Oral evidence: Access to Finance, HC 866Wednesday 4 May 2016
Oral evidence, 4 May 2016.
Witnesses
Andrew Sandiford, Partner, Bishop Fleming, and Simon Littlewood, Partner, Grant Thornton, gave evidence.
Chair
Gentlemen, we will make a start. We are slightly early, which is unusual for my chairmanship. Welcome to the Business, Innovation and Skills Select Committee. We are grateful for your time. For the purposes of the record, could you tell us who are you and which firms you work for?
Andrew Sandiford
I am Andrew Sandiford. I am a partner in a firm of accountants, Bishop Fleming. We have seven offices, down through the south-west and up into the west midlands. I am here today representing the Institute of Chartered Accountants in England and Wales.
Simon Littlewood
I am Simon Littlewood. I am a partner at Grant Thornton.
Chair
I started the first panel by asking how the landscape of access to finance has changed since 2008. What are your experiences of that? How has it changed?
Andrew Sandiford
It has certainly changed. It is a very different world now. The providers have changed. The banks are different. There is no doubt about that. The banks are doing different things now. There are a lot of new entrants in the market. It is a very complex market now. The other thing, as was touched on in the earlier session, is that we are dealing with a scarred generation. There are some people out there who were very badly hurt during the financial crisis. There was some bad stuff going on in 2007, 2008 and 2009. A lot of people and businesses have a very jaundiced view of the banking sector, perhaps not always rightly so, but they have that view and those scars run very deep.
Simon Littlewood
It was covered a little before, but the variety of different places where you can find money now is unrecognisable from where it was. In 2007 it was easy to get money, because you could just go to the bank and get it. That dried up on the back of the crisis, and there was a proliferation of various different providers with creative ways of doing it. Mini-bonds emerged, which did not exist, at least not in the way they do now, and peer-to-peer platforms—that sort of approach. Even the banks themselves were looking at shifting rotational credit into things like asset-based lending and aggregation and that sort of thing.
Chair
Is access to finance still a problem?
Andrew Sandiford
It is very difficult. It is difficult for businesses to get finance. Because of that proliferation and variety, there is a need for a lot of advice. Historically, a business would have gone to the bank, asked for an overdraft and probably got it. That is unlikely to happen now. That funding is out there, but it takes a lot of finding; it takes a lot of digging around to get to the right sources and right places. Yes, it is a problem. It might not be the problem everybody thinks it is—that the banks are not lending. Bank bashing is a popular pastime and we all do it—I do it a bit. We all enjoy it a little, but the banks are doing something different now. The funders are different. Yes, it is a problem.
Chair
Simon, has your experience been the same?
Simon Littlewood
I come from a school of thought whereby there is not a problem with the availability of finance. The challenge is for people to understand what lenders are looking for and where to find it and what the different options are. To put that in context, we delivered what was GrowthAccelerator and the national Manufacturing Advisory Service over the last few years. 28,000 small businesses came through that process. Of those selected through the access-to-finance stream of activity, 87% of those who took some advice around what they were looking for around the finance were successful in terms of receiving funding afterwards. That represents an uplift of over 30% on the market average.
Andrew Sandiford
It is true those who seek advice are more successful. There is a longstanding statistic that less than 10% of businesses seek advice before applying for an overdraft.
Chair
I am going to come on to that, because that is very interesting. In your opening remarks, Andrew, you said the whole landscape is very complex and, Simon, you said there is a variety of different places where you can access money these days. If I have a small business with a great idea that I want to grow, what on earth do I do? There is this myriad different things. The Government have an initiative by the hour. I do not know where to go. What happens, and how do we make sure we simplify and clarify this for the benefit of high-growth small businesses?
Andrew Sandiford
I did a little exercise yesterday morning: “Okay, I have been told I need advice; where do I go?” “Growth hubs,” is the answer. I googled “growth hubs”. For a start, you have 39 different LEPs providing growth hubs, so I looked at four of the seven that relate to our geography—the south-west and the west midlands. Those four were all completely different. Two of them said, “This is only a provisional site”. One of them did not mention growth hubs at all, and the other was so complex in its description of what it was, I had given up before I had got beyond the home page. There is regional variation, and we have to have something that provides for that regional variation. We also need some consistency, however, and growth hubs are not doing that at the moment. There is a need for professional advice. We see it time and time again with clients coming to us. I will give you an example. A furniture business down in the south-west came to us having been turned down for an overdraft. He wanted £400,000. He had gone to his bank and asked for an overdraft, which is what he always does. “No” was the reply. He came back to us as a scarred businessman, but with some advice we pointed him in the right direction to a specific asset-based lender—one of the challenger banks—that can provide funding for that stock. However, he had gone to the wrong place. We could have saved him a lot of pain, time and anxiety had he sought advice in the first place and got the signposting to go in the right direction.
