The survey found that more than a third of small and medium enterprises (SMEs) do not have enough reserves to weather a renewed economic downturn. Cash reserves are the strongest determinant of an SME's ability to obtain financing. Lenders now require solid collateral for loans, and SME business plans must convince lenders that funds will be used for capacity building rather than extending credit to customers. While some SMEs have no choice but to rely on unsuitable sources like personal credit cards, owners should try to avoid running for the exits and consider alternatives like easier supplier credit terms.

1. 32
rocky recovery
Many parts of the global economy are returning to growth, but research
shows many SMEs are still in danger, reports ACCA’s Emmanouil Schizas
I
t is now more than two years sales, and it is easy to assume that all loans to small businesses must be
since the collapse of Lehman many of the problems they are facing secured against assets, typically ones
Brothers, which triggered the will be ironed out when growth returns. worth much more than the loan itself.
worst global economic downturn In reality, ACCA’s Global Economic This used to be the understanding in
in living memory. Small businesses Conditions Survey suggests the recovery developed countries too – until the
that survived will barely have had has run out of steam, and the Forbes credit bubble began. With the end of
a moment to pat themselves on the survey found that more than a third of the bubble the demand for security is
back – the long climb to recovery SMEs haven’t got enough reserves to back with a vengeance and will be with
is almost as treacherous as the weather a renewed downturn. Yet even us for years to come.
downward slide was. sustained growth will put serious strain
Last year, ACCA joined forces with
two other major accountancy bodies
– CGA-Canada and Italy’s CNDCEC –
on the finances of smaller businesses:
Chinese SMEs, for instance, are less
confident about the adequacy of their
04 Lenders will not finance an
SME’s customers and investors
will not refinance debt. Although many
and commissioned Forbes Insights cash reserves than British ones. business owners will try all possible
to survey nearly 1,780 small and options in order to resolve a financing
medium-size businesses (SMEs) in
six countries: Canada, China, Italy,
Singapore, South Africa and the UK.
02 Cash is king. In this as in other
studies, cash has emerged as
the strongest determinant of success
problem, different types of finance are
not always interchangeable: who you
should be talking to depends on what
We wanted to know how SMEs were in raising funds. This is partly because your needs are.
coping in the economic recovery, and the need for liquidity is driving most of Our findings confirm that, although
how finance and financial advice were SMEs’ demand for funds, and partly lenders will finance a small business’
contributing to their efforts. because lenders, in particular, are now working capital, they don’t like the idea
Many of our findings are impossible more risk-averse and less reassured by of their funds being used to extend
to take out of context: the six countries promises of sustained growth. SMEs credit to customers. To a bank, this is
considered in the Forbes study are too that can prove, through solid planning a bit like outsourcing part of their risk
different for that. Nevertheless, some and forecasting, that they are in control management and debt collection to
common lessons can be drawn. of their cashflow will have a better you, which rarely makes sense.
chance of getting finance. The business plans of SMEs seeking
01 We’re not out of the woods
yet. As the global economy
continues to edge forward, most SMEs 03 Collateral is here to stay. In
most of the developing world it
credit need to reassure the bank that
their funds will be used for capacity-
building purposes – investing in
are looking forward to a rebound in is a generally accepted fact that nearly tangible assets is usually a plus.

2. 33
The survey found ThaT more Than a Third
of smes haven’T goT enough reserves To
weaTher a renewed downTurn
Similarly, investors prefer to provide either your suppliers, your own savings, some may genuinely have no other
funds for national and international or even those of your family for funds. option, they should try to consider
expansion, including the hiring of staff. alternatives while they can, such as
But bringing in an equity investor such
as a business angel is much more
difficult if a business has debts it
05 Don’t run for the exits. As
lenders gradually withdraw from
unsecured lending and turn away from
suppliers – agreeing easier credit
terms is better for both parties than
being late with payments.
needs to refinance. customer credit risk, many business
External finance may not be
forthcoming from conventional
providers for SMEs facing either of
owners unable to obtain funds are
falling back on potentially unsuitable
sources of finance, especially personal
06 SMEs are banks too. Credit
from suppliers is the most
commonly used source of external
these two problems. If the business credit cards and late payment. These finance among SMEs. In some
is not making profits you can reinvest: expose SMEs to substantial financial countries, the flow of trade credit is
you will almost certainly need to tap and reputational risks, and although twice as large as that of short-term
In 12 months, what do you anticipate turnover In 12 months, what do you anticipate profitability
will be compared with today? will be compared with today?
1% 1%
7% 12% 9% 11%
Significantly higher Significantly higher
Higher Higher
34% About the same About the same
37%
46% 43%
Lower Lower
Significantly lower Significantly lower

