research demonstrated how executives’ personalities interact with business infrastructure to produce innovation. Forbes’ post on our findings is still ACCA’s most popular article ever, reaching about 800,000 people to date. The behaviour of entrepreneurs’ personal current accounts, for instance, can be correlated with anything from the way they speak on social media and the leisure activities they take part in, in order to populate a profile. Even language analysis could help. It’s already known, for instance, that CEOs’ and CFOs’ use of particular language on investor calls correlates with deceptive behaviour and through this to negative stock returns; or that the laughter of Federal Reserve interest-rate setters correlates with asset bubbles.

Realistically, the area most likely to see significant interest would be compliance, as Big Data is leveraged to allow easier identification of finance applicants and simplify due diligence. This can help control some of the most significant cost drivers in small business lending, especially in emerging markets. And given the small amounts involved, shaving off even a small percentage of the cost of due diligence can make a huge difference to financial inclusion.

That’s the potential.

However, as my colleagues pointed out in their review of Big Data, it’s easy to get caught up in the futurist dream and forget the reality. Big Data insights are expensive and the people that can help build them are few in number and increasingly well paid. The raw data that finance providers would need are not Open Data (indeed it helps to remember that most Big Data inputs are not); they are owned by providers with substantial bargaining power. Not to mention, their use will increasingly become heavily regulated as governments catch up with the industry.

Even then, my colleagues note that insights this tailored are bound to be short-lived. Big Data might be able to answer the question of ‘how likely is this person to need a business loan?’ very well, but only as long as the context has not materially changed. Meanwhile, competitors will each be building their own insights platforms, which other lenders will only be able to beat with even more investment. It will be undoubtedly progress, but not profitable progress.

Overall, it’s worth remembering the teachings of the Resource-Based View of the Firm. If you can’t own the raw data for your insights, or appropriate the gains from them, or if your competitors can replicate them, you have nothing of value in the long run. With no choice but to follow the leaders, many SME lenders will focus their energies on creating, buying in or replicating proprietary data.

Is this future imminent? Not as far as I’m concerned – SME lending will take a long time to catch up. The real reason for this, I think, is not cost; it is the fact that banks have such better uses for their money. I’m particularly thinking of a recent review of SME financing by uber-consultants McKinsey & Co. McKinsey found that the typical SME lender is already making really good risk-adjusted returns on equity, and they can double those by taking relatively simple analytical steps (see slide 13 on their deck), most of which don’t come close to using Big Data. If Small Data can double your returns, Big Data will almost certainly have to wait.

Emmanouil (Manos) Schizas

In our last blogpost for 2013, ACCA’s senior economic analyst, Manos Schizas, talks about trying his hand at lending directly to SMEs – and watches one of his borrowers fail.

I was extremely pleased to host ACCA’s Alternative Finance conference back in March 2013. It was an opportunity to showcase some of the most innovative finance providers in the UK, and it was exciting to see professional accountants work out the implications of their offering for themselves and the businesses they worked for.

But here at ACCA’s SME Unit we’d like to think we’re not all talk, so I have since opened accounts with a number of peer-to-peer consumer and business lending platforms, and have recently started to invest in the latter in earnest. As part of a wider portfolio of loans, I recently bought sixty pounds’ worth of the debt of a company that I shall call Space Odyssey Ltd (not their actual name of course). This may not sound like much but P2P platforms and elementary finance textbooks both stress that it’s important to diversify when investing, and I sure am glad I did in this case.

Looks good to me!

Seen from a policy wonk’s or a journalist’s perspective, Space Odyssey was precisely the kind of salt-of-the-earth business the banks ought to be lending to. It was a manufacturer with well-known big clients. At five years of age, Space Odyssey had managed to not only trade throughout the recession, but also grow by an average of 20% per year and consistently turn a profit. Now it needed to finance its working capital in order to continue growing. Its credit score was better than average for its sector, and indeed exceeded any other relevant benchmark. On top of that, the directors were willing to personally guarantee the loan and were prepared to pay more than the 6.8% average recorded by the SME Finance Monitor for fixed-rate loans of less than 100k. What’s not to like, right?