Simon Littlewood
It is worth listening to the market for where the answers come from. I see this consistently, echoing Andrew’s statements, in surveys—and Government small business surveys, in fact—in terms of where people go for advice that they trust. A lot of the challenge with access to finance is around confidence and decision making. If I feel like my house is on the line, I need to be really confident that is the right sort of finance for me, for instance. People tend to go to professionally accredited people for advice that they feel they can trust. We are an accountancy firm, but this is not just about Grant Thornton. I am slightly nervous of the number of Government-backed bodies that launch with a new website every few months. I am not sure they necessarily have the longevity to be able to create a position as a trusted source of advice. They pop up, and if you are lucky you see them.
Paul Blomfield
I am interested in exploring the reasons for bank rejection of applications. When I talk to SMEs, primarily engineering ones that have been around for a while in my constituency, their assessment is that it is because banks used to trust their local guys to make decisions. They still have a positive interaction at that level, but when decisions process up the food chain there is a one-size-fits-all evaluation of risk, which is when the refusal comes in. Is that them looking back rosily to a relationship they had in the past that perhaps they did not, or is that the way you would see things going wrong with traditional banks?
Andrew Sandiford
There was some conversation earlier about where the gap is: the size of business or the size of loan where there is potentially a problem. Certainly, from our experience, there is a point below which everything gets passed up the chain in a very formulaic manner. It is a form-filling exercise. If you do not tick all the boxes, the rejection comes back down from on high: “You have been declined.” That human interaction is missing. It is probably those looking for sub-£500,000. Sub-£500,000, you do not really get the bank’s attention, and therefore it is an automated, bureaucratic form-filling process, and I think that is a problem. I can understand why. There has to be some efficiency of delivery. One has to acknowledge the inherent conflict between de-risking the banks and asking them to make more risky loans. There is a conflict there.
Simon Littlewood
One element in that is people reminiscing about a time when things were easier. Now that things have changed—some of the lending criteria have changed and the risk profile has changed—it is easy to reflect back, as you identified, on a time when things were easier and think things are bad. Through delivering the Manufacturing Advisory Service, we ran some finance expert seminars for small and medium-sized manufacturers. There were 900 of them around the country in various different places. It was absolutely apparent how little dialogue they had with their banking and lending providers generally, although obviously there will be exceptions in there. However, that comes back to confidence in decision making, where there is a sense of nervousness of that interaction with the banking community—whether from the media or direct experience of someone calling in a loan at short notice or whatever it is. I am not sure all the evidence is there to support it, but it exists in the minds of people running businesses: “Do I want to have a conversation with the bank about some more lending there? Is that going to open up another much broader conversation about all the facilities I have with them,” and all those sorts of things. Quite a large amount of that is myth. It is about confidence in decision making. What are the benchmarks? What could they reasonably expect? That is just about knowledge.
Paul Blomfield
I can certainly see that, but within the banks themselves there is a shift of approach post-crash. Is the driver for risk cultural and their own experience, or is it a sense of a tougher regulatory framework?
Andrew Sandiford
That is a question for the banks. We see the high street banks taking less risk—there is no doubt about that. Whether they were taking too much risk in the past is an interesting debate, but it is certainly a different approach in terms of the high street banks, and you need to prepare your case well and have a very clear evidence-backed proposition to take to the bank, otherwise you will not get anywhere. That human intervention is reduced.
Simon Littlewood
They are commercial organisations that have responded in terms of their risk profile. There is a sense that what has not proliferated is the communication of what they are looking for in terms of lending, as opposed to just saying, “Not you, not you, not you.” That dynamic has had a broader impact on the market.
Chair
If you are that 22-year-old with a great idea in his or her bedroom but no credit history or assets, would bank financing be right for you? Where would you access that money in order to take forward your idea?
