Cracking the emerging company finance problem – Invest Comment

James Stirling
Chicken or egg: How can a company grow if it can’t take on finance (and vice versa)?
An important sector of the UK economy – private companies making profits of between £1m and £5m each year – is not getting the attention it deserves. These firms (also known as emerging companies) don’t grab the headlines like large FTSE 100 businesses. Nor do they receive the media coverage enjoyed by fast-growth startups. And this is despite the fact that the emerging company sector makes a significant contribution to the UK economy, driving growth and taking on staff.
Given the lack of attention, it is often overlooked that emerging companies, which are not classic SMEs, face big obstacles in terms of accessing finance. High street banks find it expensive to service this section of the market. Lacking a relationship manager, many of these businesses describe trying to get bank finance as like pulling teeth. And if you are making less than £5m profit a year, private equity is typically not interested either. There might be returns to be made, but they’re not big figures.
The venture capital market, meanwhile, has changed dramatically. New legislation is likely to significantly reduce the amount of capital that is available to emerging companies from this source.
There are reasons financial institutions might overlook emerging companies, particularly for unsecured lending. While they are a decent size – generating a profit of more than £1m – these businesses tend to be less resilient to shocks, given that they are often reliant on one or two big customers (as a firm grows, its customer base tends to diversify). High street banks also typically lack the resources to properly analyse management teams.
So what is the solution? At Investec, our philosophy is that emerging companies are most likely to get the help they need from a one-stop-shop service specifically designed for them. Why?
First, this approach makes it easier to identify suitable funding options. We will seek to look under the bonnet of the company, to identify management teams that are savvy, self-aware enough to know their own limitations, but which, crucially, are adept at handling stresses. This will give us the confidence that they’re worth our backing.
Second, a one-stop-shop will allow a business to access a mixture of finance from one place – whether that’s bank loans or equity. There is less chance that these two sides of the equation will fall out with each other, typically the legal costs will be lower, and it can help ensure deliverability – that the deal actually happens. Deliverability is important, as business owners sometimes underestimate how complicated and drawn-out a transaction of this kind can be.
But a one-stop-shop is not just about funding – it should add value in other areas. If the provider is fully engaged in the success of the company, it could play a useful role, for example, in evaluating skills gaps and work with management teams to take their business to the next level.
This article is provided for information purposes only and should not be construed as advice of any nature. The views and opinions expressed are subject to change without notice.

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