UK SMEs are hungry for growth. One recent survey found that on the whole two-thirds of SMEs are confident about their future business performance and anticipate revenue growth of up to 8 per cent over a 12 month period. A pivotal question remains however as to how these businesses will fund this expansion should they need an injection of capital.
Brexit likely means the loss of funding from institutions such as the European Investment Bank, a funding route which many SMEs have taken advantage of in recent years. The Federation of Small Businesses has noted that the EU has dedicated £3.6 billion to supporting small UK businesses between 2014 and 2020 – a shortfall which will need to be made up at home. In addition, banks are still wary of lending to many growth businesses in the post-crisis climate – meaning the path to securing funding can be a slow and arduous one. Fortunately, there are attractive alternative sources of funding available to SMEs.
These alternatives can take the form of debt or equity funding. Here we will focus on the wide array of debt and loan funding options that are set to play an expanded role in financing companies in post-Brexit Britain, including regional loan funds, direct SME lending funds, peer2peer (P2P) lenders and invoice-financing options. Companies looking for equity funding, meanwhile, can seek finance from a private equity investor which can offer them a committed long-term business partner alongside the financing. Private equity funding can also include investment by venture capital trusts (VCTs) which offer significant tax benefits to investors, and where Maven is one of the UK’s leading managers with six established VCTs currently supporting over 40 ambitious UK companies.
One of the challenges that will come with Brexit is the probable loss of EU funding to less economically developed regions of the UK. However, a number of regional funds have been developed which aim to inject money into SMEs, and are focused on businesses that can contribute to economic development, job creation and innovation. Maven manages a number of these funds, including part of the £400 million Northern Powerhouse Investment Fund (NPIF), launched by the government-owned British Business Bank (BBB). Other funds managed by Maven include the Greater Manchester Loan Fund, the Finance Durham Fund, and a £90 million debt fund as part of the £250 million Midlands Engine Investment Fund. Depending on the particular fund they apply for, SMEs can receive between £50,000 and £750,000 of debt financing.
One of the chief advantages of going down the regional funding route is that it can be a viable option for businesses that cannot meet the specific lending criteria of banks – whether they cannot provide the security banks require, or may need a longer capital repayment holiday or period to repay the debt than banks can provide. A broad variety of businesses are eligible: regional funding is typically open both to start-ups and established SMEs, across a range of sectors, though they will need to meet certain criteria in terms of locations and size, and may not be eligible if they operate in certain sensitive sectors.
Another option to access alternative debt is via P2P funding, which matches SMEs with businesses or individuals willing to lend them money. This fast-growing sector expanded 67 per cent to £7.3 billion last year; the BBB reported that it channelled 94 per cent of the loans it issued in 2016 through P2P platforms rather than the ‘big four’ banks.
P2P is attractive to small businesses because it can greatly speed up the process by which they access funding compared to banks, and also may apply more flexible lending criteria. However, it is a sector which has been the focus of calls for more regulation, amid concern about the quality of loans on some providers’ loan books, and questions about whether investors fully understand the risks.
Another fast-growing sector in recent years has been private debt – including direct lending to SMEs via dedicated loan funds. Recent figures by Preqin show that the aggregate capital raised by UK-based private debt funds increased almost five-fold in the decade to 2015, to $16.2 billion – and that UK is home to more than a third of Europe’s private debt funds.
The above funding avenues are all options for businesses looking for long term debt financing. SMEs that have short term cash flow shortages, on the other hand, would be probably be better served by looking at senior debt solutions, such as invoice discounting – where they obtain short-term financing against unpaid invoices.
Ultimately, while the loss of EU funding represents a challenge for UK SME’s, alternative forms of debt and equity funding options are poised to make up the shortfall and fuel the ambitions of growth businesses. In this fluid environment, businesses would be wise to seek support and advice to secure the type of funding which will best help them to achieve their goals.
Ewan MacKinnon is the investment director at Maven Capital Partners.