Sweating the small things

There’s been no tailing off of interest from new lenders coming to the NACFB in the first month of 2017. When we are building a full panel of lenders, we have to tailor that panel to the actual demands from small businesses.

Related topics:  Commercial,  Commercial finance
Rob Lankey | CEO - NACFB
2nd February 2017
rob lankey nacfb

That does include lenders who will deal with the top end – the “biggest of the mediums” – and a growing number of firms at the other end of the scale, the real niche lenders. We recently wrote out to our members to comment on a new lender to the market, one that was looking to invest in businesses with minimum EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) of £5 million. Some of our members wondered aloud whether you could truly fit such businesses into the “SME” category, a question which sent us back to basics; what does an SME in the UK in 2017 actually look like?
EBITDA figures are effective for large companies with significant assets, and/or for companies with a significant amount of debt financing, but not so much for SMEs. You usually want to use a different process for evaluating small companies, or medium-sized companies with low-value loans.

That’s because EBITDA is worked out by looking at earnings before the deduction of interest expenses, taxes, depreciation, and amortization, so for small companies who don’t have significant interest expenses or asset depreciation, you may as well simply look at earnings post-tax for your evaluation.

Because it effectively represents the income that a company has free for interest payments, EBITDA functions as a credit rating; the higher the score, the more credit-worthy the broker. So a lender who wants to lend to businesses with an EBITDA of more than £5 million is either being very careful with their money, or choosing to apply the risk elsewhere (in the case of this particular lender, by being open to a broad range of sectors rather than focusing on one specific area of expertise).

Would an SME expect to have an EBITDA in excess of £5 million, though? Generally speaking, no. If we go back to sections 382 and 465 of the Companies Act 2006, we can read that a small company has a turnover of not more than £6.5 million, a balance sheet total of not more than £3.26 million and not more than 50 employees.

A medium-sized company has a turnover of not more than £25.9 million, a balance sheet total of not more than £12.9 million and not more than 250 employees.

Crucially, I am unsure whether these figures have been adjusted for inflation over the past decade; after all, it is still a 2006 act. But if the definition is truly current with these values, then insisting on an EBITDA of more than £5 million is going to eliminate all but the top end of SMEs.

The end result is that members are unlikely to have much business to put this lender’s way. Remember that the average loan size requested by the SMEs who approach is directly is somewhere below £200,000; for brokers in some parts of the UK, it’s as low as £50k. Break down those figures even further and you can see that the modal average is far smaller than that – businesses putting themselves at risk for the sake of a £3000 or £4000 loan. So we need to ensure there are lenders around who are set up to deal with the small stuff.

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