Tag: business

The Problem of Late Payment

Author
Angus Dent
Date

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Late payment is one of the greatest challenges faced by this country’s small businesses. Not only does it limit their ability to grow by choking their cash flows, it also causes employees to waste time chasing payment which could otherwise be spent more productively.

The government knows this, and changes to late payment legislation stand as the latest addition to their basket of policies aimed at easing the burden shouldered by small businesses. Their objectives here are commendable, but as I wrote recently when discussing their efforts to tackle red tape, getting cold hard results may prove difficult.

The ‘Prompt Payment Code’ set up by the government seven years ago has certainly not had the desired effect. Signing up to this voluntary measure means that a business is bound to certain payment terms, but, somewhat predictably, only 1,700 businesses have got involved. More recently, the EU launched their Directive on Late Payment in an attempt to instigate a 60 day payment window. But a loophole allowing longer payment terms if the supplier agrees has hamstrung this policy’s potential. Food giant Mars have reportedly capitalised on this loophole, increasing their payment terms from 60 to 100 days and using their market power to coerce suppliers into agreeing, or facing the possibility of losing contracts.

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There are legal options available to the victims of late payment; businesses can charge interest to their debtors, for instance, but only 10 per cent of SMEs are reported to have used this for fear of losing business. With the IT Firm Sage estimating that some £55bn is currently owed to the UK’s SMEs, there is clearly a need for a more workable solution.

The government’s newest initiative is named the Small Business Conciliation Service and uses an Australian model as its precedent. The Service will be used to mediate disputes between debtors and creditors and thus smooth the payment process.

Yet even if this Service becomes a tremendous success, late payment will not disappear overnight. And as Professor Nick Wilson of Leeds University Business School points out, at the moment “[SMEs] have insufficient capital to cope with bad debts and late payment. We need greater bank lending and equity investment.”

But as we know, the banks aren’t lending. So where should SMEs look? For many businesses, the burgeoning alternative finance sector could be the answer.

How will a Conservative victory alter the regulatory landscape for SMEs?

Author
Angus Dent
Date

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To say this year’s election was divisive is an understatement. Three days after the announcement of voting results, the atmosphere outside Downing Street was febrile: police were forced to stake out the area to meet banner toting anti-austerity protestors determined to express their ire at five more years of Conservative government.
But what of those who supported the Conservatives? After all, it is the so called ‘shy-Tories’ who chose not to disclose their voting intentions that have left pollsters predicting the ‘closest election in a generation’ red-faced. The 2.3% surge in the FTSE 100 that took place on Friday is perhaps the best bellwether for gauging their sentiments. Indeed, this is a government that many of the electorate brought to power for the benefits they expect them to bestow upon UK businesses and the economy. And this is an expectation that the Conservatives themselves have propagated. Overtures were made during the campaign not just to big business, but also to the small and medium-sized firms that they portrayed as the very ‘lifeblood’ of the UK economy and to whom they devoted a ‘Small Business Manifesto.’

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The party’s attempts to woo these smaller businesses seemed to strike a chord too. “We get them, we respect them, we understand them, we back them” said Cameron. The response was an open letter published in The Telegraph and signed by 5,000 small business leaders stating that Cameron’s party should “be given the chance to finish what they started.” These businesses have a long wish list for the next 5 years, but dealing with the proverbial ‘red tape’ that they encounter is a chief concern according to recent surveys.

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The Conservatives have sought to address this issue by pledging to cut down on regulations and bureaucracy to save businesses £10 billion. In fact, the party made this same pledge during the 2010 campaign and their efforts since have been met with mixed appraisals. Dragon’s Den venture capitalist James Caan commented in 2012 that regulation was still far too much of a burden, noting that opening a warehouse in the UK takes 4 ½ times longer than in Germany. Furthermore, a report conducted by business information group Croner in 2014 found that half of the businesses surveyed felt efforts to reduce red tape had had no positive effects on their businesses. “There has not been the bonfire of red tape that the government promised,” surmised a Croner executive.
Nonetheless, the government will undoubtedly work hard to make good on their regulation pledge this term. But to some extent their hands are tied, with much regulatory change pushed through by EU law; although, with an EU referendum now promised for 2017, this situation may change. Some small businesses may have acknowledged this, voting Conservative in an attempt to wriggle free from what they perceived as onerous European regulation. But whether trading EU membership for a reduction in red tape is a worthwhile choice for the nation’s SMEs is a question that needs to be asked.

