SME Business News

Invoice discounting is a way of releasing money from your invoices without having to wait for your customers to pay them.  Exact details vary but typically invoice discounters will release about 85% of an invoice’s value within 24 hours of it being issued.  It is a finance solution suited to companies with an annual turnover in excess of £500,000 that sell products or services on credit to other businesses and have an established credit control function.

Reasons for choosing invoice discounting include:

- Improved cash flow as you receive payment almost immediately

- The facility grows as your business increases; it doesn’t have to be re-negotiated

- It releases more funds than many other funding facilities

- You retain control over the administration of your sales ledger

- It is confidential; you issue the invoices in the usual way on your own stationery

- Suppliers can be paid promptly, improving your payment reputation

= You are able to benefit from supplier discounts for cash and prompt payment

- It can be used to provide funding for mergers and acquisitions

- Unlike overdrafts, invoice discounting solutions cannot be recalled on demand

The prize on offer in the BBC’s popular television show, ‘The Apprentice’ has been changed to reflect the reliance currently being placed on small businesses to boost the economy.

In 2011, the successful Apprentice will no longer win a £100K job working in one of Lord Sugar’s businesses. Instead, Lord Sugar will set up a new business with an initial investment worth £250,000 – a life-changing opportunity in this time of economic hardship when re-growth and long-term commitment are the key to financial recovery.

The winner, whether a keen business rookie or someone who’s had several years of experience, will choose the type of business they want to set up – be it a digital online firm, catering company or fashion accessories line. Lord Sugar will be looking for an Apprentice with the flair and drive to build a business, which he will jointly own with the winner, each taking a 50% interest. Lord Sugar will be mentoring and guiding his winning Apprentice, bringing with him over 40 years of his own business experience to help the business take its first fledgling steps.

Lord Sugar comments: “In the past years, I was searching for a candidate to employ, now I am looking for a business partner. The good news is they won’t have to put any money into the new company, I will. With an injection of £250,000 of value into this start up company, this is an amazing opportunity for someone who will choose the type of business it will be. I will be looking for a person with some expertise who can demonstrate they have a good understanding of all facets of business, so as to take this venture to another level.”

Faced with difficulties borrowing from the banks, and attracted by easy availability of funding, a growing number of small business owners are turning to pawnbrokers.

One such firm, Borro, says it has seen a 45% rise in small business customers over the past year alone.  In an interview with Will Smale, the BBC’s Business Reporter, Borro’s founder, Paul Aitken explained, “The reluctance of the banking sector to lend in recent years has certainly helped us, but it is more than that. Thanks to the internet and changing attitudes, pawnbroking has become a lot more accessible and acceptable.”

David Sonnenthal of the New Bond Street Pawnbrokers commented: “As the banks have restricted their lending we’ve seen a big increase in businessmen and entrepreneurs coming to us to raise cash with a short term loan. We don’t need to know what the money’s for and we don’t ask, but some of our customers have said that their bank has refused to extend their overdraft and they’ve risked losing their business, missing out on a deal or failing to pay their staff if they couldn’t raise some cash quickly.”

Apart from availability of finance, the major advantage of using a pawnbroker is the speed at which they are able to lend. There are no credit checks, or lengthy decision making processes; once the security for the loan has been assessed, and the size of the loan has been agreed, the customer is able to leave with the money.  Typically, pawnbrokers will lend up to 70% of the value of the item being pawned.

The popularity of pawnbrokers is growing generally. The Local Data Company’s latest report, titled ‘Pawn is Reborn’– a snapshot of high street ‘banking’ across the UK 2008-2010’, based on Britain’s top 720 towns and cities shows a significant increase (+44%) of pawnbrokers across the country whilst banks have reduced their numbers (-1%).

Guideline procedures which businesses can implement to prevent bribery on their behalf will be published in the New Year, prior to the Bribery Act coming into force in April 2011.  This is to allow businesses an adequate familiarisation period before the Act commences.

The Act is intended to ensure the UK is at the forefront of the battle against bribery and to pave the way for fairer practice by encouraging businesses to adopt anti-bribery safeguards.

The main thrust of the Act is to:

Introduce a corporate offence of failure to prevent bribery by persons working on behalf of a business. A business can avoid conviction if it can show that it has adequate procedures in place to prevent bribery.

Make it a criminal offence to give, promise or offer a bribe and to request, agree to receive or accept a bribe either at home or abroad. The measures cover bribery of a foreign public official.

Increase the maximum penalty for bribery from seven to 10 years imprisonment, with an unlimited fine.

