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SMALL BUSINESS FINANCE MARKETS2015/16
www.british-business-bank.co.uk [email protected] British Business Bank @BritishBBank
CONTENTS
3 FOREWORD 4 EXECUTIVE SUMMARY8 INTRODUCTION
9 CHAPTER ONE OVERALL ASSESSMENT OF MARKET DEVELOPMENTS
11 1.1 AGGREGATE FLOWS OF FINANCE TO SMALLER BUSINESSES ARE ENCOURAGING
14 1.2 EXTERNAL FINANCE FOR SMALLER BUSINESSES CONTRIBUTES TO GROWTH AND PRODUCTIVITY
16 1.3 ANALYSIS OF NEW DEBT APPLICATIONS21 1.4DEMANDSIDE–AWARENESS&DEMANDFORFINANCE24 1.5 SUPPLYSIDE–BANKLENDING27 1.6SUPPLYSIDE-EQUITYFINANCE30 1.7 REGIONAL PERSPECTIVE
33 CHAPTER TWO START-UPBUSINESSES
34 2.1 TRENDS IN START UPS36 2.2 START-UPSANDTHEECONOMY38 2.3 START-UPSDEMANDFORFINANCE40 2.4 ANALYSIS OF NEW DEBT FINANCE
APPLICATIONSBYSTART-UPS42 2.5EQUITYFINANCEFORSTART-UPBUSINESSES
44 CHAPTER THREE SCALE-UPBUSINESSES
45 3.1 GROWTH PERFORMANCE OF SME SECTOR 47 3.2 DEBT FINANCE FOR HIGH GROWTH BUSINESSES50 3.3MID-CAPBUSINESSES53 3.4 SMALLERBUSINESSESEXPORTS&EXPORTFINANCE56 3.5EQUITYFINANCEFORGROWINGBUSINESSES61 3.6LONG-TERMFINANCE
65 CHAPTER FOUR FINANCE PRODUCTS AND DIVERSITY OF SUPPLY
66 4.1 ASSET FINANCE69 4.2 ONLINE PLATFORMS73 4.3 DIVERSITY OF DEBT FINANCE SUPPLY77 4.4 THE RISE OF CHALLENGER BANKS
80 GLOSSARY84 ENDNOTES
2 BRITISH BUSINESS BANK
TheBritishBusinessBankhasaclearmission:tochangefinancemarketsforsmallerbusinesses,sotheyworkmoreeffectivelyanddynamically.Bydoingso,weplayourpartinsupportingwidereffortstoincreasetheUK’sproductivityandlong-termgrowth.This,oursecond‘StateoftheMarket’report,showshowthosefinancemarketsforsmallbusinesseshavedevelopedoverthepastyear,andtheprogresswehavemadeinachievingourambition.
Workingwithover80financepartners,weaimtounlockfinanceforsmallerbusinessesinthreeways:byincreasingexistingsourcesoffinance;bycatalysingnewchannelsoffunding;andbyimprovingsmallerbusinesses’understandingoftheirfinanceoptions.Bydoingso,wehelpstimulatecompetitionandincreasethechancesthatbusinessesfindtherightsortoffinancefortheirparticularstageofdevelopment.Importantly,whereweactisinformedthroughoutbyanin-depthunderstandingofthefinancemarkets, aswellasathoroughanalysisofhowthesebusinesses contribute to the UK economy.
Thisreportisthereforevitalinguidingourwork.ItunderlinesagainthefundamentalimportanceofsmallbusinessesintheUKeconomyand,withtheappropriatefinanceandsupport,thepotentialtheyhavetoraisetheUK’sproductivityandgrowthperformance.Inthatregard,Iampleasedtoseeencouragingsignsacrossabroadrangeoffinancemarkets.Astherecoveryhascontinuedandbalancesheetshavebeenstrengthened,banklendingisgraduallyimproving,withmorefirmsgettingthefinancetheyaskedfor.Assetfinancehasseen solidexpansionoverthepastyear,andequitydealflowsarestrong.Andashasbeenwelldocumented,theUK’speer-to-peersectorisgrowingrapidly,buildingontheUK’sleadingpositionintheareaoffinancialtechnology.
Througharangeofwell-judgedinterventions,theBankhasplayeditspartindevelopingthesemarkets.Examplesareoursupportofequityinvestorsthroughourinvestmentsinearlystageventurecapital,soimportantforinnovativebusinesseswithhighgrowthambitions;ournewENABLEproductthatencouragesparticipatingbankstolendmoretosmallerbusinesses;andourInvestmentProgrammewhichhasprovidedfundingtopeer-to-peerlenders
andothermarketplacelenders.Whiletheseareallpositive,wefullyrecognisethereareareasofthemarketthatstillrequireattention.
OnepriorityfortheBankistoensurethateffectivefinancesolutionsareavailableforinnovativebusinesseswishingtoscale-up.Tosupportthoseambitions,weareworkingwithprivatesectordeliverypartnerstoroll-outtheinnovative‘HelptoGrow’pilot.Afurtherpriorityisregionalgrowth.Asthereportshows,thereareregionalimbalancestothefinancelandscape.Ourresearchdemonstratesthatnooneregionhasamonopolyongrowthbusinesses: smaller businesses with growth potentialexistinallregionsoftheUK.Toensurethatfinanceisavailableforsuchfirms,wearedelightedtobesupportingthenew£400millionNorthernPowerhouseInvestmentFund.