The Case for Diversification across the Crowdfunding Risk-Reward Spectrum

Author
Angus Dent
Date

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Ten years on from the creation of the world’s first peer-to-peer lending platform, the alternative finance sector’s stupendous rate of growth has rendered it unrecognisable. This has been a decade in which cumulative funding by UK platforms has risen from under £50,000 to almost £3.4 billion, driven by a proliferation in the number of platforms in existence as well as in the scope of their models and products.

The factors that have catalysed the development of alternative finance and allowed the sector to shake off its “cottage industry” credentials are manifold and too broad to discuss in this particular post. Symptomatic of its increasing importance, though, is the level of interest with which national authorities have begun to approach it; the FCA stepped in with a raft of legislation in April 2014 to begin the process of regulating the sector, whilst the government continues to postulate the benefits of including P2P lending within the ISA framework. Both of these activities serve to validate the growth that has taken place and to further legitimise alternative finance as a new investable asset class.

Indeed, it is hoped that such high-level involvement will encourage those who have been watching the space’s growth from afar, such as the IFA community, who have so far trodden a cautious line, to begin to engage more readily with the sector for the benefit of themselves and their clients. Underpinning the reticence that can still be found in some quarters, though, is the question of how alternative finance should be approached as an asset class and included within an investment portfolio. After all, the growth that has taken place has engendered much greater complexity, with the numerous products now on offer carrying different rates of risk and return.

In my opinion, the answer is to look for diversification. Diversification is a central tenet of Modern Portfolio Theory and its benefits have been frequently extolled since the 1950s. In recent years, however, the concept has come under some scrutiny. Active fund managers who heavily diversify their funds are often lambasted as “closet-indexers” – those whose funds simply replicate the performance of their benchmarks, but at a greater cost to the consumer due to their hefty fees. As cheap passive investment vehicles such as ETFs become more common, it is argued that this approach is unsustainable and active managers should maintain a smaller, “conviction based” portfolio to achieve outperformance. Yet whilst the world’s foremost investor, Warren Buffet, conforms to this viewpoint, casting over-diversification by professionals as mere “protection against ignorance,” he acknowledges that the concept retains its relevance for those without his powers of prescience, namely individual investors. And with the majority of investors gaining exposure to alternative finance without professionally managed vehicles, diversification remains important.

Strategies for achieving diversification are potentially numerous, and could include spreading investments across different platforms, geographies, products and risk-grades. A well-constructed portfolio that adopts such strategies should grant good exposure to this exciting sector, whilst simultaneously mitigating the risk to the investor. For example, an investor might look to higher grade business loans, higher grade consumer loans, and loans secured against property as the low-risk bedrock of their portfolio. The next risk band might contain medium-grade business loans as well as loans facilitated by foreign platforms, which whilst achieving geographic distribution could also bring in the risk of currency fluctuation. Finally, the highest risk section of such a portfolio would likely be composed of equity crowdfunding propositions, which carry the greatest potential rewards of all but also a significant risk of failure.

Whilst lowering risk for the non-professional investor is perhaps the most obvious benefit of diversifying a portfolio in this way, it also serves to allocate investors’ capital in a way that is equitable and consistent with the aims of a sector that developed to bolster investment to individuals and undercapitalised businesses. With reference to businesses specifically, it has been estimated that there will be a funding shortfall for SMEs of £84-191 billion between 2012 and 2016 as traditional sources of finance remain stifled. Spreading investment across the spectrum of opportunities, investing in the debt and equity of diverse businesses at different phases in their growth cycles, which are united by their need for a cash injection, spreads the benefits of this new mode of funding. It is best for investor security, and best for the economy.