Alliance Manchester Business School, explores the impact of COVID-19 on routes to funding for SMEs and discusses what lies ahead post-lockdown… It’s a worrying time for SMEs running short of money during the COVID-19 pandemic. Not only will they be hit hard by a significant drop in customer revenue, but traditional funders are also holding back, fearing an uncertain future. This lack of cash means reinvesting profits for organic growth is impossible, and simply paying the bills has become a challenge. Under the current pressures, founders are unlikely to invest more of their own money or borrow from friends and family. So what about external funders? In the last few weeks, there has been somewhat of a freeze in new equity investments, despite many venture capital funds claiming to be active. Predictions that the UK economy is heading for a recession make new investments unattractive.
What’s ahead for the UK?Added to this is the more practical problem of venture capital firms” inability to get out to meet new businesses. Instead, venture capital investors are focussed on protecting their existing portfolio rather than looking for new opportunities, with the British Venture Capital Association urging more support from the government.
Despite this, there is some positive news internationally. In China, equity investment seems to be rebounding relatively quickly after the lockdown was lifted, a trend we could see emerge in the UK.SMEs that are already backed by a venture capital partner can consider the government’s £1.25bn ?Future Fund , a convertible loan scheme that can match existing equity in a venture. The fund is designed to target start-ups and high-growth ventures that have missed out on other government business support programmes, such as Coronavirus Business Interruption Loans (CBILS), although it has received mixed reviews due to some of its terms.
Company valuations dropNotably, UK tech businesses that have graduated from US accelerators are not currently eligible. CBILS offer different debt funding options, including invoice or asset finance, overdrafts, and loans of up to £250K or up to £5m when coupled with a personal guarantee. The Bounce Back” scheme includes term loans that are a quicker and simplified version of CBILS and seems to be aimed at smaller ventures and sole traders.
Another important consideration for any business looking to raise funds is the significant drop in company valuations as a result of the pandemic. This has meant many planned IPOs, including Airbnb’s landmark float, are being pushed back a year.A number of businesses are turning to crowdfunding to stay afloat. While some are raising money for products and services related to the fight against COVID-19, others are exploring it as a means for survival. This includes social enterprises that have been hit hard by the pandemic. In an attempt to address the funding shortfall, the government’s response is principally through debt financing, offering loans with favourable terms to help businesses survive until customers can return. Government support is offered by the British Business Bank and administered via a range of more than 60 lenders. These range from high street banks and digital banks, such as Starling and Atom Banks, to alternative finance providers, such as Funding Circle and Thincats. The amount lent to date is fast approaching £15bn, but could exceed this.
Plugging the funding shortfallWhile these initiatives may appear generous, there could be big problems when the scheme ends. When repayments start next year, the UK is likely to be in recession with some businesses struggling to cope. This over-reliance on debt funding will also make it more difficult in the future to raise further funding for expansion, so these initiatives should be considered a short-term fix. Unlike large-scale operations with sizeable cash reserves, such as Heathrow Airport which reportedly has enough to last a year, it’s not practical for small businesses to maintain extensive coffers. Instead, SMEs should go back to their entrepreneurial roots. As businesses grow, they often tend to lose their entrepreneurial spirit, but as a lean start-up, ventures can react quickly to customers” needs, and quickly open to new markets. Some of the successes we ve seen during lockdown include brewers switching to hand sanitiser, food and drink suppliers switching to home delivery, and theatres and exercise classes moving online. There are signs that SMEs are increasingly using social media as a tool to engage with their customers, and this show of agility puts them in good stead to weather the storm and adapt to survive.
Share this story