Awarenessoftherangeoffinanceoptionsisimportanttoo,sobusinessesknowwheretogettherightfinanceforthem.Whilstlevelsofawarenesshaveimproved,inparticularfornewertypesoffinance,itisstrikingthatoverhalfofUKsmallerbusinessesstillgoonlytotheirmainbankanddonotshoparoundforfinance.Wewillthereforecontinuetoworkwithourpartnerstopromotethesuccessful‘BusinessFinanceGuide’,anexcellentresourceforfinancingoptions,andwillfinaliseouradvicetoHMTreasuryonthedesignationofnewfinanceplatforms,throughwhichsmallerbusinessesdeclinedfacilitiesbytheirbankswillbereferredtoalternativeproviderswhomaybeabletohelp.
Ibelievethatalongsideourexistingprogrammes,thesenewinitiativeswilldeliverfurtherimprovementsintheUK’sfinancemarkets,makingthemmoredynamicanddiverse.Ilookforwardtoworkingwithourpartnersandthesmallbusinesscommunitytoputtheseinplace.
FOREWORDKEITH MORGANCEO, BRITISH BUSINESS BANK
SMALL BUSINESS FINANCE MARKETS 2015/16 3
EXECUTIVE SUMMARY
4 BRITISH BUSINESS BANK
Thisreporthighlightsthecontinuedimportanceofsmallerbusinessesto UKeconomicgrowthandtherecentevolutionofthefinancemarketsthatsupportthosebusinesses.
Encouragingly,flowsoffinancetosmallerbusinesseshaveincreasedsincetheBritishBusinessBank’spreviousSmallBusinessFinanceMarketsreportlastyear.However,ouranalysisfindsthatstructuralproblemspersist.ThecontinuedimportanceoftheBritishBusinessBank’sobjectivesinaddressingtheseissuesandunlockingfinanceforsmallerbusinesses remains clear. We will continue to:
• Increasethesupplyoffinanceavailableto smaller businesses in areas where the markets do not work well
• Createamorediversefinancemarketforsmaller businesses
• Helpensurebetterprovisionofinformationin the market connecting smaller businesses andfinanceproviders
OurunderstandingoffinancemarketsforsmallerbusinessesaspresentedinthisreportwillbeusedbytheBusinessBanktohelprefineourstrategyandtofurthersupportsmallerbusinessesachievetheirambitions.
SMALLER BUSINESSES ARE ESSENTIAL TOADDRESSINGTHEUK’SPRODUCTIVITYCHALLENGE
TheUKeconomyhascontinuedtoperformwellrelativetootherdevelopednations,andalthough risks remain, central annual growth forecastsare2.2%for2016.Thisexpectedgrowthhassupportedbusinesssentimentoverthelastyear–themajorityofsmallerbusinesseshavesaidthattheyareconfidentaboutgrowth,witharound56%intendingtogrow in 2016.
Behindthispositiverecentperformancelurklong-termchallengesfortheUKeconomy,mostnotablytheimportanceofraisingproductivity.UKproductivitylagsthoseofitsG7peersandbyfocusingonthisareaofrelativeweaknessanopportunityexiststoconvertgrowthintorisingstandardsofliving.AsSMEsemploythemajorityoftheUKprivatesectorworkforce,creatingadynamicsmallerbusinesssectoriscriticaltoenhancingnationalproductivity.
Whatisclearisthattherateofentrepreneurialactivityishigh:theUKhasseenremarkablystrongratesofnewbusiness(start-up)formationinrecentyears.Therewerearound350,000newenterprisesregisteredin2014andtheUKnowhasarecordpopulationof5.4millionsmallerbusinesses.However,thatiscounterbalancedbythefactthatfewerUKsmallerbusinesseshavemadetheleaptomateriallygrow(scale-up)thansimilarlysizedbusinesses elsewhere. The UK is near the bottomofOECDtablesofthepercentageofstart-upbusinessesthatgrowtomorethan10employeesafterthreeyears.
Researchhasshownthatsuccessfullyincreasingthenumberoffirmsthatscale-upwouldsubstantiallyimpactjobcreation,productivityandgrowth.Therefore,itisaprioritytounderstandwhatisneededforamoresupportiveandcohesiveecosystemthatenhancesthecapabilityandambitiontogrowamongsthighpotentialsmallerbusinessesinthe UK.
TheBritishBusinessBankwillfocusmoreofourattentionandresourcestowardsfindingeffectivefinancingsolutionsforsmallerbusinessestoallowthemtoscale-upandachievetheirgrowthambitions.
FLOWS OF FINANCE TO SMALLER BUSINESSES HAVE IMPROVED. HOWEVER, SIGNIFICANT GAPS IN THE MARKET REMAIN.
