By Marcus Leach

The Forum of Private business is warning that the vast majority of small businesses seeking affordable finance will miss out on a new £2.5 billion equity fund launched by the UK’s largest banks and the British Bankers’ Association (BBA).

The Business Growth Fund allows banks to take stakes of between 10% and 50% in ‘high growth’ businesses with turnovers of between £10 and £100 million in return for investments of £2 to 10 million.

However, according to the latest figures from the Department of Business, Innovation and Skills (BIS), just 5% of small to medium businesses (SMEs) have funding requirements of £1 million or more — with just under a quarter (23%) needing between £10,000 and £24,000.

In addition, a paltry 1% of SMEs are seeking equity finance (down from 2% in 2006/07), with the majority choosing not to sacrifice a stake in their businesses and preferring debt lending in the form of bank loans (40%) and overdrafts (35%).

Dubbed the ‘modern day 3i’ in reference to the organisation set up to help finance SMEs in the aftermath of the Second World War, the Forum is concerned that the Business Growth Fund will not help the vast majority of firms struggling to find the cost-effective finance necessary to compete for new contracts, create jobs and drive economic growth.

“The Business Growth Fund aims to bridge the clear gap in funding for ‘high growth’ firms identified in the Rowlands Review back in 2009 and so is certainly a welcome step and one that is long overdue,” said the Forum’s Senior Policy Adviser Alex Jackman.

“But we cannot allow this to overshadow the real problem — the lack of affordable lending being made available by banks to start-ups and other small businesses - those that are not eligible to benefit from the fund. There is a real danger that these firms will be left behind and that would be disastrous for the economy.

“We need much better debt finance in the form of cost-effective lending in parallel to this kind of equity investment. So far efforts to make this happen - such as a lending code that is not binding, targets that many banks are simply not meeting and mentoring and appeals schemes of unproven merit - are just not enough.”

Under the Business Growth Fund the banks are committing to provide £1 billion of equity capital over three years and £1.5 billion over ten years.

Conceived as part of the BBA's taskforce last autumn, the fund was central to the Project Merlin deal struck between the Government and major banks. The deal included an increase in lending to SME and restraint on bank bonuses.

It followed the Rowlands Growth Capital Review which in November 2009 found a significant shortfall in growth funding for firms seeking £2-10 million. The review emerged from the former government's 'New industry, New Jobs' strategic plan for Britain's recovery.

Commenting on the launch of the new fund and his company’s own research into the funding requirements of UK SMEs, Forum member Peter Watson, who is a Director of the data analytics for marketing company, Data Works, said:

"Any support for business from the Government and the banks is welcome, but this scheme is aimed at businesses with over £10million turnover and therefore will be available to around 1% of businesses operating in the UK.

“Small and medium enterprises (SME) represent 99% of the business stock and clearly more help is required to support growth companies in this sector to become the £10 million plus turnover companies of the future.”

The Forum is calling for better access to finance as part of its Get Britain Trading campaign. Proposals include ensuring banks have better regional infrastructures and more localised lending powers, stricter timelines on lending decisions and greater transparency by both banks and businesses.

Get Britain Trading is also demanding improved competition within finance markets to encourage alternatives to the leading high street banks.