Planning for growth. The economic environment and the financial support available

Transcription

1 Planning for growth The economic environment and the financial support available By David Smith, April 2013

2 Contents 3 Growth and investment time to seize the moment? 3 The challenges for business 4 The lending situation 4 Low cost of borrowing 5 Export opportunities 5 Stirrings of growth 6 New initiatives 6 Time to talk about that business plan? 7 Key takeouts 2 of 7

3 Growth and investment time to seize the moment? Is the economy set to grow more strongly for the rest of this year and into 2014, and is this the time for businesses to invest? What finance and support is available for businesses looking to grow? These are key questions for businesses and to explore them we interviewed two senior Barclays representatives, both of whom have their fingers on the economic pulse. We talked to Dr Richard Roberts, Barclays Senior Economist for SMEs and Alan Turner, Head of Debt Finance, Corporate Banking. The challenges for business We began by asking about how they would assess the biggest challenges for firms in the current environment. The main challenge and this applies to SMEs as well as larger businesses is that the economy has been flat and business confidence low, says Turner. If you ve got a flat economy and weak confidence it means investment is low. Investment levels are still about 15% below pre-crisis peaks. You can see it in the accumulation of cash on the corporate balance sheets. Current estimates are that this stands at 750bn, equivalent to something like 50% of the UK s GDP. Similarly, for smaller businesses, we re close to a position where for every pound we have lent we have two pounds on deposit. For most companies, plans are pretty well baked for what they will do when the moment is right. When confidence returns, the recovery will be stronger than some are expecting. So firms are holding onto cash rather than using it to expand the business through investment. Yet, as Turner points out, corporate Britain is in a healthy state. Balance sheets are in good shape and most businesses have the capacity to borrow, he says. For most companies, plans are pretty well baked for what they will do when the moment is right. When confidence returns, the recovery will be stronger than some are expecting. Confidence is the key. What Turner describes as left-field events, such as the crisis in Cyprus, which followed market worries over the outcomes of the Italian election, may continue to weigh on confidence. But there is also the chance of positive surprises. Turner and Roberts cite the measures in the budget to boost the housing market. At some point there has to be a person at the end of the chain making a purchasing decision, Turner notes. One of the benefits of the housing initiatives in the recent budget could be to give people more confidence in the wealth they have in their property. For Roberts this is a key point. Developments in the housing market and the mortgage market are potentially very important for the smaller business sector, he says. One way or another, a significant number of our business customers are linked to the performance of the housing market. 3 of 7

4 The lending situation A series of government initiatives, including the latest Funding for Lending Scheme (FLS), have been aimed at improving the flow of finance to business. From a Barclays perspective, the key issue is loan demand. We ve seen a modest increase in small business applications for borrowing compared with the end of last year, but year-on-year they re very slightly down, says Roberts. There s slightly better news among larger SMEs there we are seeing a pick-up. Turner argues that subdued loan demand is directly linked to the economic environment but stresses that Barclays is very much open for business and, indeed, has been increasing its share of the market. It is a brutal fact that lending volumes to SMEs across the industry have fallen, he says. But our approval rates are high for our corporate bank they are well north of 90%. We ve put a lot of time and attention into the various government initiatives. If you look at the fundamentals, at the moment the cost of borrowing is very low in absolute terms it s at its lowest for the past 25 years. Dr Richard Roberts, Barclays Senior Economist for SMEs We dived in enthusiastically on Funding for Lending and we have seen growth. We wish it were more but we re pleased with Cashback for Business, a product which provides upfront cashback based on the size of the loan, and the other initiatives we ve run. Over the past three years we ve increased our market share of the money lent into the corporate market by over 20%. Low cost of borrowing The latest SME Finance Monitor, covering firms with turnovers of less than 25m, was published in May. It showed that only 1 in 10 of all UK SMEs had applied for finance during the preceding 12 months. Another finding from the monitor was that approval rates for any kind of credit application remained stable at 70%, while only 40% of those planning to apply were confident that their bank would agree to their request, highlighting a perception gap in the market. Given the government s ambition to rebalance the economy towards exports, while a third of those already exporting planned to sell into new markets overseas, only 4% of those who do not currently export thought that they would start to do so. Commenting, Turner said, The central question for us with our clients is: Do you feel able to apply for loans? We are concerned about the businesses which feel discouraged from applying in the first place. Businesses should remember that applications for finance are not a test, but rather a joint activity to be navigated with their bank. Businesses should remember that applications for finance are not a test, but rather a joint activity to be navigated with their bank. 4 of 7

