UK not have enough collateral good, but also it

UK businesses main source of finance is bank lending,
however, “bank lending is changing, with both cyclical and structural factors
at play” (“Boosting finance options”, 2012). In the case of SMEs, they might
face certain difficulties and problems when trying to access bank lending,
which is why they should focus on raising finance from different available sources,
which must appropriately fulfill their capital needs and requirements. The
crisis of 2008 to 2009 affected the UK economy in many ways, in the case of banks,
they became more risk averse. This means that banks might have become less
interested in giving loans to SMEs, because it might present a greater risk as
opposed to investing in government bonds or treasury bills. Therefore, it can
be expected for SMEs to not be given any loans, in fact, “33% of SMEs applying
for a loan were rejected” (“Boosting finance options”, 2012). This shows that
SMEs might not have been able to raise finance on time as not only did banks
become more risk adverse, but they implemented additional requirements for
borrowers to meet, such as “higher collateral requirements” (“Boosting finance
options”, 2012). Hence, this can act as an obstacle for SMEs because they might
not have enough collateral good, but also it might be risky to undertake. This
is because if unable to repay the loan on time, the lender will be free to poses
all the collateral goods, leaving the SME at a disadvantageous position, with
the possibility of going out of business. Therefore, alternative sources of
finance, both internal and external might be of great potential for SMEs to use
as well as larger companies, as it will be discussed in the next section.

Due to the lack of
bank lending available to SMEs, it can be stated that a debt finance gap might
have become more present. In general, a finance gap exists because the total
funding a company needs is smaller than the actual funding that is needed and
available for the company to access. In the case of small start-up companies, accessing
funding might be a significant issue. This is because it might take them
several of years before they are well established, but before this happens
their business operations, sales and such might fluctuate greatly. This means
that they might not be fully aware of their total expenses and might be unable
to clearly and rightfully determine whether they need financial help.
Therefore, it is fair to establish that the debt finance gap might be mainly
made up of these companies, which might not play a key role in the UK’s
economy, yet. Nevertheless, the finance gap SMEs might experience can be
reduced if they use other sources of finance as it was indicated previously. Corporate bonds, one of the main sources of finance SME’s
can access, is often used to finance large scale projects, which is why it
provides them with long-term working capital. In 2009, 2% of SME’s used
corporate bonds to finance their activities, and in 2010 this increased to 4% (Whiting,
2010). This statistic shows that there
has been double the increase among SME’s using corporate bonds to finance their
businesses. Hence, it can be established that it presents a high potential for
firms to access and use it. However, one of the reasons why SMEs might have not
shown interest in relying on corporate bonds is due to concerns investors have
in terms of liquidity and credit rating. This is because they “lack the
appetite and resources to analyse
the credit risk of small companies” (“Boosting finance options”, 2012), which means that it is more difficult for
SMEs to access the bond market. Nevertheless, new policies are to be
implemented to address this issue and it is recommended for the “Association
of Financial Markets in Europe to explore the creation of an aggregations
agency to lend directly to SMEs and/or to pool SME loans to facilitate SME
access to the public corporate bond markets” (“Boosting finance options, 2012). Hence, this can help with the
recommendation of UK retail investor to increase their interests for corporate
bonds. This is because retail investors might be more willing to purchase SMEs
bond as it might be more trustworthy, and they are more likely to feel
confident to do so. Thereby, in the long term more SMEs will be actively
operating in the corporate bond market, with the right policies in place as
well as receiving the support from the government during the early stages to
launch it appropriately. Thus, this might make corporate bonds a highly used
source of finance, helping tackle the debt financing gap among SMEs.

