Managing Your Cash Flow

Small and medium businesses afraid to consider equity finance

2 min read

03 February 2014

Britain’s growing businesses are over-reliant on debt and should think about pursuing equity finance instead, according to a report released by the CBI today.

It found that half of all small and medium businesses rely on bank loans and 35 per cent use overdrafts, compared with just 3 per cent who use equity finance. That’s compared to a European average of 7 per cent.

The main concern businesses have about giving up equity is losing ownership (46 per cent), whilst a quarter said they were worried about a loss of decision-making power.

But the report also found that 81 per cent those businesses which have used equity finance in the past would recommend it to others and four fifths would use it to help grow their company again.

Katja Hall, the CBI’s chief policy director, said: “We need to shatter the equity finance glass ceiling and encourage growing firms across the UK to use this largely untapped resource. It’s a myth that using it results in loss of control and decision making.

“Equity finance is one of the most effective ways for small and medium-sized firms to access investment capital and there are plenty of investors who take a minority stake.”

The report suggests that growing companies need “patient capital” which is invested for more than five years, but that half of business angel, venture capital and private equity investments are made for less than this amount of time.

The Government should pilot a scheme incentivising investors to hold equity on a longer-term basis, “to stimulate and nurture more long-term investment culture which growing firms are looking for,” Hall added.

It should also use the forthcoming British Business Bank to develop a mezzanine finance option – a hybrid convertible debt to equity finance product, the CBI said.

Related: The City Grump: Don’t finance your business with debt

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