How are UK firms raising finance?

The textbook section on finance is sometimes a bit far from the mark when describing how firms (especially the biggest) raise finance in reality. Several years have passed since the ‘Credit Crunch’ of 2007/08 and big problems remain. Business lending has now been falling steadily for four years, and is 20% lower than in 2009.

• You’d think the first place to look for finance are the banks, but according to The Economist, Britain’s bruised banking sector leaves anyone looking to set up a new firm or expand an existing one scratching around for cash. The graph above shows how far bank lending has fallen.
• The second option for companies (Ltd or PLC firms) is selling shares (equities) and the graph shows how that remains an important part of finance. UK firms have raised £22bn in this way over the last four years.
• The surprise to me is quite how much money is raised through issuing bonds (£49bn over the last four years), which is twice as much as was raised through selling shares. As an economics teacher, I’m always talking about the bond market in economics (as this is the mechanism by which governments borrow money), but in Business Studies, I seldom mention bonds…

This topic sometimes crops up when discussing economies of scale, when talking about the advantages larger firms often enjoy when raising finance. That’s the main issue really: small businesses have very limited access to stock and bond markets. This is a big problem, because outfits with fewer than 250 employees account for 70% of jobs.

New types of lender are starting to fill the gap. The article goes on to discuss several interesting examples, like peer-to-peer lending. Others are reinventing old ideas. Financial firms from London’s 19th-century discount houses to modern pawn shops have always been ready to exchange illiquid assets for cash, for a fee. The ability to convert assets into cash can mean the difference between snapping up a valuable opportunity—to buy some discounted stock, or a competitor—and missing it. As cash flow improves, bosses return the cash. The typical loan is repaid in three months.

According to the article, these new forms of lending may persist even when Britain’s banks return to life. It’s well worth a read.