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Why is SME funding accessibility determined by UK location?

Author: ICAEW Insights

Published: 04 Aug 2021

Although there are many national providers and government-backed schemes for micro-businesses these are still not evenly distributed, says Yvonne Gale, CEO at NEL Fund Managers.

The main reason for the geographical disparity is the fact that most businesses’ fundraising is asset-backed. In other words, the scale of the assets a business has available is dependent on how prosperous it has been. 

“As we know, the economic inequalities in how prosperous businesses are determines how much free assets you've got available as collateral to borrow against,” Yvonne Gale, CEO at NEL Fund Managers, says. 

Additionally, it's very common for lenders – but not NEL Fund Managers - to ask for a directors’ personal guarantee, which is intrinsically linked to the equity available in their home.

“Obviously, if you've got a really big house in the south east of England, you've got a much stronger ability to borrow, than if you've got a terraced house in a former mining village in the north east,” Gale says. “Therefore, there is more money available to businesses in the south east because of that collateral than there is in less prosperous historic areas - that's just how it is.”

On top of that, there is the question of home ownership and who owns their houses, which is not evenly distributed around the UK.

“These are long historic trends - it’s nothing new,” Gale notes. 

NEL fund managers is part of a responsible finance network which brings together lenders that deliberately work in areas of economic disadvantage, looking at the business idea viability regardless of the collateral position. But the problem, she says, is they are not well known and each is quite small and can’t afford the advertising or publicity that would increase their exposure. 

“We do a lot of networking and make sure that the local advisers are aware of what we do, but it's just pushing against the tide, because the local advisers are bombarded by messages from mainstream finance providers,” she says.

Micro-businesses, especially in the less prosperous part of the UK, should look for relationship-based lenders, Gale argues. With these lenders, entrepreneurs will get to speak with a real person, rather than an automated credit scoring system, and these lenders will be more likely to listen and take the story as a whole rather than rely on financial ratios.

Her second piece of advice to entrepreneurs is to look for ‘constructive declines’ – a technical term describing when a lender appears to be willing but attaches a large amount of conditions, many of which are unreasonable.

“Entrepreneurs should look at all the conditions and realistically think whether they can satisfy all of them,” Gale says. “If not, then they should put their energy elsewhere.”

Lenders should die or fall off their reputation, she believes, and therefore entrepreneurs should ask family and friends in business who are good lenders to partner with. 

“The next couple of years could remain volatile - it could be difficult and some surprises may yet come,” Gale says. “You really want a funder who's going to stick with you and won’t demand their money back in three months' time if there is a hitch.”

She admits there is less nervousness now than 12 months ago at the height of the first wave of COVID-19, but rocky times still lay ahead for many businesses. 

As they file their accounts, how much they borrowed and potential significant losses will be there for the world to see. This will have an effect on credit ratings and ultimately their ability to borrow more money. 

Rating downgrades also affect businesses' access to insurance as well as driving the prices of the insurance premium up, Gale highlights. 

At the same time, businesses will have to repay the debt they borrowed, which could provide difficulty for some as they are hit by continued disruption that is not directly linked to the pandemic but connected to it. 

“At the same time, a lot of lenders are not going to be keen to provide finance,” she says. “So the ability to borrow money, even for very positive reasons, could become constrained.”

The post-pandemic recovery and post-Brexit reform have both been billed as an opportunity to bridge the gap between regions, with question marks continually raised around the future of offices and city centres. However, while politicians are increasingly vocal about fostering prosperity outside of the London hub, Gale remains sceptic.

“I recognise that they are political pledges and changes in working patterns but I’m sceptical about how much it will benefit places like the north east,” she says. “The inequalities are so deeply structural that that might not be a big factor yet.”

The role of relationship based lenders will be key in changing that, but it will take time. 

“It's going to take generations of incremental prosperity before people believe that their small business can change the world,” she concludes. “The work we do is about providing finance to people who might struggle otherwise to get finance, and many of the businesses are really just about wanting to provide a nice living for them and their family.”

Insights Special: Access to finance

ICAEW Insights examines the finance options and support available to businesses, as well as the challenges they face in obtaining it.

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