February 2012

In 2011, Manchester proved a beacon for foreign investment creating 180 new projects leading to 13,500 new jobs, according to UK Trade & Investment (UKTI). Expectation in the telecoms, media and technology (TMT) sector is particularly high, where the strong expectation is that more specialist companies will follow the likes of Endemol and the BBC, whose relocation to MediaCity in Salford is blazing a trail.

It is the expansion of niche companies that Pam Dawes, Managing Partner of the Mazars Manchester office, describes as most likely to achieve their growth targets over the coming year. In particular, Dawes is seeing companies that have worked hard to acquire the right skills and develop a clear niche have the advantage over companies with a less focused approach. “Some of our clients in specialist areas of IT, and particular parts of the service industry have lined up the right skills, focus, unique selling point and service delivery. And I see them all doing well and bucking the trend,” Dawes reveals.

But even for those companies prepped and primed for growth, access to finance remains one of the key issues that businesses in the region believe needs to be addressed most urgently if their development plans are to come to fruition. Dawes agrees that raising finance is challenging and many businesses have found their plans thwarted because traditional sources of lending, especially cash flow lends, are less available. 

Dawes believes such a blinkered national approach to lending takes no account of the potential of the region’s specialist players – gems which are not just surviving, but thriving. One such example is a local property management consultancy, which Dawes confirms is extremely profitable. “They are earning a 20 per cent return, compared to the big industry giants in this sector making around five per cent. Whereas this example is a smallish company – just under the audit threshold – they are still making a million-plus on the bottom line. Even though the business is owned by just two people, they are very profitable and faring better than the larger companies.”

In addition, she is witnessing a worrying trend for banks to offer complex financial arrangements to both new and existing customers. “Banks are increasingly offering to arrange or replace a tier of finance with, for example, a mezzanine structure which is more about a quasi-share capital arrangement. More importantly it's often more expensive for the business and its owners who may see their shareholding diluted in the process,” she says.

As an example, Dawes explains that in response to an overdraft request for say, £2.5m, a bank will in practice look to provide £1.5m working capital facility, often in the form of invoice discounting, and a further £1m linked to much higher interest rates, with an option to convert to shares in certain circumstances. What banks are doing here, says Dawes, is protecting their own positions by lending as shareholders. “However, these proposals are shocking some borrowers,” she explains.

The result is that companies who simply cannot afford to ignore business growth opportunities, are now uncertain as to what financial options they have. Dawes says many companies are finding that to expand they have to raise the money themselves by exploring more creative options, such as growth capital and development finance.

"Fortunately there are a number of new providers of growth finance, some regionally focused (such as the North West Fund) and some national funds (e.g. the Business Growth Fund) which can fill the gap. However, businesses need to be well prepared before entering into discussions with such funders and accept that there will be an equity cost to the finance. We are working with a number of businesses where the opportunities for growth are real and current and they need access to funds now to take advantage," Dawes explains.

It’s another example of how innovative solutions to funding problems are helping ensure that companies in the region continue to move ahead with their development plans. After all, as Dawes concludes, “If you’re not going forward, then you are slipping backwards.” 

Click here to find out how one famous Manchester resident is now using his skill in the charity sector.