FUNDING GROWTH FOR BRITAIN S SMALL BUSINESSES

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1 FUNDING GROWTH FOR BRITAIN S SMALL BUSINESSES PUBLISHED IN ASSOCIATION WITH LORD DIGBY JONES

2 ABOUT LORD DIGBY JONES Foreword If small and medium sized businesses can t access finance they can t grow. It s a well-known dilemma, but as growth returns to the UK economy it s necessary we solve it. Lord Digby Jones is a British businessman and Cross Bench Peer in the House of Lords who has served as Director General of the CBI ( ) and Minister of State for Trade and Investment ( ). ABOUT URICA URICA is the revolutionary but common sense early payments platform for SMEs. URICA takes the friction out of payment terms by paying suppliers early cash for a small discount against their sales. And it allows customers up to 75 days to settle at no cost to them. So there s no downside for customers. It s not debt, it s not invoice discounting. It s Business on Better Terms For more information please contact: Since the financial crisis, policymakers and researchers have struggled to come up with a solution. The debate has focused on debt, and whether or not banks are lending enough, or if businesses want to borrow. This survey fills a huge gap in our understanding of SME finance. By asking businesses how they feel about both bank debt and payment terms, it seeks to build a full picture of the cash strain down the supply chain. The results are enlightening, and I hope will fuel a step change in our approach to small business finance in the UK. Thanks to everyone who contributed. You have also helped us raise money for Ladies Fighting Breast Cancer and The Prince s Trust. Lord Digby Jones Three out of four small businesses want to be paid early but most would never ask you Lord Digby Jones Katherine Herbert T: E: katherine.herbert@urica.com 2

Lord Digby Jones is a British businessman and Cross Bench Peer in the House of Lords who has served as Director General of the CBI (2000-2006) and Minister of State for Trade and Investment

3 KEY FINDINGS: Businesses expect to grow: 75% of businesses expect to grow by more than 5% in the coming year. Businesses are wary of banks and debt: 32% of respondents don t feel comfortable taking on debt to grow, and 54% don t trust their banks to understand and support their needs. Extended payment is an issue: 82% of respondents have suffered extended payment in the past three years, while 49% said they wouldn t need to borrow if their largest customers paid earlier. Businesses want early payment, but won t ask: 78% of businesses facing extended payment would accept a cash discount for early payment, but half would either hesitate to ask or not ask their customer for this. SAMPLE: Responses were collected from more than 350 UK small businesses with sales of between 1m - 5m (24% between 2.5m and 5m) in Q These businesses had staff numbers of 6 to 49 (20% had more than 20 employees). The typical respondent was the Managing Director covering the following sectors: Respondents by sector Manufacturing 29% Other services 7% Transport & Storage 4% Communications 5% Administrative & support services 6% Retail 7% Wholesale 9% Construction 10% Professional services 23% 3

Extended payment is an issue: 82% of respondents have suffered extended payment in the past three years, while 49% said they wouldn t need to borrow if their largest customers paid earlier.

4 WHY WE DID THIS STUDY The UK economy is finally recovering from the financial crisis and recession. Last year it grew by 1.9% (ONS), the fastest rate since 2007, and economists are predicting growth of 2.5-3% for With growth, businesses need finance. Historically, as many businesses fail coming out of a recession as going into one. Cash strain is the killer of opportunity. Bank lending to SMEs is inevitably scarce following a banking crisis, and payment terms are longer due to larger businesses shoring up their own finances. The government has encouraged banks to lend to smaller businesses and invested in new solutions to build an alternative finance market, but many of these have been based on debt. While studies have examined SME access to finance, most have ignored these businesses desire for debt and the effect of longer payment terms. The purpose of this study was to hear from businesses at the heart of the UK economy ( 1m- 5m) about both these issues. The results will be presented to the British Business Bank and BIS. 4

Historically, as many businesses fail coming out of a recession as going into one. Cash strain is the killer of opportunity.

5 I expect to grow by SMALL BUSINESSES ARE GROWING AND FINANCE IS NEEDED Businesses are growing. Threequarters of the businesses surveyed expect to grow by more than 5% and one-fifth expect to grow by more than 20%. How much business growth do you expect in the next 12 months? 20% + 21% This indicates great confidence among businesses of 1m - 5m in size, but also suggests a large funding requirement % 5-10% 23% 32% Unsurprisingly, 43% of businesses surveyed will need finance to grow, and this rises to 60% among businesses expecting to grow by 20% or more. 0-5% I will need to borrow money to help with growth Don't Know, 12% 24% Yes, 43% No, 45% 5

How much business growth do you expect in the next 12 months?

