Why aren’t there more SMEs in the UK?In fact, just 0.6% of UK businesses are mid-sized, with more than 50 employees. This attitude is in stark contrast to continental owner-managers where the approach more commonly is to build multi-generational family businesses.
The real problem is for more sophisticated SMEs and owner-managed businesses, without traditional assets to use as security who are looking to borrow between £0.5m and £5.0m.What we need to do is challenge this short-sighted culture and instead encourage more UK entrepreneurs to grow their businesses over the long-term. That is how we will create the next Virgin, JCB or Dyson.
People aren’t looking at the long-termWhile the UK is a great place to start a business, many of its entrepreneurs may not be thinking about building a business for the long term. In fact, the start-up environment is heavily disposed to favour starting and selling a business. The UK media often glorifies founders that have started, built and sold a business in record time. There are numerous books and articles that explain how businesses should set up to sell from the start. Indeed, some businesses are deliberately structured to sell from their initial foundation. While building to sell is ingrained in the UK, it means many businesses are simply not supported to grow over the long-term.
A lack of capital…Just look at funding and access to capital. A lot of commentators in the media argue that SMEs aren’t getting any funding, but the reality is a little more nuanced.
Certain parts of the market function well…Smaller businesses are able to access both bank funding and finance from new entrants such as peer-to-peer platforms. Larger businesses, or those with a traditional asset base, are well served by banks and specialist debt funds.
The real problem is…The real problem is for more sophisticated SMEs and owner-managed businesses, without traditional assets to use as security who are looking to borrow between £0.5m and £5.0m. We call these the missing middle. The middle missing struggles because while banks can fund an amount that reflects the assets in a business, they can’t help if a business has no further assets to borrow against. This has meant that without access to secured lending business owners have had to consider selling a stake in their business to raise funds or agree to personal guarantees.
What’s the impact?Consequently, too many growing SMEs are forced to balance the difficult choice of scaling back their growth against diluting their ownership or agreeing to personal guarantees. For these slightly larger and more complex SMEs, the lack of genuinely unsecured lending is a significant barrier to growth.
Suitable financeThis contributes to the broader issue of why the UK fails to build more mid-sized firms and new global behemoths. Without access to suitable finance, the best outlook for a small but growing business very often is to sell to a larger, often foreign, counterpart. That way, former owners can at least leverage their larger parent’s financial clout to implement their growth plans.
So, what’s the solution?What can those that support UK entrepreneurs do to help build businesses for the long-term? We must first address access to capital. Often the traditional bank or peer-to-peer loans only run for a few years at most.
Advisors help by identifying suitable lenders and in developing the forecasts and business plans central to the credit process based on future cash flows.But short-term loans encourage short-term thinking. We also know that many SMEs often need unsecured credit of between £500,000 and £5m. These loan sizes are too big for peer-to-peer platforms but too small for banks and debt funds. To help businesses access to this type of long-term unsecured growth capital, lenders need to change the way they operate. Rather than focusing on a company’s physical assets such as property or stock, funders must instead assess what cash flows the business will generate in future.
Changing lending cultureThis free cash can be used to service debt instead of equity. Caple is the first in the UK to offer long-term unsecured lending between £500,000 and £5m, which are based on the future cash flows of the firm. We do not require collateral, floating charges or personal guarantees as security.
Going forwardWhile the UK has a thriving start-up scene, we need to do more challenge the “build to sell” culture and the lending that has gone with it. Instead, we need to encourage more UK entrepreneurs to grow their businesses over the long-term and that means providing the funding to match.
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