Archives For Small business

SH  01

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.


Ian Murray MP

By Ian Murray MP, Shadow Minister for Trade and Investment

Improving trade will be vitally important to growing the UK in the coming decade. Indeed, boosting exports must be a national mission. The current Government has also recognised that and have set an ambitious target to increase exports to £1 trillion by 2020. However, there are concerns that the pace at which exports are expanding isn’t fast enough.

The headline news from the Office for National Statistics is that the monthly trade deficit in February narrowed, down to £2.1bn from the £2.2bn in January. The value of goods exports was the lowest since October 2010, while the goods deficit excluding oil and items such as precious stones and aircraft – widened from £8bn to £8.5bn.

For these statistics to improve, Labour believe that Britain’s small and medium-sized businesses will be crucial to driving our exports and we are looking at ways we can support them to do that.

Ensuring that firms have access to the finance they need to export is a crucial. That is why the Government’s two flagship export schemes – the £5bn Export Refinancing Scheme and the £1.5bn Direct Lending Scheme – need to start lending and I would encourage ministers to look urgently at the performance of these schemes.

The UK needs to get more businesses exporting to boost middle-income jobs and grow our way out of the cost-of-living crisis and so we can ensure Britain can compete in growing global markets. We have fantastic, innovative businesses, and many important advantages on which to build up our exports. We have a strong British brand, our language, our legal system, and even our time-zone work in our favour. We should be drawing on the rich cultural tapestry of Britain, building on the links with our Disapora communities to strengthen trade links with emerging markets, and building city-to-city links as Chuka Umunna the Shadow Business Secretary outlined last week. To grasp the opportunities and exploit our full potential needs a Government that is prepared to act and prepared to support.

If this does not happen we will not only miss being ahead of the game and fail to grasp the opportunities with regard to exports to the BRIC economies, the ship will sail on the new wave of fast growing economies – the Next Eleven, including the recently much publicised MINT (Mexico, Indonesia, Nigeria and Turkey) countries.  Ministers must do much more than offer warm words.

As April’s Western Union International Trade Monitor has shown, only 9% of SMEs have customers in China compared to 15% a year ago, whilst only 6% sell to India (vs. 14% in Q1 2013). Indeed, the percentage of SMEs planning to expand into emerging markets fell from 36% in Q4 2013 to 28%. That’s not good enough. These are exactly the markets that UK businesses should be breaking into, but they can only do this with the support of an active government which utilises its export guarantees, a future Labour Government would be as active as possible.

The next Labour government will make it a central mission to boost exports, innovation and investment as part of Agenda 2030, which is our plan for better-balanced, sustainable growth. This means engaging with our European partners using our membership of the EU to reform it and to help us as we look to boost our exports in new markets overseas and help more small firms export. The UK mustn’t head for the EU exit door, an approach which would do nothing for jobs and the ability of smaller and medium sized businesses to export.

Our Small Business Taskforce has made a number of recommendations to Labour which we are examining. These include creating export hubs in major world cities to give UK firms a foothold; export “rainmakers” who can help small businesses identify and approach potential customers; and a suite of export finance products comparable to those offered by the US Small Business Administration.

As a former small business owner, I know the importance of having a government which supports business and steps up not steps away. We have businesses across the country that have huge ambition. It needs to be matched with a government prepared to act.

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.

Matthew Hancock profile pic

Matthew Hancock, Minister for Skills and Enterprise, Department for Business, Innovation & Skills

As a Government, we are working to make life easier for small businesses. We are simplifying regulation, and, where we can, cutting taxes. But I need your help.

As accountants and finance professionals, you have a hugely important role to play in supporting small business. As trusted advisers, I’m asking you to help communicate the changes we’ve made, and the support available to small businesses, to encourage firms that start-up in the UK to scale-up in UK.

December saw small businesses in the spotlight as the UK celebrated its first Small Business Saturday and government published Small Business: GREAT Ambition – our commitment to make it easier for small businesses to grow.

We are also working hard to simplify employment processes and reduce red tape. These are the issues that small companies regard as obstacles to their growth ambitions and we are doing all we can to address them, including introducing a £2,000 relief on National Insurance bills from April 2014 and making it easier for businesses to calculate their income tax and expenses. But simplifying a regulation reduces a burden only when a business knows the requirements on them have been reduced. That’s where you come in.

The Small Business Saturday campaign did a great job in encouraging the UK to support small businesses. Nearly half of all consumers in the UK were aware of the campaign, and of those over half (57 per cent) shopped at independently owned businesses. It’s vital that we don’t lose this momentum.

We’ve listened to small businesses to better understand their growth ambitions, with most telling us they aim to increase in size. Small firms have told us they need help at critical points and new measures announced in Small Business: GREAT Ambition is making it easier for them to grow.

The new offerings include; broadband vouchers to help small firms access faster and better broadband connectivity, a fairer deal on energy for small businesses, access to £230 billion of public sector contracts and new measures to tackle late payment.

The British Business Bank also received an extra £250 million to support alternative lenders and challenger banks in releasing capital to growing small businesses. This is in addition to the £1 billion already allocated.

Small Business: GREAT Ambition is part of the wider Business is GREAT campaign, which points small businesses to sources of advice and support that can help them grow, and celebrates those that have grown with the help of government support.

There is a new entrepreneurial spirit sweeping across local communities which will help our ambition to make the UK the best place in the world to start and grow a business.

Small businesses are essential to the overall health of the economy and we want them to start benefitting from these changes now. By working together we can ensure small firms understand the support on offer, and have access to the most up to date information, so they can get on with the crucial task: to grow and create prosperity and jobs.

The Department for Business, Innovation & Skills would welcome your thoughts and any further ideas you may have to help small businesses make the most of government support available. Please contact

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.