SMEs reluctant to follow corporate path

The corporate bond market has failed to flourish among small and midsized companies whose boards consider listed debt as the hardest way to raise finance.

Tradeable debt remains a mystery to most small company bosses, says a survey by BDO, the financial services group, and the Quoted Companies Alliance.

The study showed that while issuing tradeable bonds have become more attractive to fledgling businesses, few boards yet feel comfortable enough with the market to use it.

“Historically, listed debt has been the preserve of blue-chips,” said Scott Knight, BDO partner.

Most small companies were unaware of efforts by the London Stock Exchange to foster a new market in small corporate bond issues designed to attract retail investors and provide even small firms with alternative sources of funding to equities and bank debt. Issuing shares remains the most popular form of financing for all but the biggest listed companies, the survey said.

Mr Knight said that funding had become yet more challenging for SMEs “with respondents reporting that it is more difficult than three months ago” and that “listed debt is the most difficult form of finance to obtain”.

However, he said there were signs that attitudes were changing. He and Tim Ward of the QCA said equity finance had lost some of its popularity as companies appeared to seek out alternative finance.

The numbers of companies that said they would prefer to raise money by issuing bonds doubled year on year, albeit from a small base of just 6 per cent of respondents.

More than 40 per cent of bosses of small quoted companies questioned said they would still opt to raise money by issuing new equity. But just under 40 per cent expressed an interest in issuing corporate bonds at some point in the future as an alternative to equity. This is in reaction to increasing concerns about the lack of investor demand for equities in small enterprises.

More than a third of those questioned acknowledged the benefits of bonds over shares: many welcomed the fact that issuing bonds did not dilute ownership or the control of a company.

Nonetheless, a number of company bosses said
they remained nervous of issuing bonds. Some worried about the inflexible nature of corporate debt with its fixed schedule of interest payments and repayment.