The total balance sheets of all companies in the UK show this astonishing mountain of unused cash, most of it in the large corporates but a fair amount in the 200,000 strong SME sector.
After years of acting as a ‘company doctor’ for owner managed businesses, at the start of the recession I began arranging loans for them. In my experience, outside of the retail sector not many SME’s have wanted loans for working capital, most applications have been for buying premises or acquiring another business.
It’s clear that many successful small businesses have avoided taking on more debt. A recent survey of several thousand SME’s supports this, showing that 80% have not borrowed in the past year nor do they plan to seek external funding in the foreseeable future.
So when the banks claim that they cannot meet their Government imposed lending targets to SME’s, it’s not entirely their fault!
However, the underlying problem is that most small businesses are undercapitalised. The balance sheets I see very seldom have more than £1000 of share capital, often just £1 .
Most startups have been funded by personal finance – credit cards, the bank of family and friends, house remortgage. Why? Because the availability of seed equity has been almost non-existent.
Early stage companies have low or non existent revenues at a time when expenditure is high and so require additional funding to develop. However, bank loans and overdrafts – historically the only available sources of outside funding – are fundamentally unsuitable for newco’s because the cost of servicing the debt comes at a time when little cash is available.
In addition, the bank’s lending terms and conditions are usually oppressive and subject to change at any time. Not a good combination for an uncertain fledgling business.
Equity finance on the other hand is there for life, it can’t be withdrawn (although it can be lost) and does not drain cash. Therefore I’m glad to see a new source of equity funding, Crowdcube, which is an online ‘peer to peer’ matching service that invites lots of individuals to invest small sums of cash in start-up or early stage companies.
More on this next time.