07/10/2014

By Philip Barker, Partner and Head of Industrials, Cavendish Corporate Finance


The UK’s resilient economic recovery, now into its sixth straight quarter, has been underpinned by strong growth in the mid-market. Yet while SMEs are creating jobs and bolstering exports, important concerns remain over the availability of financing, potential skill gaps, a reluctance to export and sluggish productivity. Here, Philip Barker, Partner and Head of Industrials, Cavendish Corporate Finance, provides an overview of some of the main challenges mid-market companies are experiencing, advice on how they might overcome them and an insight into how businesses can seek out opportunities for further strong growth.

New avenues for funding:
The availability of financing remains a critical concern. The most recent figures show that bank lending to UK companies is contracting much faster than in Germany and France; consequently, the number of UK SMEs turning to banks for funding is at its lowest level in years. In the US, one innovation allowing companies to raise capital has been the creation of online marketplaces for trading shares of private, venture capital-based businesses. Major companies that have appeared in their earlier stages on one such platform, SecondMarket, include Facebook and Twitter. Another, SharesPost, has completed more than 2,000 equity transactions since 2011, totalling $1 billion.

Similar platforms in the UK could provide growth companies with a much-needed avenue to generate non-bank funding — especially if the Government increased the scope for its Enterprise Investment Scheme, which provides tax relief to people buying shares in small companies.

Skills for growth:
While the UK mid-market had more firms achieving sales growth of more than 10% in the last year than Germany, France and Italy, employment growth has lagged behind. There are concerns this could reflect a widening skills gap, particularly if the sharp recent rise in university tuition fees leads to fewer people taking the academic route. This could, however, be an opportunity — especially if the gap is filled by less costly alternatives with proven economic benefits, such as apprenticeship schemes and vocational courses.

At present just over a third of UK mid-market firms offer apprenticeships — compared to three quarters of their German counterparts. Government incentives could include National Insurance Contribution exemptions for the duration of an apprenticeship, or tax relief for companies providing training to young people with no prior work experience.

The export challenge:
A recent survey by Lloyds Bank found that just two in five UK mid-market companies currently export, and less than one in 10 intend to sell overseas in the next five years. Yet companies which do export have a greater than 20% better chance of survival than their peers. There can be a number of barriers to exporting, such as uncertainty about the legal and regulatory climate overseas, a lack of suitable contacts, and exchange rate volatility. A starting point for SMEs to seek help should be the UK’s Trade and Investment (UKTI) department, however close to half of businesses surveyed were not aware of the department.

One positive step would be to increase the visibility of UKTI, perhaps by consolidating it with other public bodies such as UK Export Finance. Another might be to incentivise corporate mentoring schemes, creating networks for companies seeking to export for the first time to be coached by businesses that have already exported to the same market and also an SME-specific dedicated export credit scheme.

Getting heard:
While the CBI does an excellent job lobbying for UK industry as a whole, growth companies have not had such success in being heard by Government. There are numerous bodies which claim to support SMEs, e.g. the Institute of Directors, the Federation of Small Businesses and newer organisations such as Entrepreneur Country and E2Exchange. To increase their voice in Government, however, there is scope for more cohesion and cooperation between them. Closer coordination — perhaps via an umbrella organisation of trade associations — could substantially increase their influence when making the case for mid-market businesses to policymakers.

Closing the productivity gap:
Though the mid-market has become the UK’s most productive sector, productivity still lags behind other European economies. Closing this gap could raise median UK household income by an estimated 15%. Yet recent surveys suggest that SMEs have been reluctant to invest in technology, instead spending resources on expanding their workforce. With the economy forecast to continue to grow resiliently and interest rates still very low, now is the time for growth companies to capitalise on the opportunities of the digital economy.

The Government could consider additional incentives in the form of tax relief for investment in technology. Businesses could also look to increasingly viable alternative financing methods for capital expenditure, such as the newly regulated crowdfunding sector. Whatever the routes chosen, addressing this productivity issue is vital to ensuring that recovery and future growth is as beneficial as possible for the UK economy.