Budget 2017: Risks for the SME

Whatever their political persuasion, SME directors would probably agree that small business policy and taxation has been broadly constructive since 2010. It hasn't always been a smooth ride and arguably imagination and political courage have been in short supply but a period of relative stability has helped leaders plan for the future.

Will Philip Hammond keep a focus on enterprise?

Will Philip Hammond keep a focus on enterprise?

And while Philip Hammond, the Chancellor, has had a firm grip on the fiscal wheel since his appointment last year, there is increasing worry that we may now slip off-road. The Greek philosopher, Heraclitus, once proclaimed "The only constant is change". Well the political landscape shifting beneath our feet and there is a creeping danger of an increased tax burden and/or a failure to invest in the SME ecosystem. 

 

While we hope the chancellor keeps his eyes on the road ahead, we see these five pertinent risks on Wednesday. 

 

RISK one: allowing business RATES to keep rising

Ask almost any business in London (our home at EquipmentConnect) which part of the tax system needs to be reformed and Business Rates is an almost guaranteed answer. The calculation of this tax fails to consider profits and consumption of local services and is levied using a somewhat lazy and blunt property valuation methodology. The burden of Business Rates must also be considered alongside high charges such as expensive waste collection and excessive data costs.

There is a risk that the chancellor allows the currently planned 3.8% rise to pass while signalling a green light for for future rate increases. We support the British Chambers of Commerce who has pushed to reduce Business Rates instead of the the planned reduction of corporation tax.  It is imperative that the chancellor limits any growth of this anti-enterprise, usually regressive, very blunt form of business taxation. 

 

risk two: reducing the VAT threshold on small business

The media have thankfully made considerable noise on this most serious threat. The government has indicated an effective demolition of the threshold at which VAT must be paid by small business. Currently a sole-trader or business can have annual revenues of up to £85,000 before VAT must be levied but this may fall by 75%. The threshold is so important because it allows small business to postpone the cost and admin pain until they are 'de facto' real. And this pain is very real - according to Mike Cherry, the national chairman of the Federation of Small Businesses, SME owners and the self-employed spend a working week a year complying with their VAT obligations.

Postponing this burden until micro businesses are 'alive and kicking' is absolutely critical if we are to maintain the entrepreneurial goodwill generated.

 

risk three: Dithering on TRANSPORT AND infrastructure INVESTMENT

Britain lacks first class infrastructure across the regions. From motorways that are clogged up to overpriced rail systems that are prone to breakdown to regional broadband speeds that are plainly inadequate.   

This isn't the present governments fault but rather the result of decades of a short-termism and a London centric political mindset. 

If the government is serious on developing the 'Northern Powerhouse' we need to push ahead with high speed rail with connectivity from coast to coast. An annoying broken record it may be but a third runway at Heathrow is essential!

The UK is fortunate to be able to borrow cheaply. The current yield on a 30 year government bond is less than 1.85% (way below inflation!). We need to make the most of this opportunity and double the national productivity investment fund created last year. It's time to go big or go home. 

 

RISK FOUR: failing to grow the ANNUAL INVESTMENT ALLOWANCE

Closer to home for EquipmentConnect is the risk of government failing to support further increases in the Annual Investment Allowance which facilitates a taxation rebate for equipment and machinery purchase.

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The current level of £200,000 per year is certainly a vast improvement on what we had before but ensuring our SMEs have access to the best equipment and machinery is essential if we are to roll out of the productivity slump that has dragged on the countries economic growth for several years now.

Furthermore, investment in equipment and machinery often has strong secondary benefits such as 1.) increasing wages for what are ultimately more productive workers (and thus increasing income tax take!) 2.) supporting UK industry - a huge chunk of expenditure goes to our burgeoning advanced equipment manufacturers 3.) enhancing our long term competitive edge in the knowledge economy.

We would hope that the government will increase the Annual Investment Allowance and by doing so, keep our country well armed for future years of prosperity. 

 

RISK FIVE: BACKING AWAY FROM HOUSING INVESTMENT

Make no mistake about it - The lack of available housing has been negative for UK business. Emigration of talent and longer commute times are generally considered as leading factors dragging on productivity growth. 

During the recession the number of new houses built each year fell from c. 220,000 to a measly 120,000. It is calculated that we now need to add almost 300,000 new dwellings each year to satisfy demand from changing demographics. While we are unlikely to get even close to this level - you have to look back all the way to 1968 to find a precedent - we should at least achieve 200,000 new dwelling per year by 2018. As our minister of state Sajid Javid recently emphasised there has a more suitable time to borrow cheaply by issuing government bonds

Furthermore the construction industry is one of the laggards in 2017 and with spare capacity, the stimulus is likely to achieve its goals without pushing inflation in the sector. 

