Funding challenges for high growth SMEs
Jann Brown highlights the challenges posed in an ICAS paper on funding high growth SMEs.
SMEs are the backbone of the UK economy. They account for 99 per cent of all UK businesses. They employ 60 per cent of the workforce and deliver nearly half the revenue in the UK economy.
In the March budget, the UK Government announced several measures intended to help SMEs: incentives for exporters, help with apprentices and doubling the annual investment allowance. The creation of the British Business Bank and the Funding for Lending Schemes are also welcome initiatives.
But the biggest issue for many SMEs, six years on from the credit crunch, remains access to finance. It is depriving many of our busiest business bees of the pollen they need to make the honey. According to one recent survey there is a shortfall of £4bn for SMEs in the UK. If invested wisely, that money could create jobs, increase productivity, drive exporting, deliver greater wealth and increase tax revenues for an austerity focused Treasury.
ICAS has recently carried out a powerful piece of research on funding for SMEs. Its recommendations should be carefully considered by politicians at Westminster and Holyrood.
The key finding is that we are too focused on funding "fawns" rather than growing "gazelles". Fawns are the new start-ups, often in technology, which attract a lot of political and media attention.
The gazelles are the companies with the ability and attitude to grow quickly. These are companies, often in less glamorous sectors, with the greatest potential to deliver on increased exporting, innovation, more jobs and greater economic value added.
These companies, which grow at 20 per cent or more each year, are a relatively small but crucially important part of the SME sector. It is this group of companies that we believe policy makers must target, rather than the entire sector.
The greatest need is for long-term finance for these companies rather than investment for start-ups, and the research also highlights ongoing systemic failure of the banks in this area of funding.
Finally, it raises a little understood phenomenon of the current times – the reluctant borrower. Some of these high potential, high growth companies are reluctant to borrow to fund their expansion. But that's not just a matter of these companies being risk-averse. One of the key drivers of their reluctance is lack of trust in the banks and fear of losing autonomy over decision-making in their business.
So, it seems there is much more that needs to be addressed to help SMEs play their part in the long-term, sustainable economic growth of the UK economy. That's the next challenge for our ICAS researchers – how can we turn the reluctant borrower into the willing investor, growing the gazelles of the future? Targeting these SMEs, and unlocking the potential of the reluctant borrowers, will be the key to success in growing the UK economy.