5 Roberts is concerned at the perception among SMEs that it is expensive to borrow. As he puts it, If you look at the fundamentals, at the moment the cost of borrowing is very low in absolute terms it s at its lowest for the past 25 years. Export opportunities One disappointing finding from the SME Finance Monitor was the small number of businesses planning to expand in export markets. This is something, as Turner points out, Barclays is trying to improve, working with clients and the government. One of the more confusing outcomes of the past three or four years is how can you devalue your currency by 20%-plus and not grow your exports? We have a rich international history but we are perhaps too focused on the domestic economy, he says. So we are putting a lot of time and effort into the UKTI initiative to double exports by 2020 and to get another 100,000 companies exporting. There are genuine opportunities on both the product and the service side. Business knows best where its competitive advantage lies. Finance is there to facilitate the strategy; it doesn t define it. The level of help from the government means if there was ever a time to consider exporting, this is it. But I think exporting too often falls in the too difficult to do category. The level of help from the government means if there was ever a time to consider exporting, this is it. I would encourage any client to come and speak to us about the support available. Our Relationship Directors are here to help. We are putting a lot of time and effort into the UKTI initiative to double exports by 2020 and to get another 100,000 companies exporting. Stirrings of growth Investment is the key to growth and to shrugging off this prolonged period of dull economic activity. There are just one or two signs, according to the Barclays experts, that growth may be stirring. Based on our account data we have a significant share of the private sector economy in England and Wales going through our books every day we have seen a modest recovery in underlying activity in the opening months of the year, says Roberts. Things did take a dip at the end of last year but in the last couple of months the underlying numbers have not been bad at all. We re seeing cash growth of 4% or 5%. There clearly has been a bounce-back. The activity pick-up is less to do with manufacturing, although that has been a strong sector for Barclays, and more to do with the construction and business services; whereas this time last year we saw a bit more strength in manufacturing. But it is there. There are pockets of health within sectors too, such as retail. Turner agrees. 0.6% for GDP growth this year is a fair reflection, he says. However, in saying that, if the first quarter has delivered 0% growth, the next three quarters will be better in that case. The interactions I have with clients tell me that they are ready to do things when the time is right. Roberts sees a similar picture. Customers are very strong, in liquidity and so on, but it is not yet feeding through significantly into investment. But we think it will. 5 of 7

6 New initiatives The March budget included a range of initiatives to support business, including a further cut in corporation tax; a commitment to implement most of the recommendations of Lord Heseltine s No Stone Unturned report on growth; a 2,000 employer s allowance for firms; 1.6 billion funding for a long-term industrial strategy; the abolition of stamp duty on AIM (the Alternative Investment Market) transactions and a green light, with 1 billion of funding, for the Business Bank. Roberts, a long-time adviser to the Department of Business, Innovation and Skills, believes that these initiatives are in the right direction, particularly the Business Bank. My strong view is that the Business Bank is fundamentally a good idea, he says. Most of the things that were announced in the budget were to do with non-debt lending to try to solve this long-term problem. There is a growing understanding that for groups of business customers who are having trouble getting access to finance at any price reflects the fact that some of the long-term problems of the SME funding model are coming home to roost. The Business Bank is a five-year project, minimum. Part of the plan is that when demand recovers, the bulk of that demand will be for finance that traditional commercial banks, like us, can fulfil. For others, some of the new initiatives, such as business finance partnerships and co-investment funds, as well as the Business Bank, will be more suitable. Barclays is very active in referring companies to the Business Growth Fund. The devil will be in the detail for the Business Bank but I do think this is very much worth exploring. Time to talk about that business plan? Perhaps the strongest message at the moment for businesses with a strong management team and a business plan: Barclays is ready and willing to help. We encourage clients to come to talk to us early about their plans planning ahead will allow a more nimble, and appropriate, response as soon as recovery starts. We do believe that if you take a month horizon, the lending market will look a good deal stronger than it does now. Dr Richard Roberts, Barclays Senior Economist for SMEs As Roberts puts it, Provided firms have got a reasonable business idea and they meet the bank s criteria, they should be able to approach us with confidence. They have a very high likelihood of getting the money they need. Small and medium-sized businesses, he says, will act like a sponge as the upturn gathers pace, both soaking up finance and driving growth. We acknowledge that there is a degree of nervousness out there but we think, as the economy recovers, some of the concerns will fall away. We do believe that if you take a month horizon, the lending market will look a good deal stronger than it does now. So I would encourage people to think about their business plans and talk to us now about how we can help plan for the future. 6 of 7

7 Key takeouts While corporate Britain is healthy, more confidence is crucial for stronger financial recovery The cost of borrowing is at its lowest in 25 years With genuine opportunities in both the product and service sectors, now is the time to consider exporting A number of finance options are available for businesses, including the Funding for Lending Scheme and the Business Growth Fund, alongside traditional loans and overdrafts For businesses with a strong business plan, Barclays is open, ready and willing to help. Find out more about how we can help you. Speak to your Relationship Director or call *. *To maintain a high quality of service, your call may be monitored or recorded for training and security purposes. Calls to 0800 numbers are free of charge, when calling from a UK landline. Charges may apply when using a mobile phone or when calling from abroad. Lines are open from 8am to 6pm Monday to Friday. The views expressed by the author do not necessarily reflect the views of the Barclays Bank PLC Group nor should they be taken as statements of policy or intent of the Barclays Bank PLC Group. The Barclays Bank PLC Group takes no responsibility for the veracity of information contained in third party articles and no warranties or undertakings of any kind whether express or implied, regarding the accuracy or completeness of the information is given. The Barclays Bank PLC Group takes no liability for the impact of any decisions made based on information contained and views expressed in this article. Barclays is a trading name of Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register No ). Registered in England. Registered number is with registered office at 1 Churchill Place, London E14 5HP. 7 of 7