Written evidence from Britchem Products
UK Ltd
1. BACKGROUND
BritChem Products UK Ltd is a chemical blending
and packaging business located in Oldbury West Midlands UK. The
company was established in 2005 and began trading in 2006. In
the year ending 31 March 2010 the company reported sale of £1.7
million and an operating profit of £107k. Some of the key
aspects of the company are summarised below:
— The company EXPORTS 100% of the products
that it produces.
— The company exports to the West African
market where it has 95 customers (distributors/wholesalers).
— In 2007 the company won the Black Country
ACBF awards for best Business Start up and International trade.
— The business is owned 50/50 by Mr Paul
Udenze and Mr Charles Nwachukwu who both bring to the business
a large degree of experience in both the manufacturing and service
sectors.
2. ACCESS TO
FINANCE
2.1 The company has constantly struggled to
secure access to finance to support its growth from the outset.
In part this is because the company was a small, early stage venture
(and in our experience bank's do not like to lend money to early
stage, unproven enterprises) and in part because the business
was established with the intent of selling goods to the West African
market and this market is considered by many to be more risky
than others (this is despite the fact that official statistics
indicate that the Nigerian market is the 32nd largest export market
for the UK) Source UKTI 13 January 2010.
2.2 The company was established with the assistance
(in terms of help, guidance, grants and loans) of Business Link,
the Manufacturing Advisory Service and the local Community Development
Finance Institution (Black Country Reinvestment Society and Aston
Reinvestment Trust) and loans from LloydsTSB under the Small Firms
Loan Guarantee Scheme (SFLG). As one of the founders/owners of
the company I would like to stress that without the assistance
and finance provided by these organisations it is doubtful that
the company would have got off the ground.
2.3 The majority of the finance that has been
raised to secure the company's growth to date has been capital
invested by the owner/founders (£125k) and loan capital invested
by our family and friends (£75k).
3. ENTERPRISE FINANCE
GUARANTEE SCHEME
3.1 During the early stages of 2010 we made
an application for a loan (in support of the growth working capital
requirements of the company) under the Enterprise Finance Guarantee
Scheme (EFGS). The loan was required to help the company to grow,
create jobs in the UK and helped the company to expand the export
markets to which it exports.
3.2 Loan applications were made to Royal Bank
of Scotland Plc and HSBC Plc under the Enterprise Finance Guarantee
Scheme (EFGS). The loan applications were made with the support
of a local West Midlands firm of corporate finance specialists
(Blue Sky Corporate Finance Ltd) and their assistance was partially
funded by a grant from Business Link.
3.3 The EFGS loan application was declined on
the basis that the principle activity of the company is to EXPORT
and one of the rules of the EFGS scheme is that a loan under this
scheme cannot be used where the principle purpose for which the
loan is being sought is to support the activity of EXPORT. It
is my understanding that no such rule exists where the primary
use of the loan is to support the activity of IMPORTING.
3.4 Our corporate finance advisors have checked
the legitimacy of the reason given by the banks for declining
the loan application with EFGS experts at Advantage West Midlands
(AWM), Capital for Enterprise Ltd (CFeL) and at the Department
for Business, Innovation and Skills (BIS). In all cases the EFGS
experts have confirmed the existence of the rule preventing a
loan being granted to Britchem Products UK Ltd under the EFGS
scheme. There does not appear to be any consensus on the rationale
for this rule but so far two theories have emerged from the discussions
with CFeL and BIS:
— One theory is that the rule was established
at a European level under the principles of "State Aid"
to prevent the EFGS loan from distorting trade between European
Countries (ie a loan being made to a company in one European Country
to create jobs that would displace jobs in another European Country).
If this is indeed the rationale for the rule then it would appear
to ignore the fact that the EFGS loan scheme is only available
to SME's and it is surely difficult to imagine that an SME can
materially distort the markets within the EEC. More importantly
the loan that is being sought in the case of Britchem (see above)
is intended for the support of export activity outside of Europe.
— The other theory is that a loan under
the EFGS scheme is not needed for the support of export activity
because other Government backed initiatives (most obviously the
support provided under the Export Credit Guarantee Scheme) are
better suited to this purpose. If true; then this rationale is
based upon a limited interpretation of the support provided under
export credit guarantees (explained below). Suffice to say that
all of the experts from the worlds of corporate finance and banking
that have looked at the Britchem business agree that an EFGS loan
would be ideal (if it were permitted under the rule of the scheme)
and that export credit guarantees are not suited to the working
capital requirements of this business.
4. EXPORT CREDIT
GUARANTEES
4.1 Export Credit Guarantees (ECG) underwrite
all or some of the value of the sale (debt) being made to an export
market and where this support is available then it may be possible
to use the value of this underwritten debt to secure working capital
finance secured against the value of this security in the UK.
4.2 The principle underpinning ECG's is that
the export company has a single order from a single customer in
the export market. The organisation providing the ECG can then
assess the trading record and credit worthiness of the export
customer concerned and can offer/price the insurance according
to their view of the risk concerned. This model only works if
the exporter knows precisely which of its customers is going to
buy the goods that it is exporting and in most cases only if the
exporter has a firm purchase order from the customer(s) concerned.
4.3 Britchem (and we suspect many other companies)
does not work in this way. Britchem ships goods to stock in its
target market. At the stage that the goods are loaded onto the
ship Britchem will not know for certain which of its 95 (and growing)
customers in its target market are going to take delivery of the
inventory concerned. When the goods exported arrive in West Africa
the container is split down, allocated and shipped to its customers
on an as required basis.
4.4 In summary the ECG model does not work for
a company that is `shipping to stock' in an export market and
because of this fact the Government intervention into the ECG
market is of no benefit to exporters like Britchem.
5. CONCLUSION AND
RECOMMENDATION
5.1 There appears to be a consensus that small
to medium sized enterprises will lead the UK economy out of the
recession and also that export will play an important part of
this process. Britchem is a small but fast growing and viable
export based business in desperate need of additional working
capital to finance its growth.
5.2 One of the obvious Government backed schemes
that could assist our company is the EFGS loan scheme and it would
appear that one or more of the banks that operate this scheme
would gladly consider extending the company credit under the scheme
save for the fact that this would not be permitted under the rules
of that scheme.
5.3 The irony of this rule is that we are surrounded
by companies here in the West Midlands that are little more than
warehouses for good being imported from China (and other markets)
on their way to retail outlets. I can only presume that these
companies are therefore supporting the creation of wealth and
jobs in the markets from which they import. In the event that
any one of these companies are SME's and they need working capital
finance to grow (and import more) then a loan under the UK Government
backed EFGS scheme would be freely available to them.
5.4 It follows that our recommendation is simple
and straightforward—that the rules of the EFGS scheme (or
whatever scheme replaces this) are changed to ensure that EXPORTS
are not only permitted but also encouraged.
14 September 2010
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