One of the starkest findings from the British Business Bank’s Small Business Finance Markets 2017/18 report is that 42% of UK SMEs business have an aversion to borrowing.
Establish in 2014 with a remit to making finance markets work better for small businesses, the government-owned institution has made some key observations in its latest review, as it seeks to offer increased awareness of funding opportunities for SME businesses to thrive.
Ensuring SMEs can access funding is a major drive for the bank, as it looks to harness the powerful collective of SME businesses – particularly start-ups – who are at the forefront of pushing the UK economy forward.
While the numbers of SMEs and start-ups continues to grow, investment is lagging behind the UK’s major international competitors. In a blog for Innovate UK, Kevin Baughan and Nick Bassett point out that the UK’s ‘total R&D investment has plateaued to around 1.7% of GDP for the last 20 years, whilst the US and Germany have increased their investment to 2.8% and 2.9% respectively’.
SMEs need investment but currently prefer to live by their means, meaning growth is slow. SMEs need to be exploring the opportunities to secure additional funds, to alleviate the Pain Points felt by SME businesses. A simple ‘Google search’ brings up page after page of what the major pain points are – and it is a recurring theme: cash flow and a lack of capital. Statistics from the British Business Bank (BBB) support this as it reports that 66% of SMEs who did apply for external finance over the last three years did so to acquire working capital or ease cash flow.
Poor cash flow management brings disruption to businesses and as a result further pain points such as time inefficiency and increased staff turnover. The lack of capital significantly stifles expansion – be that products or markets – given the inability to invest.
The need to find solutions for these core SME businesses was evidenced in the UK Government’s Industrial Strategy white paper. Via the likes of the BBB and Innovate UK, it is putting capital into these organisations to make available through a variety of initiatives.
However, while the finance is being put into place, the BBB in its review, noted that businesses either aren’t aware of or don’t understand the variety of finance choices available to them. With that in mind, the bank has launched a digital hub this year which will set out finance options in a simple to use format, to equip businesses, and especially those with growth ambitions, with the know-how to find the finance best suited to their needs.
Since the economic crash of 2008 funding is no longer just on the High Street bank, with many SMEs avoiding this route due to the time taken to apply and a misconception that their application will fail. Consequently, one of the BBB’s aims is to raise awareness of the various types of funding now available such as Business Angels, Peer-to-Peer lending, Regional funds via the Northern Powerhouse or Midlands Engine and, crucially, Patient Capital.
Patient Capital is very much at the forefront on investment funding with the Government having announced in the 2017 autumn budget it will plough £2.5bn into the BBB to distribute accordingly. This comes on the back of a Patient Capital Review (PCR).
What is Patient Capital?
In short, Patient capital is another name for long-term capital. With patient capital, the investor is willing to make a financial investment in a business with no expectation of turning a quick profit. Instead, the investor is willing to forgo an immediate return in anticipation of more substantial returns down the road.
In his summary, PCR chairman Sir Damon Buffini stated: “If left unaddressed, this will continue to stifle the rich pipeline of UK start-ups coming to fruition and will see the UK lose out on the jobs, skills development, talent, technological know-how and other economic benefits they could provide.
“While the ultimate aim should be for the UK market to grow and mature to a point where patient finance is delivered by the private sector, government action is required to kick-start this development.”
It is anticipated that the government’s £2.5bn, along with existing resources, will unlock up to £13bn of finance to help UK smaller businesses realise their full potential and, over time, help broaden and deepen these markets through attracting private sector capital – the central goal of the Patient Capital Review
As the BBB acknowledged, the ability of SMEs to access finance is critical for funding business investment which in turn allows businesses to start-up and achieve their full growth potential. An inefficient market in SME finance with fewer businesses getting the right finance can constrain business development and reduce business survival rates.
British Business Bank – website, report and infographic: