With the allure of alternative financing on one hand and the familiarity of bank loans on the other, which way should finance professionals turn, asks Manos Schizas
This article was first published in the April 2015 international edition of Accounting and Business magazine.
Business finance is at a crossroads and which way finance professionals turn could have a significant bearing on how businesses are funded in the future. The situation is best summed up by two key questions. How many times recently have you read an article about how alternative financing will be the future saviour of enterprise? Quite a few, I’m sure. At the same time, how often have you read that banks’ doors are firmly closed to those entrepreneurs looking for investment to grow their businesses? Too often to count, I suspect.
Yet bank loans and overdrafts remain the types of finance that ACCA members are most often involved in raising on behalf of clients. And that presents finance professionals with a dilemma. Innovation is rife in the financial services industry, but the majority of funding applications facilitated by ACCA members still relate to bank loans – anecdotal evidence suggests the advantage of familiarity is still very powerful. Despite attracting an enormous amount of venture capital and capital market funding, alternative finance platforms have yet to make inroads within the profession, at least outside of a few early adopter markets in the developed mature economies.
The backdrop to this is, of course, the financial crisis that engulfed global markets in 2008. We are still feeling the aftershocks of the crisis more than half a decade later, but as of mid-2014, ACCA has reported that financing conditions at the global level are at their most benign since the recovery began in 2009. In most parts of the world, less than a fifth of large corporates and less than a third of SMEs were reporting problems accessing finance, despite the headlines.
The key factor behind this shift, however, appears to be an extraordinary level of global monetary stimulus, which is likely to prove short-lived, much like the coordinated monetary easing agreed by the G20 in 2009. And with traditional finance providers demonstrating a remarkably high resistance to risk, the beneficiaries of this stimulus have been larger organisations in the more developed regions of the global economy.
So the reality is that even though the macro picture seems to be improving, small businesses still face huge challenges when it comes to fundraising. ACCA’s own research has revealed that a substantial share of business financing is still only available on a risk-free basis – recipients must be seen as risk-free or able to provide significant security.
However justified, the need for collateral (and the narrow range of assets accepted as eligible) is keeping some of the most promising businesses out of reach of much needed finance.
As has been seen in many markets before, the silver lining is that where there is a breakdown in how the market works, an opportunity for disruption always presents itself. If traditional finance providers fail to respond to the needs of those that require finance, then others will step up and provide alternatives. But it will not happen overnight. And this is where ACCA members have a crucial role to play.
ACCA’s research has revealed that between the first quarter of 2013 and the second quarter of 2014, nearly a third (31 per cent) of its members were involved in raising finance, either for their own organisations or for clients. Most active of all were members in Africa, with 40 per cent personally involved in raising finance, and 31 per cent trying to raise finance for their own organisations.
The Middle East and Asia Pacific followed close behind, with 37 per cent and 35 per cent of members in those regions respectively trying to source funds for their businesses or clients.
Looking across the size of organisation, it becomes clear that members are most engaged at the SME level – 55 per cent of members working in small and medium-sized practices and 41 per cent of those in SMEs were involved in raising finance. And ACCA research has confirmed what many already believe – that, at least among SMEs, businesses around the world consider finance professionals to be the foremost experts in financial management and business financing.
Bank loans and overdrafts
Of the 31 per cent of all ACCA members involved in raising finance, the majority were helping businesses secure bank loans and overdrafts, although more specialist types of financing were also well represented in the fundraising efforts – a quarter (25 per cent) of ACCA fundraising members (equivalent to 8 per cent of the total membership) sought funds from the capital markets, usually on behalf of clients, and a similar proportion were involved in raising supply chain finance, including invoice discounting, factoring, reverse factoring and trade finance. Government guarantees and export finance also figured in the finance professionals’ armoury. And 14 per cent tapped the bank of family and friends.
Newly popular methods such as crowdfunding and peer-to-peer lending were sought out only by some 4 per cent of all ACCA’s fundraising members, and almost all of this occurred in Europe.
Throughout all the fundraising techniques, there is an increasing need for timely information. This requires finance professionals to act as true business partners. Practitioners are increasingly expected to provide a quasi-assurance service to fundraising businesses. They need to be able to speak directly to the senior directors and explain the long-term implications of financing decisions. And with the increasing array of financing options, there is a risk that business owners are distracted, often with disastrous results, so such businesses will need authoritative advice to help them narrow their options, not merely evaluate them.
Looking forward, finance professionals need to position themselves so that they can play a decisive role in any organisation looking to raise finance or help others to do so. Businesses need reasonably priced and rapidly delivered finance but, more importantly, they need good planning, trust and finance appropriate to their purposes and circumstances. They need to know which way to turn. This is the crossroads that faces the complete finance professional of the future.
Manos Schizas is former senior economic analyst at ACCA. He led ACCA’s Research and Insights programme on access to finance.
"Despite attracting an enormous amount of venture capital and capital market funding, alternative finance platforms have yet to make inroads within the profession"