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Moreover, many UK firms relying less on external
sources of finance, mainly to reduce the risk it involves and to be less
depended on other entities. Therefore, firms might focus on raising finance
internally to carry out their business activities and this can be done through asset-based
finance. SMEs can raise working capital and short-term cash loans by securing
their assets including “invoices, stock, property, machinery and intellectual
property” (“Boosting finance options”, 2012) as collateral. For example,
“42,000 of the UK’s SMEs use accounts receivable finance” (Boosting finance
options for business, 2012). This might
be because some firms might no longer be able to receive bank lending as they
might have reached their limit, or they might be repaying an older loan and it
might not be sensible to take a second one. Also, because they might only need
to finance short-term needs, asset financing might be more adequate to use.
Thus, this might not affect nor contribute towards a change in the finance gap.
Furthermore, asset-based finance can be particularly beneficial for start-ups
and other companies that might lack a credit rating and may be unable to
qualify for a loan. Thus, it will be relatively challenging for them to receive
bank lending, and the process might take several months, making it time
consuming. Hence, asset financing provides these companies with the finance
they might need during the early stages, which can be crucial in the developing
and growth of these firms. On the other hand, more mature and well-structured
firms like SMEs can benefit from this finance. For example, firms that have
intellectual property rights in place against their assets might increase the
likelihood of being financed by any type of lender. This is because having IP rights
such as trade-marks, patents and such add some degree of exclusivity of the
firm. This indicates that there’s a great potential for this SME to appeal to
the targeted market place and perform well too. Therefore, if asset financing
is used appropriately by small firms and SMEs, they should have more finance
available and might not experience a finance gap. Nevertheless, there are behavioural barriers to the growth of asset financing by UK SMEs
as they “appear to have negative perceptions and a general lack of awareness” (“Boosting
finance options”, 2012) because they tend to use it as a last resort. Hence, it
is vital for educated and experience entities like financial advisors to
provide the guidance and advice for SMEs to rightfully access asset-based
financing.

A third source of finance is that of mezzanine
finance, “a form of debt sharing characteristics
of equity” (“Boosting finance options”, 2012). It is a distinct form of debt
financing mainly because it can be tailored specifically to the needs of a
certain business. This means that it tackles explicitly certain businesses
activities, which include product development, penetration of new markets, and
strategic expansions including mergers and acquisitions. Therefore, mezzanine finance might help reduce the finance gap in the
UK, as it provides a source of finance for SMEs looking to engage in any of the
previous strategic developments. This is because, the mezzanine financer might
be more likely to provide the capital needed if they see that the only purpose
of its use is to finance their development. Nevertheless, in the real world a relatively small
number of firms use it, “only 1% of firms used mezzanine finance in 2010”
(“Boosting finance options, 2012). In part, it is because although UK firms
know how it works, they were unware of how to use it correctly and thus they
might have refrained from aiming to access it. However, with the help and
guidance of financial advisors or programs made accessible for the firms,
seeking to access mezzanine finance has a great potential to increase.  

Ultimately, having
analyzed the different range of sources of finance UK small and start-up firms
and SMEs can access, it but are not effectively using them, it can be
established that they are experiencing a finance gap. The “finance gap could be between c£84bn and c£191bn over
the next five years” (“Boosting finance options”, 2012), a relatively large amount that is not available for these firms to
finance their business activities. This is because banks and other lenders might
lack the capital they need to finance SMEs. This can also be due to a lender’s
personal choice on how to use the capital they have and what type of firms to
fund. For example, newer and smaller firms are riskier to invest in which is
why lenders might not work with these firms. As mentioned before, certain
sources of finance like corporate bonds are available but there are certain
issues that do not lead SMEs to access it. Hence, influential stakeholders like
the UK government, financial advisors and both institution and individual
investors should work together to find new ways to solve any issues and unlock
greater resources of finance. Furthermore, SMEs and small start-ups themselves
should become more engaged in implementing and learning about the most adequate
sources of finance they can access. This means that their accountants or
financial advisers must be well educated on this matter, to be able to
rightfully advice a company. They must determine and budget the funds and
amounts they may require accordingly, to not find themselves lacking finance. Hence,
with the input of both parties, lenders and borrowers the finance gap can be
reduced, meaning that finance will be more accessible and available among all
firms in the UK.