Concerns have been raised that companies may find themselves liable for the actions of individuals over whom they have little control. An individual may be deemed to working for an organisation, whether or not they are an employee.  For example, a consultant working on behalf of a business, who attempts to procure them an unfair advantage, may cause them to be prosecuted for bribery unless they can prove that they had adequate procedures to prevent such conduct.

Lynn Bleakley, partner and business defence specialist at Midlands firm Cartwright King Solicitors advises: “The details of the Act should become clearer when the Secretary of State publishes the required guidelines. A minimum we can expect is that companies should carry out risk based assessments, closely monitor those associated with them, give training to employees and carry out relevant audits. Contracts with “associated” individuals and businesses should include anti-bribery and corruption provisions, to ensure everyone is clear about their responsibilities.”

The Bribery Act will prove to be good news for UK businesses according to risk consultancy Control Risks.

‘I think most well-managed businesses recognise this new legislation was severely overdue’ says John Bray, Director of Control Risks’ anti-corruption services. ‘Whilst there will be short term pain for some companies who need to update their anti-corruption measures quickly, the law helps bring about a more level playing field and provides additional protection for individuals when they are faced with demands to pay bribes.’

‘Paying bribes is not only ethically unsound, but it also doesn’t make sense from a business perspective either,’ says Bray. ‘Conducting business in this way poses an enormous risk to corporate reputation and now companies also face the risk of punitive fines and even prison for senior executives. Additionally, more often than not, it only exacerbates the problem with demands for more, and larger, bribes.’

New data released by Experian has revealed a fall in mergers and acquisitions (M&A) and equity capital market (ECM – flotation, rights issue and placements) deals during Q3 2010, compared with the same period last year.

The total number of UK M&A and ECM transactions during Q3 2010 fell by 22.7% compared to the same period last year - from 1,110 deals in Q3 2009 to 859 deals in Q3 2010.

However, the total value of Q3 2010 deals increased by 45.3% on Q3 2009 - from £41.07billion to £59.67billion.

Compared to the previous quarter (Q2 2010), the UK saw a 23% decrease in volume, but a 4.8% increase in value - from 1,115 deals worth £56.96billion to 859 deals worth £59.67billion.
Wendy Smith, Business Development Manager at Experian Corpfin, said: “Although the UK returned to growth in the final quarter of 2009, the level of deal making in the UK since then has yet to reflect this.  Deals tend to slow down during Q3 of any year, so quarter on quarter figures show a seasonal decline.  However, the year on year view reveals that while some regions held up a little better than others, there was still decline in the volume of M&A and ECM activity overall.”

Only one in five of the UK’s smaller employers have begun to consider the financial impact of new pension regulations coming into force in 2014 which require them to autoenrol millions of extra employees into workplace pension schemes, according to new research.

The survey, conducted by the Association of Consulting Actuaries, gathered responses from 404 smaller employers with 250 or fewer employees. Across the UK, there are over 1.2 million of these smaller firms with 1 employee or more  all of whom will be required to auto-enrol their employees into a ‘qualifying workplace pension scheme’ under the Government’s current pension reforms.

Over half (53%) of the respondents say the reforms will ‘add significantly to costs’ and 29% say they are ‘likely’ to level-down (reducing future pension contributions into existing and new schemes) to meet the additional cost of newly pensioned employees; although the scope for levelling-down is limited across the UK’s smaller firms as a whole as at least two-thirds do not offer any pension arrangements at present. Overall, 54% of smaller firms say they support autoenrolment, but they expect 35% of employees to ‘opt-out’ of the new pensions.

Smaller firms say the principal reasons why employees do not join existing schemes is ‘cost’ (84%), a ‘preference to spend’ (72%) and ‘disillusionment with pensions’ (69%).

Businesses not presently providing pensions say they do not principally because of ‘cost’ (96%), ‘economic conditions in their sector’ (82%) and ‘insufficient competitive pressures’ (53%).

Banks should exercise more flexibility over the criteria they use in granting funding to small companies, it has been claimed.

The Forum of Private Business (FPB) has called for bank managers to be authorised to exercise their knowledge of local businesses and to accept strong order books and letters of credit as proof of the financial viability of small and medium-sized enterprises (SMEs) when assessing loan applications.

The FPB argues that unless the flow of finance improves, many small firms will be forced to close, at a time when Government is looking to the private sector to drive the economy forwards.

“The private sector and small business growth in particular is expected to lead sustained economic recovery but bank lending is getting steadily worse. Worse, even, than six months ago when the economy was still struggling under severe recessionary conditions,” said the Forum’s Finance Director Nick Palin.

