According to a new CBI/BDO report, Stepping up: fixing the funding ladder for MSBs, this is one way in which the government can encourage long-term debt and equity investment in the “forgotten army” of British businesses.
The report says that MSBs account for just 1.8 per cent of companies but generate nearly a quarter of private sector revenue and make up 16 per cent of total employment.
However, over half of MSBs are finding it hard to access a loan for longer than five years.
As such, the CBI and BDO are calling on the government to create new funding vehicles, Long Term Lending Trusts (LTLT), which offer income tax relief to savers investing in long-term MSB debt funding.
The LTLT would extend tax incentives to investors who are willing to commit to providing long-term debt, in a similar way to the successful Venture Capital Trust scheme, for at least five years. Targeting individual savers, it would offer a return based on yield, not capital gain and income tax relief, with a deduction from income tax in the year of investment.
The report’s authors said it would cost the government only £310m a year. It also recommends a change in the way the Enterprise Finance Guarantee works, by rewarding lenders for providing longer-term loans.
“Building up a British ‘mittelstand’ of successful medium-sized businesses is mission critical to our economic future. With little recognition, these firms quietly toil away, creating jobs in communities and boosting growth in every corner of the nation,” said John Cridland, CBI director-general.
“A key part of unlocking their enormous potential is for the government to fix the funding ladder, filling in the gaps in supply of long-term finance that the UK’s brightest growing firms need to succeed.”
He added: “Incentivising savers to invest in our businesses for the long-run is a win win. It offers them attractive, alternative investment packages, while helping propel medium-sized businesses along their growth path, boosting the economy as a whole, and enhancing productivity.”
Read more on the Mittlestand:
- Private equity arm of Lloyds pledges £1.2bn to UK’s medium-sized businesses
- Brittelstand vs Mittelstand: Who would win in a clash of the mid-market titans?
- Prime minister David Cameron lifts lid on scheme to create British Mittelstand
John Gilligan, partner at BDO UK, said: “Making the most of the UK mid-market is fundamental to creating a balanced and sustainable UK economy. But the UK lacks diversity in long term funding sources – particularly for mid-sized companies.
“We’re not trying to reinvent the wheel. Instead we’re suggesting an innovative adaptation of existing distribution channels. This is designed to allow new entrants to start up and flourish alongside current funding sources. The proposal also gives the people of Britain the opportunity to directly invest in long-term loan portfolios to the middle market in a regulated environment.”
Other recommendations were for the government to continue to “actively promote the benefits that private placements have for British companies”, and make the UK the best place to list on a growth equity market by allowing companies already listed on the London Stock Exchange’s AIM to raise more capital from existing investors without the need to produce a prospectus.
Sean Taylor, co-founder and managing director of Redwood Technologies, supports the moves. “Long-term finance is critical to the future of any growing firm, but the lack of it can make climbing up the growth ladder a tough task for many mid-sized businesses,” he said. “These proposals are aimed at giving companies like ours a much needed leg up in reaching our full potential, at the same time as helping savers.”
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