Atanaggregatelevel,flowsofbothdebtandequityfinancetosmallerbusinessesgrewin2015showingthatfinancemarketshaveimproved.Notably,afterseveralyearsofcontraction,netbanklendingtosmallerbusinesseshasincreasedforfourconsecutivequarters.Assetfinancehasalsocontinuedtogrowstrongly.Alternativefinancebusinesslending,thoughstilllessthan3%ofgrosslending,grewby75%to£1.26bnin2015.
Whiletheoverallmarkethasundoubtedlyimproved,ourdetailedanalysisindicatesthatweaknessesandstructuralimperfectionspersistinspecificareasofthemarket.Evidencesuggeststhatamaterialportionofsmallerbusinesseswhoapplyforfinancearestillrejectedasaresultofproblemsinsmallbusiness
financemarkets.Thisreflectsthelikelihoodofinformationasymmetriesbetweenborrowersandlenderswhereitmaybecostlyordifficultforlenderstosecuretheinformationtheyneedtomakeaninformedinvestmentdecision,aswellasotherstructuralissues.Itappliestosmallbusinessesatallstagesofdevelopment,whethertheyarestarting-up,scaling-uporseekingfinancetostay-aheadintheirparticularareaofthemarket.
TheBritishBusinessBankwillcontinuetorefineourprogrammesdesignedtoaddressthisgap,notablythroughourlong-runningEnterpriseFinanceGuaranteeprogrammewhichhelpsviablesmallerbusinesseswholacksufficientcollateral to borrow.
Evenwithanincreaseintheavailabilityoffinancenationally,ourresearchshowsthatlocaldistributionisuneven.InparticularfewerequitydealsoccurforsmallerbusinesseslocatedinregionsoutsideofLondonandtheSouthEastthaninside.Giventhatfinanceisvitalforgrowth,thiscanonlyentrenchregionaldifferencesandstymieeffortstorebalancenationaleconomicactivity.
TheBritishBusinessBankwillhelpaddressthisweaknessthroughourtargetedregionalefforts,suchasoursupportforanew£400mNorthernPowerhouseInvestmentFund.
SMALL BUSINESS FINANCE MARKETS 2015/16 5
FINANCEFORSTART-UPSCONTINUESTOBE IMPORTANT BUT INCREASING ACCESS TO CAPITAL FOR HIGH GROWTH SMALLER BUSINESSES IS AN EMERGING PRIORITY
Rejectionratesforstart-upsseekingnewloansexceed50%,inpartreflectinglenders’difficultyinaccuratelyassessingtheviabilityofsmallerbusinesseswithlimitedtrackrecordsandinpartreflectingtheinabilityofverynewbusinessestomakeregulardebtrepayments.Whilefriendsandfamilyremainthemostcommonfundingsource(usedby34%ofstart-ups),notallentrepreneurswithgoodideashaveequalaccesstothiskindofsocialandfinancialcapital.
TheBritishBusinessBankremainscommittedtoexpandthenumberofStartUpLoansinordertocontinuetoaddressthestructuraldisadvantagethatsomeoftheUK’snewestbusinessesfaceinsecuringfinancetomaximizetheirpotential.
Forsmallerbusinesseslookingtogrowrapidly,equityfinanceisoftenthemostappropriatefundingtodrivetheirgrowthduringthemostriskyperiodsoftheirdevelopment.Equityinvestorsaretypicallymoreactivethanlendersintheday-to-dayoperationsofthebusinessandarepreparedtotakeonhigherlevelsofrisk.Increasingequityflowsthereforecanplayausefulroleinimprovingsmallerbusinesses’abilitytoscale-up.
Marketsforthistypeoffundinghaveimproved,withseedstageequityflowsgrowing48%p.a.since2012,andUKequityprovidersinvestingahealthy£2.2bnayearin2014.Nonetheless,theUKearlyequitymarketremainsafractionoftheUSmarketwhichisseventimeslargerthantheUKmarketasashareofGDPandsurveysshowthatmanyentrepreneursforwhomequitymightbemostappropriateremainaversetotakingonexternalequity.
ThisongoingdisparityemphasisestheBritishBusinessBank’scommitmenttomaintainandexpandourearlystageequityinterventions–boththeAngelCo-FundandtheEnterpriseCapitalFund–tocontinuetoaddressthisarea
ofunder-development.WehavealsosupportedtheestablishmentoffundsthroughourVCCatalystFund.
Onceestablished,highgrowthpotentialsmallbusinessesoftenrequireadditionalexternalfinancetoachievetheiraspirations.Although,flowsofUKventureandgrowthcapitalincreasedin2015,thereisnotafirmlyestablishedmarketfordebt-basedgrowthfinanceintheUKmarket.Long-standinginformationasymmetriesremainwhereabusiness’spastisnotanaccuratereflectionofitsfuturepotential.Thismakesitmoredifficultforfirmswithhighgrowthpotentialtoobtainenoughdebtfinancetorealisetheirpotential.
TheBritishBusinessBankwillhelpaddressthissituationthroughtheplannedpilotofournewHelptoGrowschemetargetedtowardshighgrowth smaller businesses in 2016.
