One of the greatest challenges for small businesses is accessing capital when they need it most.
My experience has shown this is a complex problem to solve and one I believe businesses, accountants and lenders must all solve together. So I was excited to host a panel discussion at Xerocon London with three experts to understand how small businesses can feel supported on their finance journey.
I was joined by Anton Krawchenko, a managing director on KPMG’s UK Debt Advisory team, Katrin Herrling, co-founder and CEO of Funding Xchange and Pamela Phillips, Xero partner and founder of de Jong Phillips.
The small business lending landscape
The UK’s 5.6 million small businesses are often referred to as the engine of growth as they contribute 50% of the UK’s GDP. But, despite the value small businesses contribute to the economy, many face ongoing challenges accessing finance. There is an estimated unmet financing need of 22 billion pounds.
This reinforces the scale of the problem. If a small business can’t get access to capital, they might not be able to move into new premises, buy stock to start their retail business, or have the cash flow to sustain their business.
Anton highlighted the role advisors can play in helping small businesses make borrowing decisions based on comprehensive information about funding options, and then execute on the best possible terms.
“Most of our clients have borrowing options,” said Anton. “It could be a funding format, such as secured or unsecured. It could be the funding source, such as banks or credit funds. Or there could be an equity component to the borrowing, such as warrants. We advise clients on how different types of funding would impact their business and which is the best fit for their business objectives.”
Navigating the global pandemic impact
According to the UK government, businesses were supported with nearly 80 billion pounds of emergency government-backed loans during the pandemic.
Katrin believes the global pandemic changed the lending landscape for small businesses in the UK.
“What this did from a lending perspective is very interesting,” said Katrin. “We used to have a lot of non-borrowers in the UK who never considered taking out a loan and didn’t see lending as part of how they wanted to build their business. But during the pandemic, smaller businesses started to consider lending as it became more normalised.”
“However, small business support packages have given the impression that lending doesn’t take any effort or require personal guarantees. If you were a first-time borrower, you were given very inexpensive capital. As we come out the other side, more stringent market-based terms are coming into effect again,” she said.
Accountants and bookkeepers now face the challenge of resetting expectations about the ease of accessing funding. For Pamela, it’s about setting small businesses up for success.
“We take on the role of the finance function and view access to capital as one of the tools to help small businesses grow or sustain their business,” said Pamela. “We make sure their numbers are up-to-date, they have a view of their cash flow in short and long-term so we can identify when there is a gap coming up and have conversations during monthly meetings around what strategies to put in place. One of these might be funding.
Recently our clients have been looking for funding not just to survive but because they’ve seen an opportunity they want to take advantage of. For example, last year we helped a client buy their dream office in Soho – the seller of the property wanted a really quick transaction. A traditional funding approach would have taken too long. We were able to work with them because all the information lenders needed was up to date so we could work with them to identify a solution based on their needs.”
Supporting small businesses on their finance journey
We’ve seen many Xero customers use the strength of their financial data to obtain unsecured finance, with support from their accountant or bookkeeper in helping prepare the application process. And lenders are using this information to make faster, automated decisions about their borrowers.
“Small businesses that have their books managed by a professional are viewed favourably during the loan application process,” said Katrin. “As advisors, you are best placed to understand client challenges and can help your small business clients to access funds by ensuring data is unadulterated and kept up to date. You can also help by being across any personal credit or guarantees that may impact a loan decision, and reviewing cash flow to ensure capacity to repay the funds.”
Many businesses are hungry for debt, but in some circumstances, lending might not be a viable option.
To balance the need for funding with being in a position of too much debt, accountants and bookkeepers should scenario plan finance costs with their clients to assess how much they can borrow, while taking into consideration how changing interest rates will affect repayments.
“Financial modelling is imperative, especially in light of rising interest rates. My advice for small businesses is to model conservatively, and quantify how your borrowing would actually meet your objectives, such as working capital funding” said Anton.
“We help our clients access funding by giving them the best foundations through good data that is kept up to date, using Xero,” said Pamela. “Advisors can stress test financial models and push out what cash flow and profit will look like with increased interest rates to help their clients make better decisions and forward plan.”
We heard about the critical role accountants and bookkeepers can play and I was surprised at how broad this can be. If there’s one thing I took away, it’s the strength of data through the Xero platform to help lenders make faster decisions about funding.
Our discussion confirmed how complicated access to capital is, yet it also confirmed there is no lack of desire to solve this and new options are evolving through constantly improving data, and through collaboration we can make a positive difference for small businesses.
Find out more about the role advisors can play in getting small businesses ‘finance ready’ at the Xerocon Sydney breakout session.