 

 

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The other well-known Hammond, formerly a presenter on 'Top Gear', now at 'The Grand Tour', always had a knack for flipping cars including to the right, the comical flip of a Reliant Robin. Makes for good entertainment from an otherwise, arguably dull, car journalist.

Philip Hammond, maybe the most dull man in Britain, has no such pressure to entertain. Lets hope he keeps an eye on the road and ensures continuation of SME growth. With the challenges ahead in 2018 and 2019 it is of upmost importance that government doesn't lose sight on what essentially is the backbone of the UK economy. 

Fraud in Asset Finance

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As we approach Halloween it's not vampires or witches that are scaring business owners. Instead it's fraudsters that are giving everyone the jitters. The 2017 CIFAS Fraudscape report identified that fraudulent crimes in asset finance increased by 22% in 2016 compared to the previous year. Asset finance fraud can be particularly unnerving as the threat can come from several directions.

There are four main sources:

Identity Fraud –  Identity related crimes happen when a fraudster has abused identity details to commit fraud. Within Asset Finance there was an 88% increase in identity fraud from 2015 to 2016. This was largely due to a high number of current address impersonations. 

Application Fraud - Where an applicant has used their own name but has submitted an application which contains false information. For example, an individual provides a false address to make it appear their equipment will be located in an area with lower crime statistics. 

Asset Conversion Fraud -  The sale of an asset that is subject to a credit agreement.  Where a business sells a good (such as equipment) that they do not have title to. 

Misuse of Facility Fraud - Where an individual obtains an account/policy or other facility with the intent of using that facility for a fraudulent purpose.

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EquipmentConnect have partnered with Innovate UK and blk.io to help prevent asset finance fraud. In a later post, we will discuss how we will use blockchain tech to improve cybersecurity and prevent fraud.

SME Finance in 2017

What a devil of a year it has been for business confidence. The uncertainty of Brexit, the weakness of government policy after an unnecessary snap election and now increasingly, the real threat of higher interest rates.

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While the economy remains fundamentally strong with low unemployment and strong industry investment, the clouds are certainly building on the horizon. Now, more than ever, SMEs should keep an open mind to ensure access to funding over the coming years.

Fintech lending platforms offer a quicker, cheaper and more user-friendly experience but crucially at this time, these platforms will typically employ different methods of assessing credit risk. For example, here at EquipmentConnect our funders will place considerably more emphasis on the asset strength of the equipment being financed vs traditional funders. By considering fintech platforms alongside other alternative funders, SMEs will benefit from dynamic view points and no longer feel exposed to that 'ride or die' feeling when applying for funding. 

In September, BDRC Continental published the SME Finance Monitor for Q2 2017. The report provides an overview of how SMEs have reacted to the events that taken place in the last 12 months. 4,507 SMEs were surveyed about past borrowing events and future borrowing intentions.  A question rose to prominence. 

Is Fintech Still Disrupting Traditional Finance?

After considering the report it is clear that despite big budgets and well resourced pools of talent, the banks are still struggling to innovate and improve sufficiently. The appetite for fresh options continues unabated.

When faced with new business opportunities that require funding, only 41% of SMEs said they would speak to their bank.

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Large platforms like Funding Circle and most recently RateSetter have gained full FCA authorisation. Furthermore Net Promoter Scores (measuring customer satisfaction) continue to be much stronger within the fintech arena than with traditional funders.  

The Fightback:

With the platforms collectively accounting for over 4% of SME finance, banks are now under pressure to react. RBS have claimed much faster and easier funding with ESME (albeit with a typically punchy 12%+ interest rate). Santander and Lloyds are also developing fintech platforms in attempt to retain customers. Ultimately though, the banks will need to radically reform and tackle hurdles such as costly legacy IT, inefficient labour practices and high capital charges if they are to dominate again.
 

How fintech helps SME Business

Recently I have been asked by SMEs and manufacturers why they should care about Fintech? So many of the tangible benefits get lost in lingo and are trapped in the London bubble. In this post I'm going to write a little on the real difference fintech is making now in 2017 and in a later post I will discuss how some of the emerging technologies such as AI /deep learning and distributed ledger technology will help. 

Financial technology otherwise known as 'fintech' applies technology, both software and hardware to financial services so as to offer improved financial services. On a commercial level fintech is about lowering the cost, increasing speed and increasing information flow to improve user experience. This is empowering SMEs to take more control of their finances.