Thissituationcanbeexacerbatedwhereasmallerbusinessisseekinggrowthviaexportingtonewmarketsandthusrequiresmorecomplexfinance.AsourworkwithGoldmanSachslastyeardemonstrated,exportsareparticularlysignificantbecauseinternationalisationisoftenassociatedwithhigherproductivity;yetUKsmallerbusinesseslagbehindFranceandGermanyintermsofthepropensityofSMEstoexport.
The British Business Bank is working with UK ExportFinancetohelpidentifyunmetfinanceneedsofsmallbusinessexportersandtocoordinateofferingstobetteraddressgaps.
Incontrast,theavailabilityoffinanceformid-capbusinesses(businesseswith£25m-500mturnover)hasimprovedmarkedly.TheEuropeanleveragedloanmarkethasgrownfrom€28.5bnin2008to€80bnin2015reflectingtheinflowofinstitutionalfundinginrecentyears.Oursurveyalsofindsmid-capbusinessesreportingrelativelylittledifficultyinobtainingfinance.
TheBritishBusinessBankwillreviewourcurrentportfolioofmid-capexposuretodeterminewhetherourcontinuedsupportisrequired.
6 BRITISH BUSINESS BANK
THERE IS STILL LIMITED DIVERSITY IN THE SUPPLY OF SMALLER BUSINESS FINANCE SO NEW PROVIDERS AND NEW PRODUCTS NEED NURTURING
ThepreliminaryfindingsoftheCompetition&MarketsAuthorityretailbankingmarketinvestigationindicatethatthefourlargestUKbankshadacombinedmarketshareof80%forgeneral-purposebusinessloans,excludingpeer-to-peerlending,in2014.Diversityofsupplyoftraditionalbanklendingisclearlylimited,butwebelievethatincreasingthediversityofchoicegoesbeyondjusttraditionalbanklending.
Otherchannelsprovideappropriatefinancefortherangeofsmallbusinessneeds,andtherearetentativesignsthatthemarketisshifting.Useofassetandinvoicefinanceisincreasing.Financialinnovationandnewdeliverychannelsgivesmallerbusinessesmorechoiceofproductsandhowtoaccessthem.Therangeoffinanceprovidersisalsogrowingwithnewchallengerbanksandtechnology-enabledonlinelendersenteringmarkets.Thesegrewrapidlyin2015,butfromlowbases,andsoarestillsmallonanabsolute scale.
Althoughwehaveseenpositivemomentumintermsofmarketdiversity,somenewentrantsfacestructuraldisadvantageswhenofferingsmallbusinessloansrelativetoincumbentsrelatedtofundingcostsandcapitalefficiency,slowingdowntheirdevelopment.Moretimeandfurthernurturingofthemarketisneededbeforetheseneweroffersbecomeeverydayalternativesforsmallerbusinessesofallsizesacross the UK.
TheBritishBusinessBankwillhelpimprovediversityofsupplyoffinanceforsmallerbusinessesbyexpandingoursupportforchallengerbanks,non-bankdebtfunds,onlineplatforms,invoiceandassetfinanceproviders.OurENABLEprogrammeshavenowsupportedover£225moflendingandourInvestmentProgrammehascommitted£353mofsupporttothesegrowingparticipants.
REAL DIVERSITY AND CHOICE IN SUPPLY WOULD BE ACCELERATED BY GREATER AWARENESS OF, AND CONFIDENT DEMAND FOR, FINANCIAL ALTERNATIVES
Awarenessoftherangeoffinanceoptionshasrisenamongstsmallerbusinesses,inparticularfornewertypesoffinanceandproviders,includingpeer-to-peerlending(upfrom24%in2012to40%in2015)andcrowdfunding(upfrom13%to49%).Awarenessofalternativesisaffectingbehaviouraswell,withthepercentageofsmallerbusinesseswhocontactonlyoneproviderhavingfallenfrom71%in2012to66%in2014andnow61%in2015.
Butevenwithrecentimprovements,overhalfofUKsmallerbusinessesimmediatelygototheirmainbankwhentheyfirstidentifyafinancingneedanddonotshoparoundforfinance.Itisclearthatmorecanbedonetoincreasesmallbusiness engagement with the market. For example,onlyaminorityofsmallerbusinessesuseexternaladvisorswhenapplyingforfinance.
ThisemphasisestheimportanceoftheBritishBusinessBank’scommitmenttoimprovingtheunderstandingoffinanceoptionsamongstsmaller businesses in the UK. We continue tocollaboratewithpartnerssuchastheICAEWtodevelopanddistributeinformationguidestosmallerbusinessesandwithHMTreasurytoimplementnewinformation-basedinterventionssuchasthereferralofrejectedsmallerbusinessapplicantstonewfinanceplatforms.
SMALL BUSINESS FINANCE MARKETS 2015/16 7
INTRODUCTION
ThisisthesecondannualBritishBusinessBankreportonSmallBusinessFinanceMarkets,settingoutthelatestevidenceonthewaysinwhichfinancemarketssupportsmallerbusinessandhelpthemcontributetoimprovingproductivityandgrowthinthe UK economy1.
Ourunderstandingofsmallerbusinessfinancemarkets,bothintermsofsmallerbusinessdemandforfinanceandthefinanceproviders’supplyoffinanceisessentialinshapingourbusinessplanningandthedesignofourprogrammesandproducts.
