ACCESS TO FINANCE
Access to Finance for SMEs
Finance is critical to the success of SMEs.
Limited access to finance is not a new problem
Access to finance for SMEs remains a persistent challenge, dating back to the aftermath of the 1929 crash and the formation of the Macmillan committee to examine the banking industry's impact on British industry. Despite the economy's recent recovery, SMEs continue to face difficulties securing loans from traditional sources such as banks.
The growing number of SMEs, combined with banks' increasingly conservative lending practices and stricter capital requirements, exacerbates the issue. Banks may be claiming to boost their support for SMEs, but a significant funding gap remains, leaving many small businesses struggling to secure the financing they need to thrive.
Post-Covid business outlook still uncertain
According to the Longitudinal Small Business Survey: SME Employers – UK, 2021 report (August 2022), 74% of employers were using some form of external finance, up 11% from 2019.
Following the trend from previous years, the propensity to use many types of listed finance increases with SME size. By nation, 80% of SME employers in Wales used some form of external finance (-3% from 2020) compared to 78% in Scotland (+3% from 2020), 74% in England (+2% from 2020) and 78% in Northern Ireland (+11% from 2020).
In terms of different sectors, SME employers in transport and storage (85%), primary sectors (81%), manufacturing (80%) and construction (80%) were most likely to use external finance. Administration (78%) and arts and entertainment (77%) were also more likely than average to use finance. Use of finance was below average in finance and real estate (59%), other services (66%), education, professional and scientific (both 67%) and information and communication (68%).
The amount of finance sought also varied by size. The median, which better represents the amount that the typical business sought, was £%0,000. This was £35,000 for micros, £150,000 for small businesses, and £500,000 for medium-sized businesses. By nation, the median for businesses in Northern Ireland was £60,000, for Scottish businesses £40,000, £50,000 for businesses in England, and £50,000 in Wales.
A comprehensive overview of the SME finance market
The British Business Bank Small Business Finance Markets report provides a comprehensive overview of the markets for different types of debt and equity finance that are most commonly available for SMEs, and indentifys the drivers of the latest trends.
By understanding the nature of the barriers that SMEs can face, and helping educate them about the different types of finance available, the British Business Bank aims to help power the growth and productivity of SMEs, who continue to represent a significant part of the economy.
The British Business Bank Small Business Finance Markets 2022-2023
'Permanent Non-Borrowers' (PNBs) increased from 39% to 51% over the same period. The gap between the use of finance and PNBs widened to 18 percentage points in Q3 2022. The proportion of smaller firms seeking finance fell from 59% in H2 2021 to 39% in H2 2022, reflecting increased barriers and uncertainty. Medium-sized firms (50-250 employees) showed the most prominent decrease in the use of finance, dropping from 48% in Q1 2021 to 33% in Q3 2022.
As the pandemic's impact lessened, the primary barriers for SMEs in Q2 2022 were increasing costs (rising from 34% in Q4 2021 to 40% in Q2 2022) and the current economic climate (increasing from 21% in Q4 2021 to 30% in Q2 2022). Other concerns included legislation (20%), supply chain issues (19%), and staff (13%). Concern about the economic climate grew faster than that for increasing costs, which remains the top barrier across all SME sizes.
Find the right finance for your business
Use our Finance Marketplace to find the right type of finance for your company. Whether you are looking for seed capital or debt financing to expand a more established business, we can help you find it.
Find the right finance for your business
Finance for SMEs
What is the right financing option for your business?
Many organisations have highlighted the issue of how important having easy access to finance is for SMEs trying to plan for future growth.
What is Equity finance?
What is Debt finance?
The ICAEW Business Finance Guide
It identifies where your business is in terms of development and growth and offers financing solutions that are relevant to your businesses specific position.
Equity Finance
Equity finance involves giving up a share of your business in return for an investment. Usually made over a medium to long term horizon, the investors share in the profit (or loss) of your business and the increase in value of your business. Depending on the scale and terms of the investment, it can also involve giving up some or all of the control over the business.