At first glance, a couple of things were troubling. My own concerns centred on a directors’ loan that was larger than the loan Space Odyssey were seeking from the platform (why were these guys unwilling to put their own money into their own company as equity? Were we investors expected to bail the directors out?) Yet I also knew that this was a common arrangement among growing firms: back in 2009, when I modelled the UK SME population for the purposes of ACCA’s response to the Rowlands Review, I was surprised then to find that directors’ loans were five times more common among the businesses the Review was hoping to increase lending to than among other SMEs – 57% of consistently-profitable, fast-growing and cash-positive businesses were using them.

Other investors on the platform were also concerned about the directors’ insistence on anonymity, the pace at which they responded to questions on the platform, and most importantly their claim (probably in error) that the company had ‘no debt’, when in fact it had a bank loan and overdraft facility in place, and owed substantial amounts to directors and even more to trade creditors. Overall, however, investors welcomed Space Odyssey’s bid, and their loan was not particularly expensive by the platform’s standards.

The other side of the story

What I now know, but couldn’t have known at the time, was that Space Odyssey was already failing, despite what seemed like decent efforts by its management. Two of its major customers had gone bust, one in 2010, then another in 2012, pushing liquidity to the limit. Then earlier in 2013, a major supplier had halved Space Odyssey’s credit limit, pushing them properly over the edge. Yes, Space Odyssey’s top line was growing, and yes, it needed money to finance working capital; nobody had lied to investors. Nor were we bailing out the directors, who kept lending more of their own money to the company throughout the last year. But there was, clearly, more to the story than that. The P2P loan covered less than half of the liquidity shortfall; and even a larger loan, I now think, would have done little to help.

This is because loss of liquidity does not remain an abstract problem for long – it spreads throughout the business’ operations quickly and messily. When a business is unable to pay on time, suppliers don’t just sit there and take it. Space Odyssey’s suppliers refused to complete pending work and orders, derailing projects already in the pipeline. Similarly, clients withheld payments as projects were delivered late or to a less than satisfactory standard. The final blow came from Space Odyssey’s suppliers who secured County Court Judgements (CCJs) against the company. Who could blame them? Except the County Court had handed down a death sentence, making it nearly impossible for Space Odyssey to borrow formally or to secure credit from suppliers. By the time it was agreed the company was to be wound down, the cash shortfall had grown eight-fold.

Meanwhile, directors were scrambling to save a dying company. Just dealing with creditors must have been a nightmare; its own owners aside, Space Odyssey had nearly 70 creditors outstanding when it went out of business, including HMRC, their landlord, and their own staff. And here I was wondering, along with my fellow investors, why they weren’t responding to our questions in time.

Curtain call

Then on 15 November 2013, ironically one day before ACCA’s recent debate on Zombie Companies, I received notice that Space Odyssey was going into Creditors’ Voluntary Liquidation. While this process is decidedly an offline, face-to-face affair, it was related to me in the spirit of peer due diligence that is common in the p2p finance sector: I was invited, along with all other investors, to submit questions for the first creditors’ meeting, where the p2p platform would also be represented. I did, and my question was, in fact, asked on the day. My subsequent questions to the platform were answered promptly by their Head of Insolvency, who also forwarded the directors’ report to creditors as well as an attendance note from their own representative. It is from these documents that I pieced together the story of Space Odyssey, although even that is unlikely to be the whole truth.

And what about my money? It looks like the directors are going to honour their guarantees, keeping investors’ losses very low. They claim they will not go back into business together, or separately.