TheBusinessBankaimstosupportbusinesses,whethertheyarelookingtostart-up,growtothenextlevelorstayaheadofthecompetition.Therefore,thisyearwehavefocusedonthedifferentmarketsegmentsthattheBusinessBankseekstoserve,namelyStart-Up,Scale-UpandStayAheadfirms.
NEW EVIDENCE
Aswellasdrawingonestablisheddatasources,theBritishBusinessBanklookstoaddtotheevidencebasebybringingnewevidencetothedebateonsmallerbusinessfinancemarkets. Inparticular:
- TheCustomerJourneysurveyfrom2012and2014hasbeenrefreshedandrunagainin2015togivefreshinsightintosmallerbusinessesexperienceinaccessingfinance
- NewcalculationshavebeenproducedusingdatafromtheSMEFinanceMonitortoinvestigaterejectionratesforcorebanklendingproducts
- TheBusinessBankhascommissionedupdatedprivateequitymarketdatafromBeauhurstwhichfocusesonvisiblesmallerbusinessesexternalequitydeals
Thisreportalsodrawsontheevidencegatheredfortherecentreport“UnlockingProductivityInternationalisationandInnovationinSMEs”onwhichtheBritishBusinessBankcollaboratedwithGoldmanSachsandtheEnterpriseResearchCentre.
Chapter1providesanoverallassessmentofthesmallbusinessfinancemarkets,reviewingdevelopmentsonboththedemandandsupplysidesofthemarkettoassesswhether,astheeconomicrecoverycontinues,financemarketsareimproving.
Chapter2looksatthemarketforfinanceforstart-upsinmoredetail,recognisingtheadditionaldifficultiesthesefirmsencounterinraisingfinance.
Chapter3presentsananalysisofexternalfinancesourcesthatareappropriateforgrowingfirmsthatarelookingtoscaleuprapidly,withafocusondebtfundsandequitymarkets.Therolefinanceplaysinhelpingsmallbusinessesexport,theexperienceofmid-capbusinessesandtheroleoflong-termfinancearealsoexplored.
Chapter4considerstake-upoffinancethatisusedwidelyacrossalltheBusinessBankmarketsegmentssuchasassetfinanceandalternativefinance.Itthenlooksatthelatestevidenceonthediversityofsupplyoffinanceandthe riseofthechallengerbanks.
8 BRITISH BUSINESS BANK
INTRODUCTIONCHAPTER ONE OVERALL ASSESSMENT OF MARKET DEVELOPMENTS
Chapter1providesanoverallassessmentofanumberofsmallerbusinessdebtandequityfinancemarkets,reviewingdevelopmentsonboththedemandsideandthesupplysideofthemarkettoassesswhether,astheeconomicrecoverycontinues,financeflowsareimproving.
Theoverallpicture,setoutinsection1.1,isanencouragingonewithflowsoffinancetosmallerbusinessesincreasingacrossawiderangeoffinancialproducts.
However,thereisastillunmetdemandforfinancefromsmallerbusinesses.Section1.3presentsanewapproachtocalculatingthevalueofrejectedapplicationsfortraditionalbankingproducts.Wewillbedevelopingthismethodologytoincreaseourunderstandingofthemarketforsmallbusinessfinanceandwelcomeinputfrominterestedparties.
Section1.4looksinmoredetailatthedemandforfinancefromsmallerbusinesses.Goodprogresscontinuestobemadeinawarenessoffinanceproductsamongstsmallerbusiness,althoughtheevidencesuggestsincreasedinformationaboutthesuitabilityofspecificproductsandhowtoapplyforthemwouldincreaseeffectivedemand.
Subsequentsectionslookatdevelopmentsinthemainbanklending(section1.5)andequityfinancemarkets(section1.6).TheseareusedbysmallerbusinessesacrossallthreeofthemarketsegmentsusedbytheBusinessBank.Banklendinghasshownfurthersignsofrecoveryin2015comparedtopreviousyears.Inequityfinancetherehasbeenstronggrowthin2015.Otherproductsareexploredinmoredetailinsubsequentchapters.
Thechapterconcludeswithregionalanalysisofsmallerbusinessesandfinanceflows(section1.7).ThisevidenceprovidessupportforBusinessBankinvolvementinsupportingprovisionoffinanceinregions.
DespitethepositivedevelopmentsinsmallerbusinessfinancemarketsstructuralproblemsremainthatdemonstratetheneedfortheBusinessBank’scontinuedrole.Thesestructuralproblemsresultinfinancemarketsnotfunctioningeffectively,withanallocationoffinancetosmallerbusinessesatlessthanoptimallevels,resultinginlostoutputandgrowth.Thestructuralproblemsariseinanumberofways.
