Louise McCoy says small businesses are well positioned to be flexible
Gone but not completely forgotten, the former British Prime Minister, Liz Truss, is widely credited with having “crashed the economy”. What she probably really did was terrify bond markets by laying out an unrealistic menu of tax cuts at a time when the economy was already considered to be in less than good shape.
witness the insolvency rates. According to data from the Office for National Statistics, 5,629 companies went bankrupt in 2022, the highest quarterly level since 2009. Equally alarmingly, one in ten companies surveyed by the ONS viewed insolvency in the coming months as a moderate to serious risk.
The main cause is rising energy costs and inflation in general. Companies in sectors such as hospitality, food, manufacturing and housing are hit hard by rapidly rising prices that cannot really be passed on to customers.
But companies are still being created, in fact quite a few. Around 93,500 companies have started in the second quarter of 2022 and while that was four percent lower than in the first three months of the year, the figure represents a large number of individuals willing to take a chance on pursuing their own business aspirations.
Even in difficult times, that’s not necessarily reckless, but it does raise some questions about finances. Let’s be honest. The vast majority of new businesses are not VC or angel-backed, nor are they suitable for that type of investment. The most common form of financing is a loan, either from the bank or from that amorphous group known as friends and family.
The timing question
But loans have to be repaid on an agreed schedule and, as recent weeks in the UK have shown, interest rates can rise at an alarming rate. So, is this a good time to take on debt, start a business, or grow? That was one of the questions I was eager to ask when I spoke with Louise McCoy, commercial director of the government-backed lender, the Startup Loan Company.
Celebrating its 10th anniversary, start-up Loans was founded during the long tail of the “great financial crisis” as a means of supporting small businesses – particularly those that may have difficulty accessing finance. Since then, it has made over 97,000 loans with advances totaling £900,000 million. The interest is a guaranteed six percent and Diversity is part of the assignment.
“About 40 percent of the loans granted have gone to female founders and 20 percent to BAME companies,” McCoy says.
Borrow more
And it must be said that Start-up Loans is quite optimistic about the credit policy. The organization is increasing the number of loans offered and also expanding its service not only for startups, but also for companies that need money for growth.
And as McCoy sees it, Startup Loans is fulfilling its mission of reaching entrepreneurs who would otherwise be overlooked by financiers. “Many of our companies say they couldn’t get started without our support,” she says.
That’s good news for companies that meet the organization’s credit criteria, but back to my original question: in this highly uncertain environment, is this a good time for SMEs to borrow, even on fairly favorable terms?
“Companies at every stage face the same challenges. But while the environment may change, small and medium-sized businesses are well positioned to be flexible,” said McCoy.
The theory is that small businesses can adapt to changing market conditions much faster than their larger rivals. The flip side of that coin is that newly founded companies, perhaps led by start-up entrepreneurs, often suffer from a knowledge and experience gap.
For example, they may struggle to manage cash flow — still a business killer — or be overly optimistic about their ability to win and retain customers. McCoy emphasizes that money is only part of the supply. Companies looking to borrow money also work (and initially) with one of Start-up Loans’ business advisors – experienced individuals who can assess both applicants’ viability and how much (or nothing at all) they should borrow.
It’s not, she adds, just a ruler over an applicant’s trade record and revenue forecast. The advisor support is also designed to help entrepreneurs tackle the practical challenges of running a business and there is also a measure of personal development assistance. McCoy takes the example of female founders who may not come from an entrepreneurial background (more men do) and therefore lack a certain self-confidence. This is an area where Startup Loans can provide support.
But is there any appetite right now? Corporate formations have declined slightly, so can we see corporate financing demand decline accordingly? McCoy says demand is high. “Starting a business is a dream for many people,” she says. “There is a huge appetite.”
But perhaps there is a broader point here. Recessions – and the UK seems on the brink of a recession – create an interesting paradox. The amount of money circulating in the economy is decreasing, but there are also opportunities, incentives, and obligations to set up businesses. For example, if you’re fired and there’s a shortage of jobs that match your skills and experience, going it alone may seem like an obvious choice. More positively, small businesses may be able to trade in a market more cost-effectively than more established rivals. New starters can also take advantage of severance pay to finance their business.
But the key to success is undoubtedly getting the right advice from knowledgeable friends, accountants, bank managers, mentors or, when the time is right, starter loan advisers. The right advice will help novice entrepreneurs avoid at least some of the pitfalls ahead.
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.