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All together now Have you ever felt that all hauliers

23rd April 1998, Page 39
23rd April 1998
Page 39
Page 39, 23rd April 1998 — All together now Have you ever felt that all hauliers
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Which of the following most accurately describes the problem?

in an area should band together and form their trucks into a wagon-train circle to fight off the baddies? Well, now you can, in a financial sense, by forming a mutual society.

Banks refuse loans to small businesses principally because of firms' lack of security, poor presentation and management skills.

But an initiative is beginning which addresses the problem of firms being unable to convince banks of their credentials. The concept is the Mutual Guarantee Society. Commonplace in Europe for most of this century-30% of small and medium sized enterprises in France and Germany use them for funding—it has taken them until the 1990s to cross the Channel. Now, with Government backing, and the support of the Co-operative, Unity Trust and Clydesdale banks, they are opening up around the country. Eight societies have been set up since 1996,15 more are in the pipeline and there may be 100 by 2006.

Fresh approach "Obtaining finance is a major problem for small firms, and I want to encourage a fresh approach to the issue," small firms minister Barbara . Roche told a briefing organised by the National Association of Mutual Guarantee Societies last year. Her boss, President of the Board of Trade Margaret Beckett, described it as "an exciting development".

Mutuals provide finance for firms which might otherwise not have been able to find it, and at a lower rate of inter est than the going rate on the High Street; arrangement fees and bank charges are typically 50% to 80% lower. They also pay a higher rate on money invested in the scheme—between 1% and 2% —according to David Bennett, chairman of NAMGS.

Member firms join a society by buying a share, typically costing £25, which entitles them to a vote. Other participants, banks, business links and large corporates may also join, but each receives just one vote. At present the eight pilot societies have 25 to 35 members each, but a fully-fledged scheme might have up to 500.

"The aim is to create a security fund which underpins loans to members of the group," explains Bennett. It is the money on deposit that provides the security for loans. The money is not lent, but members can draw bank loans against it. In certain regions, qualifying for European Regional Development Funds under Objective 1 or 2, each pound in the pot is matched by one from the ERDF, thus doubling the amount available.

The loan guarantee is chiefly seen as a topup to other security. If a society member wanted to borrow £100,000, but could provide the bank with security to cover only £80,000, then the society would consider stepping in with a guarantee on the other £20,000.

To qualify for the guarantee the company would have to have been a member of the scheme for at least six months, and to have invested between one-tenth and one-sixth of the amount required.

The application would have to be approved by the loan committee or the chief executive of the society before going to the bank. This touches on another benefit of mutuals—the level of professional support available through the societies, and the degree of professionalism they instil into member firms. A company wanting to borrow would be required to submit management accounts on a monthly, or at least quarterly basis, both before and after the guarantee is agreed.

Such support is in effect the first line of defence against business failure—it ensures that proposals are realistic and properly thought through.

If things do go wrong, the society will step in to see if the problem can be solved, perhaps by rescheduling the debt If the situation proves irretrievable, then the society may manage things without bringing in expensive receivers and liquidators.

Recovery of assets would start with the member's cash in the guarantee fund, then the company's business assets, and finally the general guarantee fund.

Self-financing The running of the societies is financed initially through grants and support from local development agencies. As they grow, the volume of business will make them selffinancing. Borrowers pay a premium for the the guarantee, though the cost is usually offset by savings in interest rates. Societies are managed by voluntary officers— chairman, secretary and treasurer—chosen from among the members and supported by employed professional officers.

"We believe in mutuality," explains Tony Crooks, managing director of Voice Tec, a Leeds-based firm specialising in computerbased communications, which has donated a Web page to the Leeds MGS, of which it is a founder member. "Through membership of the Leeds Mutual Guarantee Society we hope to have friends in business instead of a world full of competitors," says Crooks.

111 by Peter Willis For more information, contact National Association of Mutual Guarantee Societies, Scriven House, Richmond Road, Bowdon, Altrincham, Cheshire WA14 2T7 Tel: 0161 929 5130; fax: 0161 929 5133; e-mail: nigel @scriven.nwnet.co.uk.Website: http://www. nwnet/scriven/namgsindex.html


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