In 2016 there was $17.4 billion of fintech investment worldwide and £743 million in the UK. Over Q1 of 2017, the UK accounted for half of the top ten European investments in fintech companies. The UK is endowed with a natural advantage for fintech due to government support, high level of entrepreneurial talent and the prioritisation of innovation. London dominates but cities like Edinburgh, Manchester and Belfast are also increasingly involved.

So where are we seeing changes in SME business?

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Fintech is growing through financial management, borrowing, banking and credit analysis. There are a number of catalysts that are enabling the exploitation of fintech:

The Cloud - Cloud computing refers to computing services delivered over the internet and hosted on a personal network. These servers are used to access and analyse data through dashboard views and predict solutions based on analysis.

Algorithmic Decisions - Companies are now using algorithms or 'algos' to analyse and act on data. This saves time and prevents human error. SMEs like Acorn Machine are pioneers in lending based algos. 

Pro Innovation Regulator - The Financial Conduct Authority (FCA) has placed innovation and technology as a main priority to ensure competition. This has encouraged a forward-thinking approach to finance.

Data Availability - Fintech platforms pride themselves on using large amounts of data to assist SMEs with alternative finance. Data is employed in order to lend to SMEs to a) assess and manage risk, ensuring that prospective customers banking status and history are both in order. b) combat fraud by allowing SMEs to decide whether a potential customer is in fact who he or she claims to be, preventing liability and loss.

Below are some examples of fintech companies whose offering has been embraced by the SME market.

 

XERO

 

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Xero is an accounting cloud based solution for small business. Founded in New Zealand in 2006 Xero is a $3.5 billion (£1.9m) company with $300m (£163m) of revenue. SMEs can easily keep track of expenses as using the Xero cloud software allows them to work anytime, anywhere on any device. Xero integrates with your bank account and provides reconciliation, effectively making the role of bookkeeper redundant. 

 

Market Invoice

 

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MarketInvoice allows SMEs to receive cash in 18 hours against their invoices. This is achieved by allowing the SME to take control of their cash flow by selling invoices online.

Factoring has been around for a long time but its technology that gives it the thrust to really become mainstream. MarketInvoice finances over £15,000 every minute and as of October 2017 they have funded over £1.5 billion. Better yet, they provide investors with the expected return 100% of the time.

 

TransferWise

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TransferWise is an online money transfer service that disrupts banks by offering pure peer to peer foreign exchange. Covering B2B and B2C, TransferWise offers an efficient and professional user experience. The site will also save you a truck load of money. PCM research found that when transferring 2,000 euro you pay a total of £19.50 with TransferWise, compare that to £69.36 with a £25 fee when using Santander.

 

Telleroo

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Telleroo is a modern, user-friendly solution to the bulk payments service. Real time payments can be processed and tracked 24 hours a day through an online dashboard. Telleroo focus on fast customer service through online chat tools which sustains a first-rate user experience. The platform's agility makes it very valuable in the gig economy.

 

 

Starting in Fintech - A graduate's perspective

Handing in your final assignment at university sparks a range of emotions. Excitement, fear and relief stick hardest. Throughout the three years of university at Bristol, while balancing exams, social life and sport, I would occasionally contemplate what working life reality would involve. As graduation came, so did a hunger to dive head-first into the business world.

Despite having a general curiosity for innovation and technology, the phrases ‘Start-up’ and ‘Fintech’ were merely whispers during my study years, as case studies and assignments were focused on larger corporations. It wasn’t until returning home that I really discovered the essence of Fintech, a friend who had recently joined a start-up explained how technology could really shake up the bureaucratic and slow world of financial services. The more I delved into the industry, the more I appreciated the real difference fintech was making for everyday people and small business across the UK. Keen to have some have some action on the pitch, I applied and interviewed for several fintech positions.

After considering several options, I joined EquipmentConnect, a new startup applying technology and capital markets efficiency to equipment finance. Going forward there is no down-time, no deadline extensions and sadly, no dull professor to blame.

My first week has been busy and insightful. I visited Interplas (the UK’s leading plastics industry event) at the NEC Birmingham and created a database on manufacturers that appeared at the event. Other tasks included planning and posting on social media sites and developing  our marketing strategy.

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I have never been more excited to learn from an inspiring and diverse group of people. I feel the support from my team and I am thrilled to be surrounded by motivated individuals at the Makerversity campus. Being involved so early in EquipmentConnect’s journey is going to be a challenging but extremely rewarding and I look forward to celebrating the large and small triumphs together.