Trust is the key to securing funding in these challenging times

In his latest blog, Jason Oakley, CEO of Recognise Bank, looks at the funding options open to businesses as they look to grow coming out of lockdown.

It’s been a tough winter, but as coronavirus restrictions are relaxed and the government’s roadmap out of lockdown remains on track, there is a palpable feeling of confidence amongst businesses that this summer will be better. In fact, our own research found that two thirds of SMEs are confident of a boost in trade this summer, rising to more than three quarters of hospitality firms.

However, the easing of lockdown measures comes hand in hand with the winding down of government support packages, such as the furlough scheme and the various loan initiatives. This could have a major impact on companies already struggling to stay afloat, with accountancy firm EY estimating that thousands of businesses could face collapse when state support comes to an end.

While not all firms will face such dire circumstances, many companies will be looking at their finances and planning for what could still be a challenging few months. Some organisations might be looking for a short-term injection of cash to provide a cushion as they find their feet again, while others could be planning to invest to reshape their business or capitalise on new opportunities presented by changing customer demands.

How do you secure funding in these challenging times?

So, how do you secure funding in these challenging times? This was the question posed to me and my colleague James Meigh, Regional Director at Recognise, during a recent webinar hosted by business finance consultants Evolution CBS.

The first thing to recognise is that, just as the financial needs of each business will be different, the lending solutions available will also vary. The lending market is really quite fragmented and it’s not necessarily the case that one organisation can offer every solution, or indeed the best solution for a business.

I think the key is to find a partner for your business, not just a lender. A bank, or a broker, that adds value to your relationship, demonstrates an understanding of both your business and your industry, and creativity in developing the right funding solution.

One of the reasons we set up Recognise was the fact that many ambitious businesses were not being served properly by the mainstream banks, and in many cases their very own bank with whom they had probably had a banking relationship for many years. This is partly because the number of relationship managers and advisers on the high street has been dwindling, replaced by centralised call centre teams.

It also means that the business knowledge built up over many years and the experience of advising SMEs in different circumstances, along with the expertise needed to put together the best funding package, is rapidly disappearing. Thankfully, we have some great brokers and advisers filling the gaps, many of whom we at Recognise are delighted to be working with.

Issues traditional banks are not equipped to handle

Many of the financial challenges SMEs are facing at the moment, are the kind of issues that the traditional banks are not equipped to handle. For example, cashflow problems caused by customers that are not paying on time. This is the kind of issue that can really hamper a business that is otherwise successful and generating solid sales, but just isn’t getting paid on time, an issue that may well increase as customers struggle with their own finances.

Companies might want to turn to their bank for extended overdrafts or short-term loans to tide them over, but this is an expensive solution and not one built for the long-term. Instead, businesses should look at blended credit and consider specialist finance options such as factoring and invoice discounting, where they can effectively borrow against their debts. In fact, some factors and invoice discounters will take on the debt chasing for the business as well, killing two birds with one stone.

Another option is credit insurance, which can protect a business if their debtors don’t pay. Credit insurance can also bring the added benefit of better lending terms because loan providers know their risk is being minimised. 

For those businesses that have slow payers on their books, but are confident they will be paid eventually, they might want to get on the front foot and offer their customer’s an incentive, such as discounts for early settlement of invoices. In this case, where cashflow is important for both parties, it’s a win-win.

Trusted partners that help SMEs

Elsewhere on the business spectrum, you might have companies looking for funding but are yet to turn a profit or are currently making a relatively small income. While most banks are unlikely to offer direct funding in these circumstances, there are other avenues such as external investors or equity partners that businesses could explore, which in turn would open up the possibility of further structured lending.

In these cases, the advice and counsel of an expert partner is needed to cast an eye over important fundamentals such as cash flow, debt servicing, the strength of the order book and the inherent value of the business and its proposition. While there isn’t a magic wand in every case that can summon up a solution, the importance of finding a trusted advisor that is connected to a good lender still holds true.

After a difficult 12 months, I genuinely feel we are on the cusp of an exciting period where ambitious businesses will help to get the UK economy back on the road to recovery. The role of Recognise, and the brokers we work with, is to be the trusted partners that help those SMEs realise their ambitions.