It’s not a good outcome of course, but it’s been reasonable and professionally managed. Space Odyssey’s failure is no doubt a personal tragedy for a number of people and I’m not entertained by it. I didn’t sign up to lend just so I could watch businesses being wound up or so I could help myself to guarantors’ hard-earned savings, but I always knew this was a possibility. More to the point, without a solid regime for business recovery and dealing with insolvent borrowers, I would not have had the confidence to invest in the first place.

This is not to say that I, or anyone else, should only lend if we can be assured we won’t lose money. They call it providing ‘credit’, for a reason. The P2P investor’s first and best line of defence is diversification, not recovery, and the sector’s strength is that it makes diversification possible even for small individual investors.

Lessons learned

As the p2p lending sector matures, stories such as Space Odyssey’s will naturally become more common. Major platforms also know this and are already citing estimated default rates much higher than their actual historical figures, precisely in order to avoid misleading investors.  Both the platforms and the Financial Conduct Authority (FCA) are stressing that p2p loans to businesses are not savings accounts and are not guaranteed by the government. Perhaps some investors still refuse to believe their borrowers can fail, but I suspect these are a minority.

Still, I think one group of people could do with a crash course in P2P default risk: us small business lobbyists. Until recently, newspaper headlines were screaming for governments around the world to force banks to lend based on politicised ‘common sense’ criteria. In the UK, the British Business Bank is still being urged to do the same. Wouldn’t it be nice if everyone making the case for such supposedly ‘common sense’ lending were also willing to try their hand at lending their own money? They might do no better than I did on this occasion, but at least it would be their own money they’d be losing instead of the taxpayer’s.

Reflecting further on Space Odyssey’s story, I can see one way in which the p2p sector needs to mature further. My father was a bank manager before he retired, and his stories, dating back to 1960s-70s Greece, all seem to revolve around tragic heroes like Space Odyssey’s directors. When their companies were in trouble, the market knew. The bank manager often dealt with their suppliers and their customers, and couldn’t help but notice a pattern.

On the one hand, I hope that one day the p2p sector will be able to reproduce this advantage of old-fashioned relationship banking. On the other hand, I think back to Space Odyssey’s early efforts to maintain anonymity and wonder whether they would ever have bothered with a close-knit p2p lender community like that. Even perfectly creditworthy businesses aren’t whiter-than-white, after all. Balancing crowd due diligence against inclusion will be a challenge for p2p lending platforms, and I look forward to seeing how they reconcile the two.

Nicola Horlick

By Nicola Horlick, CEO of Money&Co

SMEs are increasingly going online for something they are not getting from the banks: finance.

Online crowdfunding platforms, which allow businesses to pitch directly to investors, are emerging as a smarter way for SMEs to get the finance they need. Lenders looking for a better rate of interest are ready to compete to fund the most credit-worthy ideas. This means that businesses are more likely to succeed in getting a loan via a crowdfunding platform – and at a more favourable rate.

It’s no wonder that many SMEs are putting their faith in the crowd. Although small and medium enterprises account for 99.9% of all private sector businesses in the UK and 48.1% of private sector turnover, many businesses are struggling to access finance.

Lending to SMEs has been falling since the financial crisis. Bank of England statistics show that lending has been down approximately 3% each month compared to 2012. As banks struggle to do enough to finance UK SMEs, many have found an alternative source of finance in crowdfunding.

While banks are failing to serve an important segment of the UK economy, the crowdfunding market is burgeoning. In three years, the peer-to-peer crowdfunding market has trebled and it could be worth over £1 billion by 2016.  The sector could eventually account for £12.3 billion worth of business loans per year, according to a study by innovation charity Nesta. Clearly peer-to-peer and person-to business lending – the model on which Money&Co’s is based – has the potential to significantly boost the UK economy.

Next year, the appeal of crowdfunding will only increase. In April, the FCA will begin to regulate crowdfunding businesses, providing protections to both lenders and borrowers. Under the key proposals for loan-based crowdfunding platforms, platforms will have to ensure among other things that they talk clearly and accurately about the potential risks and rewards. The regulator will also keep a close eye on the kind of back-up plans the platforms have in place to ensure lenders are protected.

