Cfi: naCfB
Adventure capital
Equity finance for small businesses is experiencing a surge in interest from brokers looking for a financial alternative in a tricky market
by
Adam Tyler, chief
executive, NACFB
In the Green Paper, ‘Financing a private sector recovery’, published by the Treasury a few months ago one of the options put forward for consideration was making equity finance more available to the SME market. The Treasury asks whether this kind of funding for small business could be a viable alternative to bank lending in some cases. Equity funding is an alternative to bank lending whereby an individual or a company buys shares in a business, purchasing a stake rather than lending it money. Many brokers will know that there have always been sources of funding from individuals or syndicates (often called ‘business angel capital’) and from companies specifically set up to invest in companies (called ‘venture capital’). This is far from a new phenomenon; indeed these forms of funding have existed for SMEs for years, so why has it had such a limited appeal? Why have SMEs relied almost exclusively on bank lending if this has always been an option? Certainly relying exclusively on loans
from banks made the SME community hugely vulnerable; and these vulnerabilities were well and truly exposed when banks were forced to rein in their lending. With a lack of alternative funding sources currently available, however, if you’re an SME you don’t have much option but to keep all your funding eggs in one basket. But is that about to change? And, if so, how is it going to change? One of the first changes is mooted in a document from the banking industry
itself. The Business Finance Taskforce has recently published a report which contains a recommendation to set up a ‘Business Growth Fund’, and here we see that the banks themselves are looking to do their bit for the equity cause. This fund is an entirely new idea and will look to make equity investments of between £2m and £10m in companies with a turnover of between £10m and £100m. As small businesses go, these are obviously quite large – but the key issue is the movement into a new direction by the main lenders.
Business aware Not only that, but there is some evidence to suggest that there is a bit of movement already. Because of the Treasury’s Green Paper (and of course the issue with traditional funding), alternatives such as equity finance have been thrust into the spotlight. Because of this awareness, both among the broker market and the SME community itself, is gradually being raised and translated into enquiries and new business, arguably with some success. Data from the UK Growth Buyout Dashboard (a quarterly analysis of the trends in the private equity market carried out by Cass Business School and Lyceum Capital) reveals that the amount invested in the ‘smaller’ end of the market (£10 million to £100 million of investment) has increased by 25% in the last three months, with 12 companies raising an estimated £590m of buyout funding. Obviously, yet again this is the (much) larger end of the ‘small’ market but the trends are still encouraging.
sMe Benefits But there is still much more to do if this initiative is ever going to benefit the vast
majority of the SME market. The issue of where the smaller business will go for finance or how they might benefit is still unclear. The BBC’s Robert Peston’s analysis of the ‘Business Growth Fund’ could best be described as cautiously optimistic. In his blog on the BBC website he says: “It is important not to get too carried away with excitement about the potential of banks’ new Business Growth Fund. I calculate that it will be able to provide risk capital to around 250 middling companies over a number of years (based in the banks’ assertion that they’ll provide £1.5 billion of equity finance in individual lumps of between £2m and £10m). As I’ve said this will be seen as a useful contribution to the growth potential of a segment of the economy that has typically found it hard to raise capital. But it won’t be transformative.”
Challenges ahead The average SME requires funding on a much lower level than is being proposed here: thousands rather than millions, and in addition there is still room for both more education and more awareness raising for brokers, SMEs, and potential investors. And there are other challenges too. The SME market represents a risky sector for angels or venture capitalists, so one idea is that tax incentives could be offered to make this kind of investment more attractive to investors. But unfortunately, even with sweeteners, there is a very real possibility that once the banks return to strength, the SME market will revert to being just as reliant on them as they always have been, and potentially just as vulnerable. So investigating alternatives now won’t just help with the present, but could also help prevent the same problems happening again in the future.
mortgAge introducer NOVEMBER 2010 49
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