SMALL BUSINESS FINANCE MARKETS 2015/16 9
1. Information problems between small businesses andfinanceproviders
Lendersorinvestorsneedinformationonsmallerbusinessestomakesoundinvestmentdecisions.Informationasymmetrybetweenbusinessandfinanceprovidersnecessitatescostlyduediligenceinadvanceofanydeal;thiscostisrelativelyfixed,meaningitaccountsforagreatershareofsmallerdeals,whichdrivesfundstowardlargerdealsizesandlarger/lessriskyfirms.Inthecaseofstart-ups,lackoftrackrecordmakesitevenmoredifficultforfinanceproviderstoassesstheriskinessofthefinancesoughtbysmallbusinesses.
Smallerbusinessesmayalsolackinformationthatisneededforthemtounderstandthefinancialproductsavailabletothemandhowtoaccessthem.
2. Market competition
Lackofcompetitionbetweenmarketparticipantsmaypreventmarketsoperatingeffectively.Thismayleadtoaloweravailabilityoffinance,orariseinthepriceoffinanceresultinginlessfinancebeingprovidedtosmallerbusinesses.
3.Spill-overs
Thesearisefromthedifferencebetweenprivateandsocialreturnstoinvestment.Investmentgeneratespositiveexternalities,orspill-overs,totherestoftheeconomyintheformofinnovationorknowledgetransfer.Thesespill-oversareparticularlysignificantforsmallerfirms,whichfinditmoredifficulttoappropriatethevalueoftheirnewknowledge,andhigh-techfirms,whichrelymoreoninnovationfortheirprofitability.
Theexternalbenefitsarenottakenintoaccountinthedecision-makingofprivateinvestors.Thisresultsinanunder-provisionofequityfinanceinsocietalterms,toprojectswhichdonotoffersufficientreturnstoprivateinvestorsbutgeneratesignificantsocialbenefits.
10 BRITISH BUSINESS BANK
4. Unintended consequences of regulation
Theintroductionofregulationsorothergovernmentinterventionsmayhaveunintendedconsequencesleadingtoinefficientoutcomesinmarkets.Forexample,whilstregulationsdesignedtoimprovefinancialstabilityarerequiredtheymayraisethecostoffinanceresultinginlessuseoffinancebysmallerbusinesses.
Itisimportanttorecognisethatinmanycasesbusinessesinabilitytoobtainfinancedoesnotrepresentaprobleminthe market.
1.1
AGGREGATE FLOWS OF FINANCE TO SMALLER BUSINESSES ARE ENCOURAGING
SMALL BUSINESS FINANCE MARKETS 2015/16 11
Thissectionbringstogetherthelatestdatafromarangeofsourcesonthevolumeandvalueofvarioustypesoffinanceprovidedtosmallerbusinesses.Consistentandcomprehensivedataoutliningthevalueoftheaggregatestocksandflowsofallformsofexternalfinancetosmallerbusinessesisnotreadilyavailablehoweverthetableprovidesareasonablesnapshotofthesituation.
Whileflowsofdifferenttypesoffinancearenotdirectlycomparable,thedatashowsthatbanklendingremainsthesinglelargestformofexternalfinanceforsmallerbusinesses,albeitwithotherformsoffinancecontinuingto increase their share.
NETFLOWOF‘CORE’BANKINGLENDINGPRODUCTSTURNS POSITIVE
Thenetflowsofbankloans(newloans,excludingoverdrafts)hasturnedpositivewithfourconsecutivequartersofgrowthtotalling£1.6bnthroughtoQ32015.Thissuggestsarecoveryinnetlending,howevertheimprovementincreditavailabilityislesspronouncedamongstsmallerSMEsanddrivenbyimprovementsinnewfinanceflowstomedium-sizedbusinesses.
Thestockofbankloansandoverdraftswasestimatedat£163bnatendofNovember2015,reflectingadeclineinthevalueofloanswhilstoverdraftlevelsweremorestable.2
OTHER TYPES OF FINANCE SHOW STRONG GROWTH
Morepositively,datacommissionedbytheBritishBusinessBankshowsthatthevalueofnewequitydealswithknownamountsgrewto£2.2bnin2014,andexpandedfurtherin2015withnearly£2.4bninthefirstthreequartersof2015,continuingthestrongupwardtrendsincethedataseriesbeganin2011.