Simon Littlewood
A wonderful part of the market is around angel finance and that early-stage part of the market. How do we support that earlier stage? EIS, SEIS and such funds are bringing more capital into that space and encouraging more people to invest in higher-risk investments there. That is the starting point. You asked about things we could be doing, and one is raising the awareness of potential investors in that space of the EIS schemes and those sorts of things. They do well. If you look at repeat investors through those schemes, there is a good story there. I am just not sure how broadly it is told.
Amanda Milling
I have a couple of things I want to pick up on. You talked about the likelihood of being lent to by the banks. Does it vary between the traditional and challenger banks? Are you seeing any variation in their likelihood to lend?
Andrew Sandiford
There is an important distinction between what people are approaching the traditional banks to get and what they are getting from the challenger banks. A lot of the challenger bank lending is around asset-based finance. The challenger banks are not doing a great deal of mainstream banking. You do not go to Secure Trust Bank or whatever it might be to ask for an overdraft; you go to finance some specific assets. Again, un-statistically and anecdotally, I would say people are probably more successful going to the challenger banks, but that is probably because they are going with a very specific ask for a very specific purpose, rather than—going back to my example—asking for a £400,000 overdraft because that is what they have always done.
Amanda Milling
That goes back to the question I asked in the last session. On Friday I met a business that went to their bank and was rejected for a loan and ended up switching their bank. Is that something you recognise?
Simon Littlewood
That is part of the business model of the challenger banks. A large amount of SME lending is structured as a loss-leader for some of the banks anyway. They are looking for the broader bank relationship in terms of facilities around exchange rates and other services they can sell around all of that. For some of the lending schemes of some of the challenger banks—and even some of the more established retail banks—the expectations of switching other services to those banks is the motivation for that lending. The effect might be that somebody gets access to capital that is appropriate for them. They might not care who does their other banking services. It is important to recognise that is a factor in how they are addressing their need in their own business models of building market share. That is why they are there.
Amanda Milling
Are they being selective? When they are looking at that, are they looking at that business and all of its growth plans and export plans? Are the challenger banks and the less traditional banks looking more innovatively or more widely in terms of the opportunity?
Simon Littlewood
I do not have the evidence base to answer that, but I would say they are more creative. Certainly, if you look at what measure tends to get done and the measures they use to demonstrate their positioning in the market, it is around client acquisition rather than volumes lent.
Amanda Milling
The bank says “no”, and you have talked about clients coming to you for signposting. What role are the banks currently playing in signposting to alternative finance options?
Andrew Sandiford
Currently, not a great deal. We have the new regulations coming in later in the year that will require them to signpost. We will have to wait and see how well that works. A mechanistic signposting to an asset-based lender just because that is what the computer churns out is perhaps not going to achieve a great deal. There is some self-interest in there obviously, but coming back to that advice piece is important. I do not know whether the banks are able to provide that advice, but there is a need for assistance to navigate this very complex market we now have, rather than a list of alternative providers.
Simon Littlewood
It is not contradictory but may just be the scale of client base. Certainly, we have very good relationships with a number of the banks, and we will do things like seminars where we introduce other types of crowdfunding platforms and that sort of thing. The point was raised earlier that they are not necessarily competing. Some of these are different sorts of money for different sorts of things, and that is okay. Part of it is them sharing what they are interested in, so that the quality of referrals they get as the bank is more appropriate for the sorts of money they are looking to get to market. They are not pretending that they are everything to everyone. Our experience is that they are quite happy to even try to educate some of their existing clients and prospects around the various different forms of finance available.
Amanda Milling
In order to fulfil their obligation as a result of the Act and be successful, what do you think the banks need to do?
Andrew Sandiford
As Simon says, it is about having a proper conversation. I do not see any value in a rejection letter having an extra page appended to it with a list of alternative providers on it. Frankly, I do not think that is going to achieve a great deal. More engagement would be hugely helpful, but I will go back to the point that I was discussing just now about the smaller applications that are dealt with in quite a mechanistic way. I have some concerns there.
Amanda Milling
Is that the way the banks will end up going: “Here is your rejection letter and here is the list of finance options”?
Andrew Sandiford
I do not know. It is my fear that that is the way it might go.
Chair
This is an important point. Why would banks want to say to a rejected applicant, “Here are our competitors, and you might go there and get all your banking services, and we are signposting you in that direction.” There is no real motivation, so how will it work? How will this be enforced?