BANKS AND DEBT MAKES BUSINESSES UNEASY I trust my bank to understand my business needs and support them Disagree 55% 20% strongly disagree 45% Agree The survey reveals a fundamental lack of trust

6 BANKS AND DEBT MAKES BUSINESSES UNEASY I trust my bank to understand my business needs and support them Disagree 55% 20% strongly disagree 45% Agree The survey reveals a fundamental lack of trust among small and medium sized businesses towards banks. Specifically, 32% don t feel comfortable taking on debt to grow. Of the businesses that need to borrow, 66% think their bank will reject their loan application. Over half of respondents don t trust their banks to understand and support their business needs. Given this, it s unsurprising that lending rates are down, and that attempts to increase them have met with lacklustre results. A cure has been elusive because most of the solutions proposed (overdrafts, factoring) have been debt-based. Are you comfortable taking on bank debt to fund business growth? % Do you think the bank would support a loan application? % No I don t want to take on more bank debt 21 No, I doubt it but I d apply 33 Not really, but I don t have a choice 11 No, I wouldn t bother applying 33 Yes, even though I don t currently have bank debt 36 Yes, I d expect so 32 Yes, I already have some bank debt 32 Don t know 2 6

Of the businesses that need to borrow, 66% think their bank will reject their loan application. Over half of respondents don t trust their banks to understand and support their business needs.

7 EXTENDED PAYMENT TERMS ARE IMPACTING NEARLY EVERYONE In the last three years, 82% of respondents have suffered extended payment. Astonishingly, 59% of these businesses were not even given notice. The fact that 49% of surveyed businesses wouldn t need to borrow if their largest customers paid earlier shows the true effect of longer payment terms. If a company is in the middle of the supply chain it can mitigate the effects of extended payment by passing them on to its suppliers. A business at the bottom of the supply chain doesn t have this option. This is the structural flaw in the UK economy: the smallest businesses, with the least ability to borrow cheap cash and the fewest finance options, effectively provide free credit up the chain. With SMEs making up 59% of private sector employment and 48% of turnover, extended payment is a real risk to our economy. This is especially true as the economy grows. I've had to accept longer payment terms from some of my customers over the last three years 18% Yes Disagree, 50% No 48% 35% They just started paying later If my largest customers paid earlier I wouldn't need to borrow Don't know, 1% They requested extended credit Agree, 49% 7

If a company is in the middle of the supply chain it can mitigate the effects of extended payment by passing them on to its suppliers.

8 MANY BUSINESSES WANT TO BE PAID EARLIER EVEN AT A DISCOUNT BUT ARE UNLIKELY TO ASK THEIR CUSTOMERS Of the businesses that have suffered extended payment terms in the last three years, 78% said they would accept a cash discount to be paid within five days. If my customer paid within 5 days of invoice date I would be happy to take a small discount (equivalent to 200 on a 10,000 invoice being paid 50 days earlier) However, 54% of these would hesitate to ask or would not ask their customer for early payment because of the perceived stigma. Early payment by large customers is a cash solution for SMEs. Unlike debt, it doesn t add risk or complexity to the business. No wonder businesses would prefer this option if it were available. Agree 30% Strongly Disagree 7% Disagree 19% The findings together strongly suggest that if large customers offered early payment to their suppliers at a discount, many small and medium sized businesses would opt for this. Strongly Agree 44% I'd ask my customers for an early payment if I was having cash flow problems I'd have no problem asking at any time, 47% I'd never ask, 18% I'd be hesitant to do so because of the stigma, 34% 8

If my customer paid within 5 days of invoice date I would be happy to take a small discount (equivalent to 200 on a 10,000 invoice being paid 50 days earlier) However, 54% of these would hesitate to

9 FOR MORE INFORMATION Ian Fitzharris E: T: Katherine Herbert E: T: URICA Limited Somerset House Strand London WC2R 1LA 9

com T: 0207 193 4389 Katherine Herbert E: katherine.

THE BRITISH ECONOMY NEEDS YOU

THE BRITISH ECONOMY NEEDS YOU Contents HOW DOES IT WORK?... WHAT S IN IT FOR YOU?... WHAT S IN IT FOR YOUR SUPPLIER?... ZERO DEBT... NO FEES... EXPORTS... OUR PEOPLE... HOW DOES URICA DIFFER FROM DEBT