Britain is on the brink of an alternative finance revolution that could help its SMEs overcome a £1bn funding gap that is inhibiting business growth. Investor sentiment towards alternative finance is clearly rising, but we cannot rest on our laurels – more must be done to ensure this burgeoning industry is able to reach its full potential.
Since the 2008 Financial Crisis, British SMEs have been struggling to acquire loans via traditional finance platforms. Banks have been tightening their grip on the number of small business overdrafts they approve, with the Bank of England revealing that £5m worth of SME overdrafts have been reduced every day since 2011. By restricting the amount of traditional funding options available to them, a growing number of British businesses are now failing to make the leap from ‘start-up’ to ‘scale-up’. As noted by Sherry Coutu, Chair of the Scale-up Institute, fewer than 3% of start-ups are able to both survive for a decade while enjoying a single year of high growth.
This is concerning given that SMEs account for 99% of all the UK’s private businesses, 60% of private sector employment and boast a combined turnover of £1.8tn. Our SME landscape is widespread, uniquely diverse, and has proven to be a vital enabler of regional innovation and productivity across Britain. Given the importance of small businesses to the British economy, the financial obstacles that stand in the way of their progression must not be taken lightly, and more should be done to address dwindling support from the banking sector.
Thankfully, the banks’ traditional lending monopoly is being steadily eroded by new systems of lending, borrowing and investing, as the explosion of alternative finance platforms in the UK has diversified lending options inexorably. In 2015, the UK’s alternative finance market grew 84% to £3.2bn worth of investments, loans and donations, with the equity-based crowdfunding market expanding by 295% since 2014 to reach £332m. The rise of equity crowdfunding in particular is a reflection of how the UK has embraced alternative finance, as investors confident in the growth capabilities of UK SMEs have become far more open to directing their capital into growing businesses via non-traditional platforms.
Rising investor appetite for UK businesses is also evident in the record levels of private equity investment that have flowed into the Enterprise Investment Scheme (EIS) – one of the key government initiatives that has been fuelling Britain’s high-growth SMEs since the early 1990s. The scheme was introduced in 199394 as a means of encouraging business investment through tax breaks. In the intervening 22 years, the EIS has helped over 24,500 individual companies raise more than £14bn of equity finance. It is growing in popularity, too; 3,130 companies successfully raised £1.66bn of funds in 201415, which is a year-on-year increase of £90m.
With very few initiatives of this nature still remaining, we are seeing that investors clearly regard the EIS as a viable and attractive method of managing both their investment opportunities and tax bill. As part of independent research recently commissioned by IW Capital, we found that an impressive 54% UK investors with more than £40,000 worth of investments are considering investment through the EIS for the 201617 financial year.
Together, the alternative finance industry led by peer-to-peer lending and equity crowdfunding, combined with the ongoing success of the EIS, have played a hugely important role in filling the finance gap left behind as banks withdrew their SME lending options. It seems clear now, one potential catalyst for scale-up growth is the UK’s buoyant community of private investors – a group filled with confidence in the nation’s entrepreneurial ability and investment potential but, as we recently discovered, are lacking the knowledge to connect capital to company.
Research by IW Capital found that sentiment towards SMEs is resoundingly high; a survey we commissioned uncovered that 71% of private investors with over £40,000 worth of investments feel confident in the growth capabilities of UK SMEs. However, knowledge on how to act on this sentiment is comparatively disappointing. Over a third (34%) of the UK’s serious investors – with more than £100,000 in investments – said they would invest in Britain’s small to mid-size businesses but lack the knowledge to do so. This equates to £126 billion in untapped private investment funds.
On the one hand, the stats are refreshingly positive – they show that the confidence in Britain’s booming SME community is there, as is the desire to invest in these businesses. And yet, the lack of investor education on SME investment threatens to undermine this and ultimately hinder the long-term potential of alternative finance in supporting Britain’s community of scale-ups.
To counter this, a huge responsibility lies with service providers and the Government to raise awareness, education and accessibility around investment options for UK investors to support our private sector. By equipping investors with knowledge on alternative finance, the industry can be governed – in part – by an educated collective that can steer Britain forward in a manner that is viable for business progression. That is why IW Capital has teamed up with UK Business Angels Association (UKBAA) to launch the first Angel Investing Accreditation programme to educate investors on SME investment. Initiatives like this are vital in ensuring alternative finance remains a growing and long-term source of funding for scaling businesses, thereby allowing the market to reach its full potential and, in turn, enabling Britain’s collection of high-growth companies to do the same.