Andrew Sandiford
To Simon’s point, they are not necessarily competing in all arenas. That is part of what we now have in this very complex market. There are different providers for different parts of the market. I do not know how it will work in practice. I do not know what the banks are planning. I have not discussed with the banks how it will happen.
Chair
In your experience with your clients, do the challenger banks have a lower risk profile?
Simon Littlewood
I do not think so. There is a real danger of assuming that, because someone puts an application into a bank, they should have money. It is perfectly fine to say, “That is not a sensible thing to do with either Government money or somebody else’s money.” To put that in context, last year, on the largest crowdfunding platform in the UK, over 95% of applicants were rejected. It is an important point: some things are rejected for the right reasons.
Andrew Sandiford
I would echo that. Bank finance is not the right answer every time either. Crowdfunding—be it equity funding, debt funding or asset-based lending—may well be a better answer. Just because 10 years ago it was always the overdraft or the short-term loan does not mean to say we should be striving to get back to that today.
Kelly Tolhurst
I have a small point about private investors, mainly regarding Mr Sandiford’s experience. I have seen the market change over the last 10 years in regard to being able to access private finance, which 15 years ago was probably not really an option for small business. In your experience, with your clients, have you noticed that there are people now looking far more to invest? You may have seen that across your client base, with the different markets that you are in. Has there been an increase? Are people more willing to take risks with their private investments to help other organisations?
Andrew Sandiford
There are a few different areas. Crowdfunding is working for a number of businesses. These are very small clients. One example is a retail operation set up in town. It was a little quirky and different; crowdfunding worked extremely well for him, and he had no shortage of applicants to back him, because it was a good proposition. At the other end of the spectrum, a luxury product business looking for a multi-million pound deal found a private individual who just said, “Yes, I have X million pounds and I am prepared to put it into this business.” There are people out there looking to invest, undoubtedly. They will say the challenge is finding the good businesses to invest in.
Kelly Tolhurst
I know it is anecdotal, but from your experience has the number of people willing to do that increased significantly over the last 10 or 15 years?
Andrew Sandiford
It has, and it is a reflection of a number of things. The demand is clearly there; interest rates are low, so what else are you going to do with your money? People are more willing to invest. I think there are more people out there prepared to do so.
Simon Littlewood
We were involved a little in the SEIS developments, and I absolutely agree that there is more willingness to explore. The success of the EIS schemes has encouraged people, just in terms of conversation, so that awareness has grown. Interestingly, the classification of those as high-risk investments by the FCA meant that, were normal IFAs—independent financial advisers—to advise any client to put money into those, it would have had an impact on their professional insurance premiums. If you imagine they are a large representative of the market and, as trusted advisers, influencing whether people are putting money into those things or not, some made the choice not to pay the additional premium to be able to do that.
Chair
Kelly has raised an important point in respect of the flows of finance. We are looking at access to finance and any problems. Is the problem with access to finance not a funding gap but an information gap; that we are just not getting the right routes in terms of marrying up people who want to invest with the people who require the capital?
Simon Littlewood
That is certainly our experience. As you say, 87% of the businesses coming through that were prepared to take advice were successful in raising their finance after application. That is not because it was transformative; their business plans did not change wildly; they did not change things. It was about some support in terms of that and alignment with appropriate funders, and knowledge of what those funders were looking for. As you say, it is that matching service.
Andrew Sandiford
I would agree. Those who seek advice and have access to the networks and knowledge are successful. That is critically important.
Chair
So there is plenty of money to go around. It is just making sure that capital identifies potential in businesses.
Andrew Sandiford
It is a big statement to say there is plenty of money to go around, but in our experience those who take advice have a good chance of finding what they are looking for. It might not be from where they expect it, but we will get them to the right place.
Chair
We heard from the first panel, and as a theme throughout many of our inquiries, that there is a small and undeveloped venture capital ecosystem in this country, certainly relative to the United States. Is that fair?
Simon Littlewood
I am not sure it is that small or that new. We really started proper VC-type investment in this country in 1983. What is interesting is the appetite to back particularly high-growth ventures at a particular point. There is lots of private equity in terms of established property deals and big familiar-type large funding investors. There is a gap relative to the States or others around that second tranche of investment into high-growth scaling businesses where, frankly, it is easier to go to somebody. We had an international investor in my own business, because we were interested in their ability to take us to a global scale. That is really appealing and why we see companies like Huddle getting to a certain stage and then taking investment from Matrix and others from the US coming into the UK around Tech City. Where you are making a decision for that type of money, having somebody who has the experience of doing that a number of times is more appealing, so they tend to exist elsewhere.