Crowdfunding can provide lenders and borrowers with more control, as well as acting to undermine the restrictive dominance of high street banks. As the economy begins to grow again, crowdfunding can inject further confidence in growth with the necessary funding.

Emmanouil (Manos) Schizas

By Manos Schizas, senior economic analyst, ACCA

Late payment is, as I’ve written before (here and here), a significant problem for small businesses in the UK, indeed in many of ACCA’s major markets. For years successive UK governments have chiselled away at the problem with an array of tools but made relatively little progress.

Hence, it was encouraging to hear that the UK government is consulting on ways of reducing the incidence of late payment to SMEs. The government, we are told, will ask for views on (among other things):

  • How it can encourage greater responsibility for payment policies at senior management and board level
  • How it can make clear which firms are good payers and which aren’t
  • Whether there is a case for further legislation or penalties for firms which pay late.

Aren’t we forgetting something?

ACCA agrees with the PM that it is important that the Government signal in very clear terms that prompt payment is a significant element of corporate citizenship. Until last month, one of the ways it did so was to require that companies provide information on their record of prompt payment to suppliers.

I say ‘until last month’ because the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, which came into effect on 1 October, effectively scrapped this obligation; a change that has been two years in the making.

In September 2011, the UK Government launched a consultation on the future of narrative reporting in the UK. One of the proposals, inspired by a commitment to regulatory reform, was to scrap the prompt payment reporting requirement. BIS’ laconic justification reads as follows:

“Successive governments have attached a great deal of importance to prompt payment to creditors by business. However, we understand that the information this requirement provides is not considered useful for either creditors or shareholders so are removing this requirement.”

Now, I don’t doubt the outcome of the consultation was as reported by BIS. I’ve seen for myself responses from other influential stakeholders that ‘warmly welcome’ the removal of such ‘superfluous’ disclosures. I can say, however, that ACCA certainly did not share the majority view. In our response to the consultation, we argued that

Companies should continue to be subject to a requirement to disclose their policies and practices on payment of creditors. […] We would agree that the existing disclosure requirement does not appear to have impacted on the prevalence of the problem. But the ineffectiveness of the disclosure requirement can […] be attributed at least in part to the ease with which figures can be smoothed and to the absence of any sanction for non-disclosure. If the current requirement were to be removed, this would we fear send an unwelcome signal to companies that late payment is no longer seen as an important issue of public policy. […] Rather than abolish the disclosure requirement, therefore, it would be better to revisit the current requirement and refocus it so as to require the disclosure of more meaningful information.

Useful in principle

Long payment terms and late payment are, at the end of the day, cheap ways of ensuring liquidity. Investors, creditors, even a company’s own staff may benefit from them. But they may also want to know how much liquidity the company can draw on in this way; the amount is not infinite, and for a business plan to assume it is, is a major risk. It’s a matter of understanding the business model and its vulnerabilities. In a credit crunch, even small suppliers will become stricter creditors, as ACCA and CBI research has demonstrated. Some could fail altogether. An over-reliance on informal liquidity for the actual financing of the business could, in fact, signal trouble ahead.

Moreover, investors, creditors and other stakeholders might well want to know whether the company’s bargaining power vis-a-vis suppliers is endangered by its payment policies. If the company is forcing its suppliers to underperform in the long term, they could refuse to do business with it in future. Alternatively, they or their assets could end up being acquired by their competitors. Either way, the remaining suppliers’ bargaining power would increase substantially, eating into the company’s profits. Why would anyone not want to know about this risk? Again, it’s a matter of assessing the viability of the business model.

The fact that a rather poor tool for delivering this valuable information did not seem to work does not mean stakeholders should forever give up on the information itself. This is a running theme whenever narrative reporting is discussed, and the solution is pursuing more integrated reporting, not giving up altogether.

I hope the UK Government’s consultation will provide an opportunity to reopen the discussion on this basis.