• Netflowof‘core’bankinglendingproductsturnspositive
• Othertypesoffinanceshowstronggrowth
• UsageratesamongstSMEshasstabilised
2011 2012 2013 2014 2015
Bank Lending Stock Outstanding Amount {c} 189 176 166 167 163 toNov15
Source: Bank of England {b}
Bank Lending Netflows£billions {d} - -8 -4 -4 2 Source: Bank of England {b} Grossflows£billions {e} - 38 43 53 53 toNov15 Other Gross Flows of SME Finance
Private external Equity £ billions 1.04 1.32 1.62 2.20 2.39 Source: Beauhurst {f} No. of Reported Deals 386 625 863 1060 870 No. of Deals (Known Amounts) 279 435 612 804 699 toSep15
Asset Finance £ billions - 12.7 13.5 14.8 16.3 12 monthsSource: FLA {g} toNov15
Peer-to-Peer Business Lending £ billions 0.02 0.06 0.25 0.72 1.26 toDec15
Source: Alt Fi Data {h}
{a}Theinformationcontainedinthistableshouldbeviewedasindicativeasdataanddefinitionsarenotdirectlycomparableacrossdifferentsources.Therecanbesomedoublecountingacrossestimatesindifferentpartsofthetable.Flowsdataarecumulativetotalsfortheyearortothedatestated.Non-seasonallyadjusted.Allnumbersareinbillionsandhavebeenroundedappropriately.{b}StatisticstakenfromBankofEnglandBankstatsTablea8.1-Available:http://www.bankofengland.co.uk/statistics/Pages/bankstats/2015/nov.aspx{c}Amountsoutstandingdataincludeoverdraftsandloansinbothsterlingandforeigncurrency,expressedinsterling.Non-seasonallyadjusted.Movementsinamountsoutstandingcanreflectbreaksindataseriesaswellasunderlyingflows.Forfurtherdetailsseewww.bankofengland.co.uk/statistics/Pages/iadb/notesiadb/Changes_flows_growth_rates.aspx.Forchangesandgrowthratesdata,pleaseusetheappropriateseriesordatatablesfromBankstats,availableatwww.bankofengland.co.uk/statistics/Pages/bankstats/current/default.aspx.(d)Dataincludesoverdraftsandloansinbothsterlingandforeigncurrency,expressedinsterling.Netflowsdoesnotalwaysreconcilewithchangeinstockduetodifferencesinstatisticalreporting.Thereportedstockcanincludeotheradjustmentsmadebybanksbutnotdetailedwhenreported,whereasflowsdatadoesnotincludetheseadjustments.{e}Dataexcludeoverdraftsandcoversloansinbothsterlingandforeigncurrency,expressedinsterling.Thetotalmaynotequalthesumofitscomponentsduetorounding.{f}Beauhurstisamarketdataproviderthatrecordsvisibleequitydealsincludingcrowdfundingdeals.DatawillbeavailableinforthcomingBusinessBank/Beauhurstpublication.{g}TheFinance&LeasingAssociation(FLA)whosemembersmakeup90-95%ofthemarket.DataobtainedfromFLAAssetFinanceConfidenceSurvey.{h}Figuresdonotrepresenttheentiremarket.DataobtainedfromAltFiData.
ESTIMATES OF THE FLOWS OF SOME TYPES OF EXTERNAL FINANCE FOR UK SMES {A}
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FIG 1.1
SMALL BUSINESS FINANCE MARKETS 2015/16 13
DatafromtheFinanceandLeasingAssociationsuggeststhatnewassetfinancevolumeswithSMEswasalmost£15billionin2014,anincreaseofmorethan9%on2013.Thelatestdatapointstowardcontinuedstronggrowthin2015.
ThevalueofinvoicefinanceadvancesoutstandingatendofSeptember2015totalled£15.9bn,althoughthepublisheddataseriesdoesnotseparateoutSMErecipientsfromotherfirms.3Itshouldbenotedthatgiventheshort-termnatureofinvoicefinancing,thetotalvolumeoffundingwithinaquarterismuchhigherthantheadvancesoutstandingatthequarterend.
Itisdifficulttoquantifythevalueofsmallerbusinessfinancingfromdebtfunds,althoughevidenceoftheincreasednumberofdealssuggestitisanincreasinglyimportantsourceoffinance.
Grossflowsoflendingtobusinessesviaonlineplatformscontinuetogrowatastrongrate.reaching£1.26bnin2015.Howeverthevalueofthesenon-banksourcesoffinanceremainsmallincomparisontotraditionalsourcesofbankfinance.
USAGE RATES AMONGST SMES HAS STABILISED
SurveyevidencesuggeststhattheshareofSMEsusingfinancehasstabilised.TheSMEFinanceMonitorsurveyshowsthatacrossallSMEs,thenumberusing‘core’bankproductshasdeclinedfrom40%ofSMEsinQ12012to29%inQ32015,butthishasbeenstablesincetheendof2013,indicatingthatthedeclineinuseofsuchproductshastailedoff.
TheshareofSMEsusinganyotherformsoffinance,e.g.leasingorinvoicefinancing,alsoremainsrelativelystable.Onthevalueofthestocksandflowsofcreditcardlendingtosmallerbusinesses,surveyevidencesuggeststhataround15%ofsmallerbusinessesusecreditcards.Howevernearly80%ofthesecreditcarduserspayoffthefullbalanceeachmonth.Thissuggeststhatagreaternumberofsmallerbusinessesusecreditcardsforshort-termworkingcapitalratherthanforlong-termfinancingneeds.
Intermsofotherfinancialproducts,17%ofsmallerbusinessesuseleasingorhirepurchaseandloansfromdirectorsorfamily&friends.Invoicefinanceisonlyestimatedtobeusedby2%ofsmallerbusinesses.Useofleasingorhirepurchaseandinvoicefinanceissignificantlymorecommonamongstsmallandmediumsizedbusinessthan it is amongst micro businesses.
