State of Business Financing: Hazards Ahead?
Since 2008, lending conditions have been affected deeply both by the fallout from the financial markets crash, and related austerity measures in Europe.
These turbulent business financing conditions are a challenge for accountants, for businesses large and small, and for lenders. Accountants play a vital role in helping organizations, be they their employers or their clients, access and secure business financing.
In light of this, ACCA conducted a research project in late 2014 to better understand how the lending environment has changed as a result of global economic conditions, gauge our members’ views, and also offer recommendations for the future.
This review—The State of Business Finance—was published in late 2014. It is an ambitious global investigation, conducted with Longitude Research, gathering across three separate reports a unique and in-depth global picture of the lending market. It also examines the role accountants play in helping small- and medium-sized entities (SMEs) and entrepreneurs to thrive and grow.
Economic peaks and troughs
The facts and figures compiled for The State of Business Finance bear witness to the last five years of economic turbulence.
Unsurprisingly, access to finance was very difficult in 2009, as the world emerged from a global recession. Depending on the region, 33%-47% of large corporations and 35-63% of SMEs reported problems.
However, financing became easier for businesses across the globe in the following five years, with developed markets benefiting the most. In 2012, many respondents reported problems with liquidity, which had gradually tightened due to a slowing global economy and the added stress of the Eurozone debt crisis, which reached their worst levels in late 2012.
Over the five-year period after the initial financial crash, governments and policymakers have worked globally to address economic concerns.
The coordinated financing push of the London G-20 meeting in 2009 helped unlock a great deal of trade finance internationally; liquidity programs such as the UK’s Funding for Lending Scheme have also made a difference; and major monetary policy decisions such as the Federal Reserve’s “tapering” of its asset purchase program, or China’s crackdown on shadow banking, had a substantial effect on the ground too.
Despite this coordinated approach, lending attitudes still need to change, especially regarding risk.
The research flagged a major concern to ACCA—the fact that a substantial share of business financing is still essentially only available on a “risk-free” basis: funding recipients must be seen as risk-free, or provide significant security in the form of collateral. This essentially starves some of the most promising businesses of finance. Our view is that this problem will intensify as small businesses become increasingly dependent on intangible assets.
The accountant’s role
Accountants provide the necessary conditions for secure lending to happen. ACCA believes that, in the future, accountancy professionals will have an advantage in helping businesses raise finance for four very clear reasons.
Firstly, both traditional and innovative finance providers increasingly require timely information straight from operations and the supply chain, which requires accountants to act as true business partners. Timely and relevant information makes for better lending decisions.
Secondly, accountants are increasingly expected to provide a quasi-assurance service to fundraising businesses. While valuable to businesses and finance providers alike, such services can only be monetized as part of a comprehensive advice offering.
Thirdly, with a substantial amount of business financing provided or underwritten by directors, finance professionals need to be able to speak directly to boards and explain the long-term implication of financing decisions. They need access to the decision makers.
And lastly, an increasing array of financing options could distract business owners with disastrous results; businesses will need authoritative advice to help them narrow and evaluate their options. An accountant’s knowledge of lending and financing options is an undeniable asset.
Accountants - building relationships
The State of Business Finance also considered what can be done to restore relationships between businesses and finance providers.
The business/lender relationship is crucial—especially so for small businesses, who often do not have a finance department like larger companies that can source and support funding.
Trust is also a key part of the relationship equation. Ultimately, financing relationships can only be mended by restoring this trust, which was decimated at the height of the financial crisis.
While businesses would benefit from providing more and better information, the evidence from ACCA member interviews showed that it takes a true business partner to meet finance providers half-way.
The future—what next?
The Economist recently said that “it is only a matter of time before the next recession strikes. The rich world is not ready.”
There are still hazards ahead, so what needs to be done?
The State of Business Finance concludes that today’s improved financing environment is exceptional and could prove short lived.
To support business financing over the long term, policies should explicitly account for multiple macro-factors over the business cycle, including global liquidity, risk appetite, structural deficiencies, and eligible collateral values.
We also need a concerted effort between international financial institutions, regulators, and standard setters to overcome the fragmentation of the global market for business finance. Financial institutions and regulators need to re-examine the over-reliance of business financing on collateral, but also look into ways of diversifying the kinds of assets accepted as collateral.
Relationships between small businesses and financial institutions globally are fragile; they can only be strengthened by restoring trust, ownership, and control, and finance professionals are ideally placed to lead this agenda.
Policymakers and accountancy practitioners need to challenge venture capitalists and corporates eyeing potential investments to see beyond sector fads. They need to work with business advisors to unearth opportunities wherever they may be.
Please share your views on how accountants, accounting firms, and professional accountancy organizations like ACCA can help improve the state of business finance around the world.