3. 34 The forbes insighTs reporT on smes can
be found aT: www.accaglobal.com/economic_storm
bank lending. This gap is set to widen
*What determInes fInancIng success?
No discussion of access to capital What SMEs plan to do with the
even more, as the chances of obtaining can be complete without a thorough money also matters. Judging from
credit from a supplier are now much understanding of why SMEs are approval rates reported in the survey,
better than the chances of getting a seeking credit and what ultimately acquisitions and hiring staff are
new overdraft facility. The problem is determines their success. popular with equity investors (often
that much of this credit flows from The 2009 study, Surviving the the owners themselves). On the
SMEs to other SMEs. Unlike (good) Drought: Access to Finance Among other hand, refinancing debt is the
banks, SMEs in the real economy rarely Small and Medium-Sized Enterprises, least likely use for equity investors
have solid credit or collection policies commissioned by ACCA, CGA- to approve. On the credit side, it is
in place and cannot afford to set aside Canada and CPA Australia, suggests hardest for SMEs to obtain funds for
capital against losses, so they end up that the lack of available finance customer financing – banks and other
taking substantial risks. is causing SMEs to postpone lenders generally don’t want to take
SMEs that find themselves in this financing decisions, and that they on customer credit risk and don’t
position need to start taking stock of expect a lack of funding to be the trust SMEs to manage it for them. On
customer credit risk, diversifying the main constraining factor on their the other hand, it appears easiest for
customer base and improving their businesses through 2011. SMEs to obtain credit for expanding
credit management. Most importantly, A year later, it appears SMEs manufacturing or service capacity.
SMEs need to start thinking of credit have, in fact, waited about as long Then again, many SMEs do not feel
as a financing and cashflow issue – not as they could. With many expecting that credit is the right way to finance
just a tool for achieving sales. Many an increase in revenue, they see some capacity-building projects.
already have: the study confirms that a need to finance capacity and Foreign expansion, in particular, was
suppliers have become much smarter working capital now, and they are the least likely objective for SMEs
about credit in the past two years. approaching the credit and equity to pursue through the use of credit
markets accordingly. (followed by investment in new
07 There is no finance without
information. Lenders and
investors don’t want to take risks they
Again, this more detailed analysis
of the 2010 data suggests that SMEs
are first looking to credit markets
technology and acquisitions). Many
businesses feel that international trade
and the associated credit markets
can’t measure. When we plotted finance to rebuild their liquidity and cash have yet to recover, and that doing
approval rates in the six countries positions. SMEs are unlikely to apply business overseas can throw up some
represented in the Forbes survey for funds for capacity-building alone. pretty intractable risks, including
against each country’s Getting Credit As a result, SMEs with poor cash protectionism and corruption. Instead,
ranking (one of the World Bank’s Doing positions are more likely than others the survey found evidence that equity
Business indicators, which measures to apply, and less likely to succeed, providers are taking over the role
the ease of obtaining credit information since they are seen as serious credit previously played by creditors in
and enforcing claims), we found that, in risks. In fact, according to the survey, funding foreign expansion.
countries with a strong supply of credit liquidity is the top driver of approval When other factors are taken into
information, obtaining funds is easier rates for finance applications. account (the size or liquidity of the
and a healthy balance sheet is more If you’re seeking credit, it appears business, the intended use of funds),
likely to give easier access to finance. it is easiest to obtain from an SME’s access to finance is more constrained
The same effect holds at the micro suppliers, while the hardest type of in Italy and China than other countries.
level: businesses that produce better credit to get is an unsecured bank Canada and South Africa follow. The
information are more likely to attract loan. Business angel investment is UK had the strongest approval rate of
funding. This is true of all but the the hardest type of equity to obtain, the six markets considered, but that
riskiest of borrowers: SMEs can benefit while retained earnings are the may also be because many weaker
from preparing financial information, easiest – provided, of course, the businesses have been discouraged
even if they don’t have the best news to business has earnings to reinvest. from applying in the first place.
offer the bank manager, provided they
are honest and keep them up to speed.
wiTh many smes expecTing an increase
Emmanouil Schizas is senior in revenue, They see a need To finance
policy adviser with ACCA’s
Small Business Unit capaciTy and working capiTal now