Businesses need to loosen purse strings and fund recovery

BUSINESS leaders need to rethink their approach to funding and finance to ensure a smooth path to recovery, according to HSBC Commercial Banking.

According to a report by the bank, which questioned more than 2,100 small businesses and interviewed 30 business and economic experts, companies are set to come out of the recession leaner and fitter.

By restricting cash flow, reducing costs, drawing on their own resources and restructuring, it highlights that strong gains have been made in business models for the future.

But it warns that if companies continue to tighten their grasp on the purse strings at the expense of investment they could unintentionally hamper their recovery and miss out on opportunities to grow and prosper.

The report investigated motives for borrowing and found the majority of businesses are saying they don’t need money (80%) because they are tightening their belts and running down their own resources or have put money in themselves (53%).

According to the research, two thirds of respondents are confident in their ability to secure bank finance and felt their bank would be likely to extend current lending facilities.

Just 17% said they weren’t seeking finance because ‘banks weren’t lending’. In the last year company turnovers fell by an average 19%.

Businesses in the North East and Yorkshire have fared better than most however over the last 12 months.

Overall turnover has shrunk marginally (by 0.7%) and companies older than six years have actually grown by 15%.

More than 20% of businesses in the North East are looking for finance now, predominantly for investment, and while this is much higher than for Yorkshire, it does suggest that the region as a whole is showing signs of emerging from the recession.

However a combination of business cash flow, accompanied by a deep unease about increasing levels of indebtedness when turnover growth prospects are limited, has had an impact on the extent to which business owners have sought finance to help them through the crisis.

The signs are that the market is picking up and although there may be a dip after Christmas, or even after the next election, confidence does seem to be building in the region’s economy.

Commenting on the report Mark Vines, HSBC regional commercial director, Yorkshire and the North East, said: “It’s essential that businesses now look to the opportunities arising from the recovery, and this means talking to their banks, actively reviewing their financial options and making themselves fighting fit to go about the business of recovery.

“We will continue to support our customers to help them take full advantage of the opportunities that come their way as trading conditions improve.”

HSBC Commercial Banking said firms needed to start taking a longer-term approach and that if firms didn’t act now they wouldn’t have the resources to weather the recovery.

A third of businesses (32%) said access to finance was likely to be a key challenge in 2010 but 85% of respondents said they weren’t currently seeking external finance.

When companies do seek external investment, the main reasons behind it are to finance growth (81%), working capital (70%) and investment (60%).

Far fewer are looking for finance to manage their current money situation with 43% seeking money to ease cashflow, 12% to repay debts and 9% to consolidate debts.

The key types of finance being sought are loans (51%), a bank overdraft (22%) and grants (16%).

The report also found that 27% of real estate and finance businesses are currently looking for finance while 89% of retail firms are looking to fund growth.