Small businesses are finding it increasingly difficult to raise finance from banks and are turning to alternative sources of finance. In this article we have reviewed the market for corporate debt and look at what small businesses should do if they need finance to grow.
Since the recession, and to avoid too much risk taking, regulators have required banks to build huge capital reserves and reduce their exposure to risk. Central Banks, meanwhile, have their sights set on fighting deflation and getting growth going. Their aim has been to make credit cheaper and more available and to bolster risk taking with very easy monetary policy. So while regulators want to reduce risk in the banking system, Central Banks aim to encourage risk taking.
This ‘easy money’ has helped bolster bank lending for larger businesses. Lending to larger firms is relatively low risk and enables banks to benefit from low interest rates and a recovering economy. A recent survey of CFOs reports that the cost of credit for larger businesses is near an eight year low while availability is better than at than at any time in eight-years. Conditions are less favourable for smaller and medium sized enterprises (SMEs). They lack the scale and resources to be able to issue corporate bonds, so have missed out on the super-cheap bond finance available to large businesses. SMEs are dependent on bank lending where, while conditions have improved, problems remain. The latest Federation of Small Businesses’ survey show that a large number of member firms rating bank credit as being ‘unaffordable’.This is where the story becomes interesting. Tougher regulation has constrained the capacity of banks to take risk and made it harder for some borrowers to access bank credit. At the same investors are eager to find ways of earning a better interest rate than they would get from putting their money in a bank. The obvious solution is to put the borrowers in search of credit with the lenders in search of yield together. Three markets are doing just that.