Britain was the fastest-growing major economy last year, when the total number of private sector businesses reached a record 5.2m.
Yet a view is often expressed that, whilst we are successful in generating innovative ideas and products in the UK, we are less successful in developing these initial ideas into leading firms.
That’s why it is very encouraging to see strong year-on-year growth in use of equity finance – funding which is so important to producing and growing such businesses. The rise of around 170 per cent since 2011 – charted in our latest British Business Bank research – is welcome, but there is still work to do to make sure we encourage and enable even more businesses to finance their growth from providers such as venture capital funds and business angels.
Equity finance can represent the best form of finance for many early stage small businesses with the potential for high growth. These businesses present a less attractive proposition for debt-based investment and as a result often fail to secure the funding they need.
We are supporting these businesses by bridging the gap in equity finance provision, helping to unlock the benefits they bring to the whole British economy. This type of financing gives entrepreneurs space to develop their businesses without the pressure of making regular repayments and the interests of both funder and business are well aligned towards maximising the value of the company. As such, equity investment is an important part of industrial and enterprise policy.
The British Business Bank’s goal is to make finance markets work better for smaller businesses, allowing them to prosper, grow and support the UK economy. Our latest report identifies several weaknesses in the market which prevent smaller businesses from realising their full potential – including a shortage in the supply of finance to high growth potential businesses and a lack of knowledge of the funding options available.
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At the British Business Bank we are working towards the development of a self-sufficient equity finance supply stream through several market-based programmes designed to address these issues. These include our Enterprise Capital Funds (ECF) and the Angel CoFund.
The ECF programme is the flagship British Business Bank scheme supporting early stage equity, with a total current investment capacity of over £530m. ECFs are structured so that we provide up to two thirds of funding, with private sector investors providing at least one third. The private sector investors take on relatively more risk and in return are granted a larger share of the upside, incentivising their involvement in this part of the market. With new state aid approval allowing investment sizes of up to £5m and funds with a British Business Bank contribution of up to £50m, through this scheme we are able to address the equity gap more comprehensively. Autumn Statement 2014 provided a further £400m for the ECF programme.
Alongside this, the Angel CoFund makes equity investments, alongside business angel syndicates, in smaller UK businesses with growth potential. The CoFund aims to promote the highest quality of angel investment – it scrutinises every deal with an independent Investment Committee to encourage the growth of sustainable angel investment in the UK.
These schemes are valuable long-term initiatives to develop a market, but supply side solutions will only work if we address market failures on the demand side too.
Smaller businesses can lack knowledge about the full range of finance options available to them. We are working with our partners to increase awareness of what is available in the market, including through the Business Finance Guide we jointly published with the ICAEW last year. This gives a comprehensive and balanced view across the whole of the market for smaller business finance and, uniquely, has input and endorsement from bodies representing all the major types of funding, as well as the major business representative bodies. Tens of thousands of businesses have accessed the guide, and it continues to be distributed through banks, advisors, HMRC and online channels, including the British Business Bank website.
The importance of smaller businesses to the UK’s recovery is paramount, accounting as they do for almost half of turnover and 60 per cent of employment in the private sector. Without equity investment our best small businesses cannot grow to fulfill their potential. For the economic recovery to continue it is in all our interests to support them.
Keith Morgan is the CEO of the British Business Bank.
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