How UK growth firms are getting the financial leg up they need to thrive

 
Keith Morgan
46 per cent of smaller businesses in the UK are looking to grow in 2015 (Source: Getty)
The UK is experiencing a “golden age” for smaller businesses. That was the message of Lord Young’s small business report, out yesterday, which heralded a record 5.2m small firms now operating in the UK.

Britain is now officially ranked as the most entrepreneurial in Europe. In recent years, we have witnessed a rising tide of entrepreneurial energy in the economy, with businesses being created at an unprecedented rate. SMEs now account for almost half of private sector turnover, and 60 per cent of all private sector employment.

But as British Business Bank (BBB) research conducted last year has shown, many companies are now shifting out of startup mode, with plenty more looking to expand. We found that 46 per cent of smaller businesses in the UK are looking to grow in 2015, and that the demand for finance is increasingly shaped not by a need for working capital, but an ambition to grow and purchase fixed assets.

At the same time, our analysis has revealed market failures that are restricting the supply of finance to some companies with growth intentions. Equity investment, an important source of finance for these firms, is used by fewer than 1 per cent of smaller businesses. Smaller companies are also generally underserved by private debt funds, which could have a greater role to play in a diverse and broadly-based finance market.

The issues that UK companies have often faced in accessing growth-stage finance mean that the Help to Grow scheme announced yesterday by the Prime Minister is of great economic significance. By helping private sector providers to support growing companies using debt finance with equity elements, it addresses directly the shortages that have been identified in the funding supply.

This “mezzanine finance” is a well-targeted boost to firms seeking funding rounds in the £500,000 to £2m range – often too small to attract institutional or debt fund backing. The BBB will be running a pilot scheme for Help to Grow, and a call to partners will be announced at next month’s Budget. We expect the pilot scheme to generate approximately £100m in new lending, supported either by BBB co-investment or structured guarantees.

Overall, we estimate that there are 16,000 high-growth businesses that can benefit from growth finance, at a rate of 500 a year. These scalable firms are particularly important because they generate a disproportionate level of job and revenue creation. A study last year by the Enterprise Research Centre suggested that less than 1 per cent of UK businesses accounted for 36 per cent of net job creation between 2008 and 2013.

If the last half-decade has seen the UK rediscover its entrepreneurial spirit, the next five years should be about the drive for growth, and how the businesses that have been founded can become the cornerstones of a secure and prosperous economy.

Supporting this is a core objective of the BBB, as part of our wider mission to make finance markets work better for smaller businesses at all stages of their development. From the Start Up Loans programme, which funds aspirant entrepreneurs, and the Enterprise Capital Funds, which support early stage high-growth businesses, to our Investment Programme, which invests in smaller and alternative lenders, our schemes have so far supported over 43,000 small businesses. In the last year, they have facilitated more than £900m of new lending and investment, along with £600m to mid-cap firms.

But this has only been possible because of the partnerships developed with funding providers across the financial services industry: from high street banks through to the innovative peer-to-peer lending and invoice trading platforms that make up the UK’s burgeoning alternative finance sector.

Ultimately, it is business that knows what is best for other businesses. We are now working with over 80 funding partners, who are helping to finance businesses and are co-investing in new funds and programmes with us. Tapping into their market knowledge and expertise is helping to ensure that public money goes as far as it can, benefitting from a multiplier effect in the marketplace.

This is exactly what we will seek to replicate in providing new support to the UK’s scale-up firms. And we are confident that Help to Grow will be a programme which plays a key role in addressing the needs of promising companies, and the economy at large.

Keith Morgan is chief executive of the British Business Bank.

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