Posts By / dbotchie

Alternative paths to access finance for small and medium scale enterprises in the UK

Small and Medium Enterprises (SMEs) form a crucial part of United Kingdom’s (UK) economy. However, limited/or lack of access to finance continue to hinder the growth of SMEs in the country. This situation has been the compelling factor behind Bournemouth University’s seminars series on “Access to Finance for SMEs”, of which the last was held at Royal Institute of Chartered Surveyors, London on 13 September, 2016. This final part of the seminar series was aimed at identifying alternative sources of finance for SMEs in the UK.

professor-stella-fearnley-first-from-left-with-the-keynote-speaker-sir-john-bourn-middle-and-the-principal-investigator-professor-jens-h%d3%a7lscher-first-from-right

Professor Stella Fearnley (first from left) with the keynote speaker Sir John Bourn (middle) and the Principal Investigator professor Jens Hӧlscher (first from right)

Experts at the seminar identified the following as the reasons why there is limited/or lack of access to finance for SMEs in the UK:

  • Lenders face difficulties in accurately assessing the viability of SMEs with limited track records because of information asymmetries between borrowers and lenders. This makes it difficult for lenders to secure the appropriate information they require to make an informed decisions on SME loan applications,
  • New SMEs often end up defaulting in debt repayment,
  • There is regional bias when it comes to SME access to finance in the country. For instance, London and the South-East often obtain disproportionately more funding than SMEs in other parts of the UK.

Are there alternative sources of funding for SMEs?

Consensus was broad-based among participants that alternative sources of finance for SMEs is growing in the UK —it grew by 75% to £1.26bn in 2015—despite the fact that only 3% of SMEs are aware of these other sources. Some of the alternative funding sources that were suggested include:

  • Equity finance

This is a method of raising capital through the sale of shares in an enterprise. A presenter at the seminar showed that equity funding has improved significantly in the UK, with seed stage flows growing 48% p.a. since 2012. Other participants also observed that SMEs are often skeptical of equity finance for fear of loss of control. But the fact remains that most of them use equity finance without even realising it. For instance, SMEs often rely on angels and venture capital to raise funds for their businesses.

  • Angels and venture capital

This form of equity finance may be undertaken directly by individuals or industrial companies; and indirectly through financial institutions or government agencies. Venture capitalists on the other hand usually invest in SMEs with high return prospects. Though SMEs’ awareness about venture capital in the UK continue to increase, only 22% of them know of a specific fund to approach.

  • Business Angels

They are private individuals who invest in new SMEs with good growth prospects, in exchange for a share of the company’s equity. Business angels often invest in business start-ups and also provide assistance in the form of consultancy (sometimes free) to the SMEs.

  • Family and friends

This source of finance has long been an important route for start-ups. However, there is always the need to maintain professionalism and a formal environment for business growth which may stand against the business owner’s informal relationship with the financiers. The big mistake many companies make is that they fail to formalise the funding arrangement with friends and family.

  • Crowdfunding

This is a method of raising finance by asking a large number of people to individually contribute a small amount of money to fund a project or venture, typically via the Internet. Though it is becoming the new ‘buzz’ going around in the investment game, existing SMEs, individuals, and startups are increasingly looking to raise funds through this method. One of the participants indicated that it is cheaper, faster and easier to access finance through this source. Another participant at the seminar showed that crowdfunding in 2015 amounted to 2.5 billion pounds in the UK.

Road map to SME access to finance

On the various alternative sources of SME funding identified, seminar participants were of the view that there is the need to critically examine each of them since it will unpack their appropriateness to different economies.

Apart from individual publications, there were also proposal for pathways to impact which will include one or two edited books and potentially a Special Issue of the International Small Business Journal, the leading UK and European Entrepreneurship journal, as deliverables.