SMEs need aid for working capital, not new equipment

Gerry Hoare
Thursday, November 24, 2011

Any help that can be given to SMEs is going to be worth trying. However, I can see a number of pitfalls and problems with this structure. How many businesses will actually need to go and buy new capital equipment?

Many companies on the lead up to the recession were investing and much of the asset finance out there has been in place for less than 5 years, so much of the plant and equipment is in good condition. Also, the fact that the scheme is geared towards investment in machinery does limit the beneficiaries to certain industries, although the print sector is one of those.

In my experience, new equipment can often result in fewer staff being needed, because generally there are improved efficiencies. That clearly would be a problem under the new £95m grant scheme, which specifies that the investment must create or at least preserve jobs. But what is to stop a company saying it will save jobs, getting the grant and then making people redundant after 3 months? How will this be policed and monitored?

Insufficient security
One of the qualifying criteria for the grant is that the company fails to meet the bank’s standard loan criteria, with the exception of a lack of security, as this is what the separate EFG scheme is for. However, if the customer can’t pay a sufficient deposit for the bank to want to finance the asset purchase, because the secondary asset value isn’t high enough, does that count as insufficient security? If the problem is that the bank doesn’t believe the company can service the monthly repayments of the asset at a higher loan amount than the grant, solve this by allowing the company to borrow less, meaning lower monthly repayments.

But given the size of the grants, if the company can’t afford the repayments at the original level, how low does the loan need to be to make the bank comfortable? I can see a case where the banks might say that because of the depressed secondary value of assets, they will only provide 60-70% loan-to-value on asset finance compared with 80% four years ago. The upside: it will generate more asset finance and help SMEs to invest and potentially grow their businesses. The downside: all it is really doing is passing the risk in a default to the government and taxpayer.

This leads me to think £500m of investment  is on the optimistic side. There is a £95m fund, which is expected to be used alongside loans of two to five times the grant value. So, at best, it will be £475m and possibly as low as £190m. Given the banks’ current attitude to risk and lending to SMEs, I wouldn’t mind a wager that the total benefit is nearer to £200m.

This is aimed at growing businesses that might want to invest in new equipment. There is nothing wrong with that – in fact, it sensible.  Clearly the banks are more likely to want to lend to a company that can demonstrate growth and serviceability in terms of repaying the borrowing. However, since the many businesses in the SME sector currently feeling the effects of recession probably need more assistance with working capital than the ability to invest in capital equipment, I am struggling to see who will benefit.

Gerry Hoare, director, Deal Bureau

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