Local accountant and Best of Haverhill business member Paul Donno from Paul Donno & Co Ltd, accountants and business advisors , was recently asked to comment in a national publication for accountants, the AAT magazine. Here is the article as it appears in AAT:

Capital ideas

2nd November, 2010

When asked his biggest regret in his first 100 days as Prime Minister, David Cameron replied: ‘Failing to get banks to lend more to struggling businesses.’ Conditions remain very tough – particularly for small firms.

In July, the British Bankers’ Association said new bank loans to small businesses had increased by £75m between May and June. The Forum of Private Business (FPB) quickly countered by saying year-on-year term lending had decreased by £269m compared to June 2009, when the UK was still in recession. June brought the eighth consecutive quarterly decrease in lending to business.

According to the FPB, average monthly loans have declined by almost half since 2008, when banks lent a monthly average of £991m to small firms. By July, this year’s average monthly figure was just £564m.

More worryingly, only today it has been reported that the white noise coming out of Whitehall on lending targets for banks suggests that they have been quietly dropped. Not good.

But is this all doom and gloom for SMEs?

 Security risk

‘Banks are still lending, but the information and security they ask for is greater than it was a few years ago,’ notes Paul Donno FMAAT of Suffolk-based accountants and business advisers Paul Donno & Co Ltd.

‘It’s more difficult for businesses to get a loan or overdraft, however, having a proven proposition and solid business plan still goes a long way.’

Security on such arrangements remains an issue for many owners, he adds, because they risk losing their homes. ‘I advise my small-business customers to try to establish a close relationship with their bank from the start – even if you don’t need finance. Then when you do, you could stand a better chance.’

The more fortunate businesses might be able to raise cash by selling assets, such as premises or machinery, but they need to consider the longer-term implications, warns Wirral-based chartered accountant Elaine Clark, managing director of CheapAccounting.co.uk.

Equity finance

Some small businesses seeking to fund growth might be able to attract private equity investment. According to the BVCA, the industry body that represents the UK’s private equity and venture capital industry: ‘Private equity is medium- to long-term finance provided in return for an equity stake in potentially high-growth, unquoted companies.’

Unless a business can offer major turnover upswing within five years, a private equity firm is unlikely to be interested. Investors favour companies ‘managed by experienced and ambitious teams who are capable of turning their business plan into reality’.

Factoring and discounting

For smaller sums, another fundraising option is factoring. As Paul Donno explains: ‘Factoring enables businesses to sell their invoices to a lender (factor), which can get businesses through short-term cash-flow crises. Typically, factors lend the business 75%-90% of the invoice value and then pursue payment.

‘For a growing business that sells products, factoring is worth considering. It’s not cheap, so it must be costed as part of the product. Advice should be sought from an accountant who understands factoring. Factors are strict on lending criteria, and the financials must be presented in a way the lender understands. We have a number of clients for whom factoring works well.’

For SMEs the role of having a good accountant offering sound advice, it seems, has never been more important.

Image shows Paul Donno working with client Neil Saville from Stylize Display Graphics in Haverhill.

Image courtesy of Tristan Newkey-Burden