Richard Fuller
You were sitting in during the previous panel’s evidence. I just want to clarify where you see the second stage. By that do you mean Series B and the £10 million to £25 million like the previous people, or do you have a different view?
Simon Littlewood
I am not suggesting there is necessarily a gap in the funding. I am just not sure it is provided by UK venture funds. You can find money, but it might be an American-backed fund.
Richard Fuller
I appreciate that. I just want to get the scale. Is £10 million to £25 million—second round funding—the area you are talking about in terms of scale of investment?
Simon Littlewood
That sort of space, yes.
Richard Fuller
Within that, is it an issue specifically for high-growth businesses, or is it a generic issue? It could be a construction business that wants to build a new wing to its widget factory.
Simon Littlewood
It is focused on high-growth businesses rather than established sectors, where effectively there are similar models operating at different scales, whether it is property or construction. You have PE houses that already have the financial models that help them make their decisions.
Richard Fuller
Sorry, I was making a slightly different point. One company is essentially looking to add a new production line for a new product or way of packaging its products versus, on the same scale of investment, one that has just £500 million revenue and is losing £3 million but growing 500% a year. Is the funding gap at the next round—£10 million to £25 million—the same problem for those two examples, or is it industry‑specific? We heard earlier it was sector‑specific too.
Andrew Sandiford
There has to be a significant growth dimension for those equity investors to be interested. That goes without saying. Drawing on personal experience, two clients of a similar size were looking for a similar sort of investment—at the bottom end, but in that tier B space. The first, because it is a far more attractive business with a much better growth story, had I think seven proposals from private equity houses, and the second did not get a single proposal, because it was construction, broadly speaking, and people are scared of construction as a sector.
Chair
We have talked about sectors and whether there are particular sectors that are unfashionable and unloved by potential investors. What about regions? In your experience—and, Simon, maybe in terms of Grant Thornton being national—do you find that the further you go from London, the more difficult it is and the less developed that ecosystem is? This is in terms of not just VC but also banks and what they do.
Simon Littlewood
I am very happy to submit some papers with some evidence to follow this, simply because there is a wealth of evidence we have exactly around the regions, by LEP, of different types of funders, where the Business Bank supported and the rest of them. I will leave some of this with you, but there is some variability. My concern is that the regional focus might result in a business in the north-east not being aware of the opportunity of funding in another part of the country that would be absolutely appropriate for them. There are absolutely regional focuses and different sorts of elements. Angel finance will tend to be easier to raise in the south-east, for earlier-stage businesses. The slight nervousness is that, without some sort of national connectivity, you are left with the pool you operate in. That is determined by geography and your postcode, rather than what might be the best source of capital for you.
Chair
Is that the market failure that the British Business Bank should step into and resolve? How is the British Business Bank going?
Simon Littlewood
In terms of that £210 million that went into a range of businesses at that early stage, the Business Bank and those backed funds were just over 20% of all those funds going to the market, reflecting that that is in the first couple of years of the Business Bank being up and running. I think the Business Bank is making an impact. I think someone else referenced the idea that, if you are doing something, do it and stick with it and allow it to evolve. Be confident in the decisions we have made and let it grow. It is on the right track in that regard.
Andrew Sandiford
The Business Bank is an interesting one. It is something of an unsung hero. If you talk to most of my clients, they probably will not have heard of it, but a lot of them will have been touched by it through the various schemes and the wholesale distribution that they do. I would echo Simon’s point; it needs to be given time to flourish, because it has made a promising start and it would be a tragedy to see it terminated in the short term.
Chair
It needs to be a long-standing part of our financial and institutional architecture. Is it big enough to make a difference?
Simon Littlewood
If 20% of the businesses we are seeing funded through that are being funded by those sorts of funds, it is already having a market impact. That is a good indicator. I am not sure what the future holds, obviously.
Chair
If there are no further questions, I would like to thank you for your time. That has been incredibly helpful. We find that really useful. Simon, if you could send us that regional information, that would be very helpful as well. Gentlemen, thank you again. Oral evidence: Access to Finance, HC 866