It is now more than two years since the collapse of Lehman Brothers, which triggered the worst global economic downturn

in living memory. Small businesses that survived will barely have had a moment to pat themselves on the back – the long climb to recovery is almost as treacherous as the downward slide was.

Last year, ACCA joined forces with two other major accountancy bodies – CGA-Canada and Italy’s CNDCEC – and commissioned Forbes Insights to survey nearly 1,780 small and medium-size businesses (SMEs) in six countries: Canada, China, Italy, Singapore, South Africa and the UK. We wanted to know how SMEs were coping in the economic recovery, and how finance and financial advice were contributing to their efforts.

Many of our findings are impossible to take out of context: the six countries considered in the Forbes study are too different for that. Nevertheless, some common lessons can be drawn.

01 We’re not out of the woods yet. As the global economy

continues to edge forward, most SMEs are looking forward to a rebound in

sales, and it is easy to assume that many of the problems they are facing will be ironed out when growth returns.

In reality, ACCA’s Global Economic Conditions Survey suggests the recovery has run out of steam, and the Forbes survey found that more than a third of SMEs haven’t got enough reserves to weather a renewed downturn. Yet even sustained growth will put serious strain on the finances of smaller businesses: Chinese SMEs, for instance, are less confident about the adequacy of their cash reserves than British ones.

02 Cash is king. In this as in other studies, cash has emerged as

the strongest determinant of success in raising funds. This is partly because the need for liquidity is driving most of SMEs’ demand for funds, and partly because lenders, in particular, are now more risk-averse and less reassured by promises of sustained growth. SMEs that can prove, through solid planning and forecasting, that they are in control of their cashflow will have a better chance of getting finance.

03 Collateral is here to stay. In most of the developing world it

is a generally accepted fact that nearly

all loans to small businesses must be secured against assets, typically ones worth much more than the loan itself. This used to be the understanding in developed countries too – until the credit bubble began. With the end of the bubble the demand for security is back with a vengeance and will be with us for years to come.

04 Lenders will not finance an SME’s customers and investors

will not refinance debt. Although many business owners will try all possible options in order to resolve a financing problem, different types of finance are not always interchangeable: who you should be talking to depends on what your needs are.

Our findings confirm that, although lenders will finance a small business’ working capital, they don’t like the idea of their funds being used to extend credit to customers. To a bank, this is a bit like outsourcing part of their risk management and debt collection to you, which rarely makes sense.

The business plans of SMEs seeking credit need to reassure the bank that their funds will be used for capacity-building purposes – investing in tangible assets is usually a plus.

rocky recoveryMany parts of the global economy are returning to growth, but research shows many SMEs are still in danger, reports ACCA’s Emmanouil Schizas

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Similarly, investors prefer to provide funds for national and international expansion, including the hiring of staff. But bringing in an equity investor such as a business angel is much more difficult if a business has debts it needs to refinance.

External finance may not be forthcoming from conventional providers for SMEs facing either of these two problems. If the business is not making profits you can reinvest: you will almost certainly need to tap

either your suppliers, your own savings, or even those of your family for funds.

05 Don’t run for the exits. As lenders gradually withdraw from

unsecured lending and turn away from customer credit risk, many business owners unable to obtain funds are falling back on potentially unsuitable sources of finance, especially personal credit cards and late payment. These expose SMEs to substantial financial and reputational risks, and although

some may genuinely have no other option, they should try to consider alternatives while they can, such as suppliers – agreeing easier credit terms is better for both parties than being late with payments.

06 SMEs are banks too. Credit from suppliers is the most

commonly used source of external finance among SMEs. In some countries, the flow of trade credit is twice as large as that of short-term

The survey found ThaT more Than a Third of smes haven’T goT enough reserves To weaTher a renewed downTurn

12%

46%

34%

7%

1%

11%

43%37%

9%

1%

Significantly higher

Higher

About the same

Lower

Significantly lower

Significantly higher

Higher

About the same

Lower

Significantly lower

In 12 months, what do you anticipate turnover will be compared with today?

In 12 months, what do you anticipate profitability will be compared with today?