“It is a fact that entrepreneurs need even more cost-effective lending in recovery than during a recession so they can invest in their businesses in order to meet renewed demand. This is clearly not happening and there is a serious risk to businesses and the wider economy as a result.”

He added: “For SMEs to become the real catalyst for sustained growth and job creation, as the Government hopes, banks must be prepared to open their doors to viable businesses again.”

That is another reason why many SME businesses are considering alternative sources of finance such as factoring and invoice discounting at this time.

Business lending has fallen by £28 billion since the start of the global economic downturn, a new report has indicated.

Bank of England figures reveal that lending has declined sharply since the collapse of Lehman Brothers two years ago, and companies now owe £471 billion to the banks, down from £503 billion in September 2008.
British bank Aldermore said the downturn in credit availability has hit small and medium-sized businesses (SMEs) particularly hard.  Its chief executive, Phillip Monks, commented:
“SMEs are the engine of the British economy, but they can’t power on forever if their ability to make vital investments and to hire new staff is compromised. This is particularly worrying as the deficit tackling measures mean the private sector must take more of their strain.”

The future of many small businesses is in jeopardy because their managers are failing to adopt basic business practices, according to recent research.

The survey, which was conducted by Simply Business, found widespread evidence of inadequate financial management, an absence of basic business planning coupled with uninformed decision-making and totally inadequate employment policies.

29% of SME bosses admit to keeping inadequate checks on their company finances due to competing pressures on their time but the picture is likely to be worse than this, with detailed balance sheets and profit and loss forecasts only being reviewed every 18 weeks, on average.  In addition, managers are failing to perform basic due diligence on customers and suppliers; 65% don’t credit check new customers, whilst 76% don’t check existing customers requesting to extend their credit terms.  30% have no formal contract at all with their business customers.

The research shows that business planning is also lacking; 54% of the businesses surveyed have no written business plan, and 68% have no detailed plans for coping with unforseen changes in the operating environment.  When it comes to decision-making, 68% of those questioned say they rely primarily on gut instinct; only 56% perform any first hand market research, whilst a mere 54% consult the company accounts  to inform their decision.

Finally, the survey shows that inadequate employment practises are leaving millions of SMEs exposed to the risk of costly legal action. 21% have no formal contracts for their permanent employees and 79% have no dedicated person to handle HR operations. This is reflected in the fact that 40% of firms have no formal, written HR policy while 46% have no formal health and safety policy.

Jason Stockwood, CEO of SimplyBusiness.co.uk, commented:

“Limited time and resources are characteristic of growing businesses, and the recession will have stretched UK entrepreneurs further than ever before - understandably, many have become so focused on working in the business, that their time working on the business may have suffered as a result.

“Those entrepreneurs left standing have successfully managed their firms through the credit crisis, but can not now afford to expose their companies to easily avoidable risk.”

The number of directors taking illegal dividends or loans from their companies is rising at an alarming rate, says Wilkins Kennedy, the Top 22 accountancy firm.

According to Keith Stevens, Partner of Wilkins Kennedy, eight out of the last ten insolvency cases he has taken on have led to investigations over the directors allegedly taking illegal dividends or loans from the company.

Wilkins Kennedy says that the temptation by directors and owners of businesses to pay themselves an abnormally large special dividend before the increase in the highest rate income tax band to 50% on April 6 2010 may have triggered the spate of illegal dividends.

These special dividends would be considered illegal if the company did not have the accumulated profits to cover the dividend payment.

HMRC, who are usually one of the largest unsecured creditors to insolvent businesses, are now so concerned that illegal dividends mean businesses are not paying their tax debts that they are asking insolvency practitioners to specifically look for this problem.

Wilkins Kennedy explains that the recession has led to a minority of directors and business owners taking illegal loans or dividends to pay for the lifestyles that they have become accustomed to but which the failing fortunes of their businesses can no longer fund.

Says Keith Stevens: “A couple of holiday homes, a taste for sports cars and an expensive divorce settlement will normally come with a big debt that needs servicing every month. For some owner-managers it seems easier to break the rules and take an illegal loan from the company than to curb their spending.”

“HMRC wants these directors banned and they want to pursue these directors through the courts for all the money that they can. That is an obligation that HMRC have, so directors need to beware of that.”

“Directors need to be careful not to treat their business as a personal piggybank.”

Data from the Insolvency Service show that 2,169 directors of insolvent companies faced disqualification proceedings in the year to March 31 2010, up 17% from 1,852 the year before.