Britain’s small business funding picture is mixed. The good news is that, while access to traditional bank loans has been limited since the financial crisis, founders have undoubtedly benefited from the rise of alternative finance.
Over £2bn is now lent through peer-to-peer lenders and close to 400 equity crowdfunding deals take place in the UK each year. Meanwhile, there has been a dramatic increase in equity investment, up from £1.6bn in 2011 to £12bn in 2019.
However, at the same time, almost one in 10 UK small and medium-sized enterprises (SMEs) are discouraged from seeking external finance.
A report released today by the Entrepreneurs Network and my personal charity the Enterprise Trust — Unlocking Growth: How to Expand Access to Capital — outlines some thoughtful policy tweaks that could be introduced in tomorrow’s Budget, along with measures to help firms during the coronavirus outbreak, to increase access to finance for SMEs.
To help growing firms we have called for Startup Loans — which provide new companies with financing — to give extra advice when businesses finish paying the money back, as many become discouraged borrowers.
And for those looking to raise funding through tax breaks, the report calls for a more streamlined process for companies to get assurance that they will qualify for the Enterprise Investment Scheme — which gives investors financial incentives to back startups which are eligible. This is currently frustratingly complicated. Simplifying it will help unlock more investment in high-growth startups so firms using pre-approved documents could be fast-tracked.
Many incubators and accelerators receive public funding. For those that do, we think data sharing should be compulsory, so that we can pick the best programmes and better understand why they work. It will also allow us to identify the schemes best at engaging with disadvantaged or under-represented groups.
We are also calling on the government to simplify the system by which firms can get tax credits for research and development — something that encourages innovation — as well as expand the scope of activities which qualify for them. The move would in turn reduce the risk of startups turning to specialist tax credit advisers, which can take up to 25 per cent.
Furthermore, to support Britain’s most innovative companies, the government should experiment with lottery-style funding for applications above a minimum quality threshold. New Zealand’s Health Research Council and others are experimenting with this approach. So far it appears to working well, because of the reduced admin and costs.
All evidence suggests that businesses which take on board investment at key moments in their growth trajectory do dramatically better than those which don’t.
These founders go on to create jobs, generate taxes, and contribute to UK economic growth.
It is clear that finance is out there, but it does not always get to where it needs to be. We need to change that.
This will not take drastic action. Instead, it is the small tweaks that could have a big impact.
Richard Harpin is chief executive of home repairs firm Homeserve and founder of thinktank the Enterprise Trust.