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wiTh many smes expecTing an increase in revenue, They see a need To financecapaciTy and working capiTal now

bank lending. This gap is set to widen even more, as the chances of obtaining credit from a supplier are now much better than the chances of getting a new overdraft facility. The problem is that much of this credit flows from SMEs to other SMEs. Unlike (good) banks, SMEs in the real economy rarely have solid credit or collection policies in place and cannot afford to set aside capital against losses, so they end up taking substantial risks.

SMEs that find themselves in this position need to start taking stock of customer credit risk, diversifying the customer base and improving their credit management. Most importantly, SMEs need to start thinking of credit as a financing and cashflow issue – not just a tool for achieving sales. Many already have: the study confirms that suppliers have become much smarter about credit in the past two years.

07 There is no finance without information. Lenders and

investors don’t want to take risks they can’t measure. When we plotted finance approval rates in the six countries represented in the Forbes survey against each country’s Getting Credit ranking (one of the World Bank’s Doing Business indicators, which measures the ease of obtaining credit information and enforcing claims), we found that, in countries with a strong supply of credit information, obtaining funds is easier and a healthy balance sheet is more likely to give easier access to finance.

The same effect holds at the micro level: businesses that produce better information are more likely to attract funding. This is true of all but the riskiest of borrowers: SMEs can benefit from preparing financial information, even if they don’t have the best news to offer the bank manager, provided they are honest and keep them up to speed.

Emmanouil Schizas is senior policy adviser with ACCA’s Small Business Unit

*What determInes fInancIng success? No discussion of access to capital can be complete without a thorough understanding of why SMEs are seeking credit and what ultimately determines their success.

The 2009 study, Surviving the Drought: Access to Finance Among Small and Medium-Sized Enterprises, commissioned by ACCA, CGA-Canada and CPA Australia, suggests that the lack of available finance is causing SMEs to postpone financing decisions, and that they expect a lack of funding to be the main constraining factor on their businesses through 2011.

A year later, it appears SMEs have, in fact, waited about as long as they could. With many expecting an increase in revenue, they see a need to finance capacity and working capital now, and they are approaching the credit and equity markets accordingly.

Again, this more detailed analysis of the 2010 data suggests that SMEs are first looking to credit markets to rebuild their liquidity and cash positions. SMEs are unlikely to apply for funds for capacity-building alone. As a result, SMEs with poor cash positions are more likely than others to apply, and less likely to succeed, since they are seen as serious credit risks. In fact, according to the survey, liquidity is the top driver of approval rates for finance applications.

If you’re seeking credit, it appears it is easiest to obtain from an SME’s suppliers, while the hardest type of credit to get is an unsecured bank loan. Business angel investment is the hardest type of equity to obtain, while retained earnings are the easiest – provided, of course, the business has earnings to reinvest.

What SMEs plan to do with the money also matters. Judging from approval rates reported in the survey, acquisitions and hiring staff are popular with equity investors (often the owners themselves). On the other hand, refinancing debt is the least likely use for equity investors to approve. On the credit side, it is hardest for SMEs to obtain funds for customer financing – banks and other lenders generally don’t want to take on customer credit risk and don’t trust SMEs to manage it for them. On the other hand, it appears easiest for SMEs to obtain credit for expanding manufacturing or service capacity.

Then again, many SMEs do not feel that credit is the right way to finance some capacity-building projects. Foreign expansion, in particular, was the least likely objective for SMEs to pursue through the use of credit (followed by investment in new technology and acquisitions). Many businesses feel that international trade and the associated credit markets have yet to recover, and that doing business overseas can throw up some pretty intractable risks, including protectionism and corruption. Instead, the survey found evidence that equity providers are taking over the role previously played by creditors in funding foreign expansion.

When other factors are taken into account (the size or liquidity of the business, the intended use of funds), access to finance is more constrained in Italy and China than other countries. Canada and South Africa follow. The UK had the strongest approval rate of the six markets considered, but that may also be because many weaker businesses have been discouraged from applying in the first place.

The forbes insighTs reporT on smes can be found aT: www.accaglobal.com/economic_storm

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