Increase in the use of equity and alternative finance by Small and Medium-sized Enterprises (SMEs)

Featuring Richard Wadman | 26th March, 2018

As some of you who attended our Finance in the South West event would have heard, last month the British Business Bank’s 2018 Small Business Finance Markets report revealed “welcome evidence that the UK’s small businesses are diversifying in their choice of finance”.

Headlines

Among the headlines from the report:

  • The value of SME asset finance deals (up 12%) and peer-to-peer business lending (up 51%) in 2017 both showed strong growth
  • Significant increases were seen in 2017 in both the value and number of SME equity deals (up 79% and 12% respectively)

Also:

  • The UK is a world leader for start-ups and has its highest ever population of small businesses, with a record number of start-ups in a year
  • UK’s scale-up performance improves, but is behind the US in part, due to less later stage Venture Capital (VC) funding
  • Demand is still a challenge, with 70% of smaller businesses opting to forgo growth rather than taking on external finance
  • 57% of smaller businesses are not confident in their eligibility to secure a traditional loan

Signs of a diversifying finance markets

The report saw signs that the finance market for SMEs are diversifying, commenting that:

  • 2017 saw a record low in the demand for traditional bank loans from smaller businesses accompanied by a reduction in their confidence in securing loans. New applications for SME bank loans and overdrafts has fallen from 2.9% in 2012 to 1.7% in 2017
  • Relatively flat levels of bank lending do not however reflect the trend within the small business finance markets, as 2017 continued to provide increasing volumes of finance to smaller businesses, with aggregate flows of financing experiencing double digit growth across several products
  • The significant increases in peer to peer business lending and equity finance deals (albeit partly driven by a small number of very large deals) highlight a shift away from traditional financing methods. This development is particularly positive as equity finance is an important factor in achieving growth. Evidence from 2017 showed a continuing trend of equity investments being clustered in certain cities, particularly but not exclusively in London. Increased equity activity outside of major cities could help close disparities in regional growth.

Importance of Patient Capital

On the subject of ‘Patient Capital’, the report noted that despite recent improvements in the availability of equity finance in the UK, our external equity finance to Gross Domestic Product ratio remains lower than several of our international competitors.

Late stage Venture Capital, was seen as a specific area of concern, where funding provision in UK markets is noticeably below that in the US. This was seen as potentially restricting UK Businesses’ growth prospects.

The 2018 Small Business Finance Markets report laid out a number of recommendations to address this issue, which includes:

  • Establishing a new £2.5bn investment fund incubated in the British Business Bank with the intention to float or sell once it has established a sufficient track record
  • Introducing large scale investments into a series of private sector fund of funds, with the British Business Bank seeding the first wave of investment with up to £500m
  • Continuing to back first-time and emerging fund managers through the Enterprise Capital Fund, supporting at least £1.5bn of new investment

Report conclusions

The report argued that a lack of awareness and understanding of the full range and benefits of finance options available to small businesses, combined with a culture of avoiding external finance, is impeding potential growth across the UK. In this context, the increased uptake of diversified range of finance options is a positive development in 2017. However, further efforts are needed to address issues surrounding Patient Capital and regional inequalities.

A full copy of the 2018 Small Business Finance Markets report can be found here.

Note: a range of finance options, covering grant, loan and equity, will be covered at our upcoming ‘Finance in events’.  For more details and to book your free place, please follow these links – Finance in Cornwall or Finance in the South (Bournemouth).

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