Raising equity finance can be time-consuming, requiring you to find the right investor(s). You will need to pitch to the investors so will need very robust materials including a business plan, detailed financial projections and an attractive valuation.
Equity Finance
Equity finance involves giving up a share of your business in return for an investment. Usually made over a medium to long term horizon, the investors share in the profit (or loss) of your business and the increase in value of your business. Depending on the scale and terms of the investment, it can also involve giving up some or all of the control over the business.
Raising equity finance can be time-consuming, requiring you to find the right investor(s). You will need to pitch to the investors so will need very robust materials including a business plan, detailed financial projections and an attractive valuation.
Some common types of equity finance include:
Seed / Angel Investing
Usually the first round of funding, after family, friends and fools! It can be either pre-launch or soon after and is usually for relatively modest amounts in the £10-£200k range.
Often, with little in the way of traction or track record to base an investment on, an angel investor will invest because of a personal interest or particular relevant expertise and will often provide advice about the direction of the business.
IPOs & Others
An Initial Public Offering (IPO) is the process whereby a company offers shares in its business to the public on an exchange. It is usually undertaken by larger, well-established companies looking to access significant sums of investment from a broad range of investors.
Other forms of equity investment include Private Equity where a group of private investors and funds provide (usually) large scale, long term financing for established businesses in return for control of the business.
Venture Capital
More established companies with a measurable track record can access larger pools of capital through the venture capital market. Usually run by professional investors, via a series of funds, the scale of investment can be very considerable, depending on the stage and needs of the company and the nature of the venture capital business or the syndicate of such companies contributing to the investment.
In return for substantial investment, venture capitalists take a larger stake in the business and will seek to exercise a greater degree of control about the direction of the business. They will also, typically, have a 3-5 year investment horizon before seeking an exit.
Crowdfunding
Modern technology has allowed the creation of a number of online platforms that allow new or existing businesses to gain investment from a wide network of small investors.
In return for a small share of the equity of a business, an individual can invest relatively modest amounts in (a series of) companies which are of interest. They can be an efficient way to raise funds for a start-up or new company but
i) they tend to be all-or-nothing so that if the target fund raise is not met then the company gets none of the committed funds
ii) they can be quite expensive once all the crowdfunding platform fees are deducted and
iii) the potentially large number of small investors can take careful management as the company grows.
Debt Finance
Debt finance is a popular way of raising finance. Whilst still allowing the business owner to stay in control, it allows finance to be raised which helps the company grow. Traditionally comprising either bank loans or an overdraft, new forms of debt finance have been developed in the last few years which provide greater options and flexibility for small business owners.
In return for the loan, a lender, who is not sharing in the ownership and therefore the risk of the company, will require a return on the loan i.e. the interest payments and, usually, some security in case the borrower doesn’t repay the loan. In addition, debt providers are generally much less involved in the day to day running of the business and in the provision of support and advice.
Debt Finance
Debt finance is a popular way of raising finance. Whilst still allowing the business owner to stay in control, it allows finance to be raised which helps the company grow. Traditionally comprising either bank loans or an overdraft, new forms of debt finance have been developed in the last few years which provide greater options and flexibility for small business owners.
In return for the loan, a lender, who is not sharing in the ownership and therefore the risk of the company, will require a return on the loan i.e. the interest payments and, usually, some security in case the borrower doesn’t repay the loan. In addition, debt providers are generally much less involved in the day to day running of the business and in the provision of support and advice.
Some common types of debt finance include:
Asset-Based Finance
Fixed Income Bonds
Usually reserved for larger companies, bonds can be an attractive source of long-term funding with terms up to 30 years or more.
Loan & Overdrafts
Along with traditional bank lenders, new lending vehicles have been established such as peer-to-peer business loans (akin to crowdfunding where groups of investors combine to lend money to companies).