It’s been just over three years since Complete Commercial Finance, led by directors Karl Lanham and Michael Moore, opened its doors to help businesses across East Anglia secure finance. In that time, there has been an almost unprecedented period of disruption, initially working through the pandemic, followed closely by Brexit and the spiralling cost of fuel, energy, staffing and, most recently, interest rates. In July, the Government launched a cross-party inquiry into the challenges faced by small firms when seeking finance, examining regulation, innovation in business finance and how the government can potentially improve access. With the spotlight firmly on their sector, Karl and Michael reflect upon the inquiry and their experience of supporting SMEs over the past three years.
BARRIERS TO ACCESSING BUSINESS FINANCE
Working with clients across Norfolk, Cambridgeshire, Lincolnshire, Suffolk and Essex, Complete Commercial Finance’s teams have seen first-hand how the economic climate has increased pressure on smaller firms looking for finance. “From the feedback we get from customers, banks are geared up to deal with larger SMEs in terms of providing a personal point of contact and some expertise behind that,” explains Karl.
“I think smaller companies tend to access finance via a manufacturer of whatever they need to buy for their business, be it a machine or vehicle, or through an intermediary such as ourselves. Few have much of a relationship with a bank manager anymore and the main barrier in accessing finance is simply finding a point of contact and actually speaking to somebody. Most micro or small businesses don’t know where to start or who to contact.”
“Another barrier is that customers don’t realise how many funders are out there,” adds Michael. “In some areas it’s got better, with organisations such as Funding Circle providing unsecured lending, but with commercial mortgages, development and asset finance, there are hundreds of lenders that companies are unaware of. Typically, a business owner will approach a bank for a loan and if they are turned down they think it’s a dead end and give up. Often they don’t know about working with a broker and, unless a professional adviser such as an accountant or solicitor points them towards us, they don’t explore an alternative solution.”
“We were talking to a customer recently who was looking at various options, one of which was going into insolvency. He said he’d spoken to an insolvency practitioner, but he didn’t know them or have a lot of faith in the advice they had given. I asked where he’d got their details and he said he’d Googled them. It’s a decent sized business which has previously turned over £10-15m. In the past, if you were in trouble you’d speak to your bank manager who would be aware of the situation and offer advice. Now customers are just picking a name off a Google search and I think that highlights that increasingly people are having to figure it out by themselves.”
THE LONG-TERM EFFECT OF COVID ON BUSINESS
One area which the inquiry will examine is the impact of the Covid Bounceback Loan Scheme (BBLS), followed by the Recovery Loan Scheme, on SME finance. While broadly welcomed by many companies as the UK went into a series of lockdowns which prevented them from operating, the long-term effect of the schemes has hampered growth for some. “The BBLS had an immediate impact as customers could borrow up to £50,000 fairly quickly and easily, and sensible businesses used this to replace asset or cashflow finance,” explains Karl. “We saw a drop in business of those kind of products for around 12 months, but once businesses started trading again, this reverted back to normal.”
“One thing many people probably were unaware of at the time was the impact that this borrowing would have on their future plans,” adds Michael. “The BBLS was designed to get companies through the pandemic, but its something banks now take into consideration when a firm is looking for funding. I think it’s a bit of a double-edged sword – it was helpful at a certain stage, but it’s now become a hindrance for those applying for a commercial mortgage who are being held back by their monthly £800 BBLS repayment. With rising interest rates, you probably need around £1,500 of available cash each month to arrange longer term debt.
“Even if a bank offers lending, it may insist that the BBLS is repaid which was borrowed at 2.5%,” says Karl, “and with mortgage rates topping 8%, you may end up refinancing cheaper debt at a higher interest rate.”
WILL REGULATION HELP BUSINESSES ACCESS FUNDING?
The inquiry will also examine whether increased regulation of the finance sector might help SMEs, considering the role of the Lending Standards Board, Financial Ombudsman Service, Business Banking Resolution Service, and whether SMEs should have the same level of protection as retail consumers. The Basel framework, developed by the Basel Committee on Banking Supervision (BCBS) provides a set of banking standards and a proposed Basel 3.1 may further limit SME access to finance.
“With Basel, the banks retain a percentage of all lending as a contingency during a financial crisis,” says Karl, “but because SMEs are considered a higher risk, under the Basel framework, banks have to put more money aside to cover bad debts. With Basel 3.1, they are talking about removing specific extra SME support, which means for high street banks it will become more expensive to lend to a small business. As a consequence, banks will naturally shift their lending to larger businesses and companies under £10m turnover could become a cinderella market.
“On the point of whether SMEs should have the same level of consumer protection and deposit insurance as retail customers, this could significantly impact the market. When changes to the Consumer Credit Act came into force, the number of lenders in the market shrank. It sounds like a good idea to give smaller business more protection, but it could end up reducing choice and increasing costs.”
BUILDING A MODERN COMMERCIAL FINANCE BROKERAGE
No-one could have predicted the events of the past three years, but Complete Commercial Finance has helped many businesses to navigate these with a supportive ear and solid advice. “When we started the business, nobody had heard of Covid,” says Karl. “Brexit had happened, but nobody understood the impact. We had Liz Trust and Kwasi Kwarteng drop a hand grenade on the economy and interest rates have spiralled to 5.25 per cent, compared with 0.1 previously. We’ve had a war in mainland Europe – who saw that coming? Nobody knows what the future holds, but the thing that is consistent in successful businesses is that they always build in a contingency, finance themselves properly and keep cash available to trade through these situations. Businesses that do things on a whim, they’re at the mercy of events and finance, used effectively, can help many to create stability when navigating events outside of their control.”
“The service we offer has little to do with lending,” says Michael. “Our customers work with us because they get the best advice and have honest conversations around planning and structure, and I think that’s what has served us best through all of those events. At the start of Covid, we gave free advice and helped people deal with their banks. The vast majority of our clients have remained with us since and the advice we give, whether it’s directly or via their accountant or finance director, is what makes them want to continue to work with us.
“A lot of brokers fear regulation, but as long as you’re doing the right thing you have nothing to worry about and the guys who have joined us over the past three years are like-minded in this approach. We’ve always tried to create a company and brand that people, and the professional market, recognise. I genuinely want to be people’s first, second choice, so if someone has been to their bank and they have said no, come to us. We want to become as crucial to our clients’ businesses as their accountant.”
“I totally agree,” echoes Karl. “In fact I prefer it when customers have been to their bank first, because it means they have usually had bad customer service, received no help and realise that we provide a great service with good advice and support when they need it most. All of the team who have joined Complete Commercial Finance are a reflection of the culture that we have as a business and of us as people as well, and we’re looking forward to building on this for the future.”
