Firms Seeking Finance Have to be Creative
27 May 2015
Headlines over the past number of weeks highlighting cuts in funding to the arts, environmental and voluntary sectors in NI and the continued discussions regarding welfare reform have brought into sharp focus the significant funding challenges facing the Northern Irish economy over the coming months and years.
As the extent of the contraction in public funding becomes clearer, the renewed importance of addressing issues around access to finance for NI businesses, particularly small and medium sized businesses, once again comes to the fore.
The hoped for devolution of corporation tax powers to the Northern Irish Executive may be on hold pending agreement on welfare reform, but it is clear that the strategic aim of rebalancing the public and private sectors in Northern Ireland will require sustained and sustainable growth in the private sector. The recent Danske Bank Quarterly Growth Report suggests that although growth has slowed in recent months, the NI economy is predicted to grow at a rate of 2.2 per cent in 2015. The private sector will continue to grow with smaller sectors such as ICT and professional and scientific services outpacing the traditional sectors such as manufacturing and construction. So, if growth is to be sustained and increased, what funding options are available to NI businesses?
Invest Northern Ireland has developed a suite of six funds under the “Access to Finance” banner totalling £170m of available finance. These funds are either debt or equity based and are designed to support businesses at all stages of development and all sizes of business. They run from loans of between £1,000 and £50,000 provided under the NI Small Business Loan Fund through the techstart NI fund, which provides funding of up to £250,000 for start-up and early stage businesses, the Growth Loan Fund and Co-Fund NI which focus on SMEs, and the Development Funds 1 and 2 managed by Kernel Capital and Crescent Capital, which can provide funding of up to £3m.
There has also been a welcome increase in peer to peer lending and angel and crowd funding initiatives. Halo, the NI Business Angel Network run by the Northern Ireland Science Park, has generated more than £9m of business Angel money for NI start up businesses since it was established. The British Business Bank Angel Co-Fund recently completed its first NI investment in ‘Sophia’, the AI software developer.
There are also increasing numbers of private investors both home grown such as Lough Shore Investments which focus on start-up businesses principally based in NI, operating in the web, mobile and enterprise spaces, and GB based entities such as Assetz Capital who specialise in peer to peer lending.
As well as equity investment, venture capital and peer to peer lending, established businesses can often avail of more traditional finance options such as asset based lending and invoice discounting. In the UK, there’s been a significant increase in asset based lending with businesses now using 38% more asset based finance than at the height of the recession in December 2009. In Q 4 of 2014, £19.4bn of asset based finance was provided to UK businesses with a further £20.5bn agreed facilities available for use. Funds available to Irish companies by way of ABL reached €3.3 bn, an increase of 41% in 12 months. 80% of asset based finance is invoice finance in which businesses secure funding against unpaid invoices, whilst the remaining 20% is represented by asset based lending, where businesses can raise money secured on a range of assets they own, including inventory, property and machinery.
Despite the growth in these alternative sources of finance, bank funding remains the single most important source of finance for NI businesses. Figures for bank activity in Northern Ireland in Q 4 2014 recently released by the BBA indicate that approved new borrowing by SMEs in Q4 was £387m – 8% more than Q4 in 2013. This reflected a loan approval rate of 9 in 10 applications. More than one third of loan applications approved were in the agricultural sector and accounted for a quarter of the total funding approved, reflecting the importance of the Agri-Foods sector to the NI economy.
As the Deputy Governor of the Central Bank of Ireland, Cyril Roux, recently commented: “Despite new and welcome initiatives to diversify sources of funding, SMEs cannot but rely on banks to provide the credit they seek to function and expand.”
In this context, dealing with the overhang of distressed loans and residual property debt held by some SMEs is also a key component in the regeneration of the sector. Whether the sale of the NAMA loan book, and the ongoing sales of loans by other lenders in the NI market leads to increased liquidity, and an enhanced capital base for existing banks to lend remains to be seen.
This wider range of financials tools for businesses to enable growth is a fundamental ingredient in developing the Northern Irish economy. It requires continued innovation and flexibility on the part of the market place - be that from the mainstream banks, VC funds, peer lenders, investors, or government.
However, it also requires an enhanced awareness on the part of businesses of the source of funds available to them. Initiatives like the SME Centre at the University of Ulster’s Business School and initiatives such as the Small Business Can forum will be important factors in spreading the word about the sources of funding available.