How a more diverse finance market can support business growth
STANDFIRST: Ken Cooper, Managing Director at British Business Bank, looks at how a more diverse finance market can support business growth.
Smaller businesses make up the overwhelming majority of the nation’s business stock. They support millions of jobs (in fact 60% of the UK’s private sector employment), and generate almost half of all private sector turnover.
Improving the growth and productivity of smaller businesses is therefore central to improving the performance of the economy as a whole.
This makes it even more important that finance markets are effective in supplying funding to smaller businesses when it is needed, and that smaller businesses across the UK have the ability and confidence to attain finance appropriate to them.
But when it comes to growth, there can be a real reticence to invest to grow. In fact attitudes against borrowing have become more entrenched, with around 70% of smaller businesses willing to accept a slower rate of growth rather than borrow to grow faster.
There are many reasons for this, leading to a sharp decline in recent decades in bank loans to business as a proportion of domestic lending, with a perception among businesses that if they apply for a loan they will be turned down (this is despite loan approval rates actually remaining quite high at around 72%).
But the good news is that there is an increasingly diverse range of finance options available, especially as new technology increases competition and enables more innovative products and services.
Our recently published Small Business Equity Tracker report shows that last year saw a 51% increase in the value of peer-to-peer business lending and that the value of equity investment also grew by 89%.
Increasing the diversity of finance options for smaller businesses is important for a number of reasons. Not only does it improve access to finance for a wider range of smaller businesses, but it can improve the terms and ease of use of that funding, and make sure that it is most appropriate form of finance that is best suited to their needs.
As the UK’s national economic development bank, which was created to improve finance markets for smaller businesses, increasing the diversity of both supplier and product on offer is a key part of our mission.
Education is also important so that smaller businesses understand the full range of finance that is available to them to help them develop and grow.
Since the creation of the British Business Bank in 2014, we have supported a host of alternative providers, such as challenger banks, private debt providers, peer-to-peer debt finance, asset finance, merchant cash advances and other fintech-enabled platforms as well as supporting some 35 venture capital funds.
Most recently we have launched the Cornwall & Isles of Scilly Investment Fund, a £40 million fund aimed at boosting the local economy by providing debt and equity finance to help growing small businesses across the region.
The fund has been established in partnership with the Cornwall and Isles of Scilly Local Enterprise Partnership (LEP), the European Regional Development Fund (ERDF) and the UK Government to provide local businesses with more funding options to help them grow and create jobs. It has two main elements:
Debt finance, from £25,000 to £1 million: this is designed for smaller businesses needing to borrow for a wide range of purposes including filling gaps in growth capital, funding expansion projects, employing new staff and investing in new machinery and equipment.
Equity finance, from £50,000 to £2 million: In simple terms, equity financing is the raising of capital through the sale of shares in a business. An equity investment could be right if you have ambitious growth plans that need long term funding. Rather than requiring regular interest payments the fund will share in the success of your company. This can be particularly useful for companies with high growth potential or those innovating with new products or services.
The Cornwall & Isles of Scilly Investment Fund is one of three regional funds established by the British Business Bank to help reduce imbalances in access to finance for smaller businesses across the UK.
Access to finance in Cornwall and the Isles of Scilly is a much higher barrier to growth than the English average, and the fund is a response to an identified market gap in the provision of debt and equity finance in the region. Despite having 1% of the UK’s smaller businesses the area attracted just 0.1% of all equity deals compared to 5.4% across the wider South West.
The good news is that region also has a high proportion – some 12.5% – of businesses classified as high growth. And there is a comprehensive programme of business support, including investment-readiness programmes. So we hope the new fund will start to unlock the potential of these growth businesses very quickly.
There is of course a wide range of funding options available which we have summarised in the British Business Bank’s Business Finance Guide, an invaluable tool whether you are a start-up entrepreneur or managing an established growing company. We have also launched a new interactive website that offers independent information on finance options for scale-up, high growth and potential high growth businesses. The information hub can be found at financeyourgrowth.co.uk.