SMEs keeping the global economy turning

By St├ęphane Blanchoz on 3rd June 2019

Alternative Credit

While large companies and household names dominate both the daily news flow and advertising campaigns, it is the small and medium-sized businesses that keep the global economy turning.

SMEs keeping the global economy turning
Image source: Photo by Porapak Apichodilok from Pexels

The overwhelming majority of the world’s companies employ just a handful of people – and the UK is no exception. According to the latest figures from the Department for Business, Energy & Industrial Strategy, in 2018, 99.9% of all UK private sector companies were SMEs. In fact, SMEs account for at least 99.5% of the businesses in every main industry sector. Together their annual turnover was estimated to hit £2 trillion in 2018, making up 52% of all private sector revenue. Not only that, these companies were staffed by 16.3 million people, meaning they provided some 60% of all private sector employment in the UK.

But despite their crucial importance to the UK economy, SMEs are often overlooked when seeking to borrow to expand or fund their working capital requirements. According to the Bank of England’s statistics on corporate lending, after a spike in 2013, there has been no significant increase in the level of money being made available to UK companies to borrow. This is despite more than 800,000 new companies being launched in that time.

This lack of available funding is an issue for companies of all sizes, but while those at the larger end of the scale can enter the international capital markets and issue bonds to global investors, this is not a viable option for SMEs with much smaller headcounts and cashflow. Instead, asset managers, including BNP Paribas Asset Management, have been working with partners to seek out these companies and make the funding previously provided by banks available to them.

Our clients, including pension funds and insurance companies, need to make their vast asset piles work hard to produce an income. Over the last few years, their traditional investments have failed to offer the returns they need, so they have turned to lending to SMEs as a new opportunity. Both we and our investment clients know that accessing finance is vital for businesses to grow and flourish. This is something that has been recognised by the United Nations, which has taken a focus on the smaller end of the scale.

In its Sustainable Development Goals published in 2015, the UN cites lending to SMEs as a key target to goal number eight, which aims to “promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all”.  The UN realises that SME lending bring huge benefits to the real global economy, without it, many of these companies would not survive. Allowing these companies to expand delivers a positive societal impact through creating jobs and moving people up the social scale. A wealthier, empowered workforce can more easily educate and provide for their families and ensure a more secure future.

Also, promoting an ESG agenda to the companies we lend to can help these businesses address their long-term sustainability and allow them to expand further as the years go on. However, unlike other lenders, who try to unduly influence management on strategic matters, we believe it is critical for companies to retain control. Small businesses are usually borne out of an idea to fill a gap in the market and we do not want to quash these ideas or entrepreneurial spirit.

But we do need to know what is going on before we lend – and this can be a challenge. While companies listed on a public exchange are subject to rigorous regulation and frequent disclosure obligations, private SMEs are under much less scrutiny. This means there is less publicly available information about the nature of their businesses – and their financial success. This means we need to carry out significant due diligence on individual companies to ensure their business strategies make sense. The lender also needs to check and recheck the financials are robust and do not present significant default risk.

With all this in mind, we strive to be a responsible lender. While we will price interest rates according to the risk we are taking, we ensure they are fair and suitable for the borrower. We know that lending to companies at excessive rates can be damaging to both sides of the deal. Instead of boosting our return on investment, lending at very high rates can actually undermine it, by making it harder for enterprises to turn a profit. Therefore, we aim to strike a firm balance between being rewarded for the risk we take and ensuring SME borrowers are able to pay. We have a responsible duty to the borrowers as well as to our clients. As a signatory of the UN’s Principles for Responsible Investment and having committed to the organisation’s SDGs, it is our duty to ensure SMEs have access to stable, sustainable funding that will see them grow on into the future and continue to provide a return for our clients.

For more information, you can visit www.smealternativefinancing.bnpparibas-am.com

 

 

Disclaimer

BNP PARIBAS ASSET MANAGEMENT UK Limited (“the investment company”), is authorised and regulated by the Financial Conduct Authority.  Registered in England No: 02474627, registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom. This material is issued and has been prepared by the investment company. This material is produced for information purposes only and does not constitute:

1. an offer to buy nor a solicitation to sell, nor shall it form the basis of or be relied upon in connection with any contract  or  commitment whatsoever or

2. investment advice.

This material is provided as an introduction to the investment company’s SME Advanced Solutions platform.  The investment company does not offer or purport to offer any direct lending or credit facilities to UK borrowers in  connection with the SME Advanced Solutions platform or otherwise. Non-consumer loans and similar credit facilities are not regulated investments under applicable UK law and non-consumer lending is not a regulated activity in the UK.   Non-consumer loan agreements and lending activities are not covered by statutory restrictions on financial promotions and communications which invite or induce persons to enter into a loan agreement or to buy or sell rights under loan agreements will not be subject to the restrictions that may apply to promotional materials for other financial products or services.

Opinions included in this material constitute the judgment of the investment company at the time specified and may be subject to change without notice.  The investment company is not obliged to update or alter the information or opinions contained within this material. Investors should consult their own legal and tax advisors in respect of legal, accounting, domicile and tax advice prior to investing in the financial instrument(s) in order to make an independent determination of the suitability and consequences of an investment therein, if permitted. Please note that different types of investments, if contained within this material, involve varying degrees of risk and there can be no assurance that any specific investment may either be suitable, appropriate or profitable for an investor’s investment portfolio.

All information referred to in the present document is available on www.bnpparibas-am.com.

As at May 2019.

 

Sign up to the Daily Disruptor Newsletter

Companies in this Article:

Bank of England
Financial Conduct Authority

More like this:

Currency exchange fintech expands into credit

27th September 2017
Ryan Weeks

Ultimate Finance hits record lending to SMEs

14th January 2020
John Reynolds

Pollen Street fund hit by Zopa writedown

7th January 2020
Daniel Lanyon

LendInvest fund sees 40% growth in assets

18th December 2019
Daniel Lanyon