By Daniel Hunter
Despite the level of public and political attention focused on the shortage of finance for smaller firms, less than one in five (17%) small to medium sized businesses (SMEs) has attempted to raise finance in the past 12 months with 40% of applications rejected, according to a new report by Albion Ventures, one of the largest independent venture capital investors in the UK.
The Albion Ventures Growth Report 2013, which examines the challenges and opportunities faced by 450 SMEs with a combined turnover of over £1.6 billion, reveals a clear divide between stagnant businesses that are borrowing to survive and those that are seeking finance in order to expand in the future.
Of those who have attempted to raise capital in the past 12 months, more than one in four (28%) were looking for long term development capital while under a third (32) wanted working finance to keep their business going. The largest demand for working finance was from sole traders, accounting for 62% of applications. The research shows that companies with a larger turnover had fewer problems finding access to finance.
Regionally, companies in the North were most likely to see raising finance as a threat to their business while it was seen as a minimum risk in London, where sources of finance tend to be more accessible. On a sector basis, manufacturing businesses were most concerned about how a lack of access to finance would impact on their growth potential, followed by retailers.
The report also highlighted significant differences attitudes towards raising finance between companies that have an optimistic and pessimistic outlook on their future growth prospects: nine in ten pessimists looked to secure finance to pay day-to-day bills compared to under two thirds of optimists, suggesting that many companies are relying on debt to keep themselves alive.
Nearly all pessimists applied for a bank loan or overdraft while optimists applied for a number of a different finance options including equity, mezzanine and invoice discounting. Furthermore, optimists are much more likely to seek finance in order to develop their business, invest in new equipment and build new products and services.
Patrick Reeve, Managing Partner at Albion Ventures said: “Given that SME cash deposits have been net positive throughout the financial crisis and are continuing to grow it is perhaps not surprising that only one in six SMEs have attempted to raise finance in the past year. It is commonly perceived that a shortage of finance has become inextricably linked to the fate of smaller businesses, yet the evidence from our report indicates that policymakers should avoid focusing on this issue at the expense of other areas that firms are more concerned about, notably red tape, regulation and a shortage of skilled staff.”
Cormac Hollingsworth, Director at New City Network comments: “The UK’s economic recovery relies in large part on a thriving SME community. To continue to improve the policy mix it’s vital that we develop an intimate picture of what is preventing small businesses from growing. While a shortage of bank lending is clearly a factor, it appears to have received a disproportionate level of attention. The bigger challenge is shifting the current reliance on debt towards equity finance and backing companies that have the strongest growth prospects.”
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