14 BRITISH BUSINESS BANK
SMALLER BUSINESSES FORM A LARGE PART OF THE UK ECONOMY AND MAKE AN IMPORTANT CONTRIBUTION TO ECONOMIC GROWTH
Smaller businesses4continuetoaccountfor99.9%oftheUKbusinesspopulationandareanimportantpartoftheUKeconomy.Atthestartof2015,privatesectorsmallerbusinesses:
• Employanestimated15.6millionpeoplewhich formsmorethanhalfoftotalUKprivatesectoremployment(60%);
• Createahighshareofnewjobs-between2008and201385%ofnewjobsintheUKwerecreatedbybusinesseswithfewerthan50employees5;and
• AccountforalmosthalfofUKprivatesector turnover(47%).6
Theabilityofbusinessestoaccessexternalfinanceisimportantforfacilitatingnewbusinessstart-upsaswellasfundingbusinessinvestmentandexpansion,ensuringbusinessesreachtheirfullgrowthpotential.Alackoffinancecanalsoconstraincashflowandhamperbusinesses’survivalprospects.Accesstotherightfinanceisparticularlyimportantforinnovativebusinessesandhigh-growthbusinesses.Byincreasingthesupplyofexternalfinancetoviablebusinessesaffectedbyproblemsinfinancemarkets,theBritishBusinessBankcaninfluenceimprovementsintheunderlyingdriversofproductivitysuchasinvestment,aswellasfacilitatestart-upsandbusinessexpansion.
THEUKFACESAMAJORPRODUCTIVITYCHALLENGEBYHISTORICAL AND BY INTERNATIONAL STANDARDS
Although,GDPandemploymentintheUKhaverecoveredsincetherecessionwithGDPnow6.1%aboveitspre-recessionlevel,ithasbeenaccompaniedbyrelativelypoorproductivityperformance,whichthreatenslong-termprospectsfortheUK’sstandardofliving.Asiswelldocumented,asignificantproductivitygapexistsbetweentheUKandmostotherleadingadvancedeconomies,whichworsenedin2014comparedtothepreviousyear.
1.2
EXTERNAL FINANCE FOR SMALLER BUSINESSES CONTRIBUTES TO GROWTH AND PRODUCTIVITY
• SmallerbusinessescontinuetoformalargepartoftheUKeconomyandmakeanimportantcontribution to economic growth
• WhilsttheUKperformswellintermsofcreatingnewstart-upbusinesses,itislesseffectiveatgrowingthemcomparedtoothercountries
• TheUKfacesamajorproductivitychallengecomparedtohistoricalandinternationalcomparisons.
• Increasedinnovationandexportingcouldhelptoincreaseproductivityamongstsmallerbusinesses
Areductioninproductivityisexpectedtohappenduringafinancialcrisisanddeeprecession,asbusinessesreduceproductionbymorethanthefallintheirworkforce.TherecoveryintheUK’sproductivityperformancehasbeenparticularlyweakfollowingtherecession.
Thatweaknessinproductivityperformanceisclearlyillustratedbyoutputperhourworkedacrosscountries. Foreveryhourworked,theUSproduced32%moreoutputrelativetotheUKin2014andG7countries(excludingtheUK)areonaverage20%moreproductivethantheUK.7 GiventhatSMEsemploymostofthelabourforce,overallimprovementsinUKproductivitywillrequireimprovedSMEproductivity,especiallyaslargerbusinessestendtobemoreproductivethansmallerbusinesses.Recentlypublishedproductivitydatashowsmicro-businessesoffewerthan10employeeshaveexperiencedfastergrowthinoutputperworkerthanlargerbusinessessince2009.Productivitylevels(asmeasuredbyoutputperworker)oflargerbusinessesin2014isstillbelow2008productivitylevels,butsince2013mediumsizedbusinesseshavebeenmoreproductiveperworkerthanlargebusinesses.8 SmallerbusinessescanplayavitalroleinraisingproductivityintheUKeconomybyspurringinnovation,facilitatingproductivechurn,andstimulatingstrongercompetition.
WHILST THE UK PERFORMS WELL IN TERMS OF CREATING NEWSTART-UPBUSINESSES,ITISLESSEFFECTIVEATGROWING THEM COMPARED TO OTHER COUNTRIES
TheUKisrankedthirdoutof14OECDcountriesintermsoftheproportionofstart-upbusinesseslessthantwoyearsoldinthebusinesspopulation.921%oftheUKbusinesspopulationismadeupofbusinesslessthantwoyearsold,whichishigherthantheUS(19%).However,theUKisranked13thwhenitcomestotheproportionofstart-upbusinesseswith1-9employeesthatgrowto20employeespluswithinthreeyears.Just3%ofstart-upbusinessesgrowtohavingmorethantenemployeescomparedto5.5%ofbusinessesintheUS.Raisingtheproductivityofthewholeeconomydependsonfacilitatingthegrowthofnewandexistingbusinesseswiththegreatestpotential.
INCREASED INNOVATION AND EXPORTING MAY HELP TO INCREASE PRODUCTIVITY AMONGST SMES
ThechallengethenishowtoincreaseproductivityforSMEssoastobuildastrongfoundationforlong-termprosperity.Recentresearch10indicatesapositiverelationshipbetweenbusinessesthatengageininternationalactivityandinnovationandbusinessperformance–includingproductivityperformance.However,UKSMEslagbehindtheirinternationalpeersinmanyoftheseareas,givingroomforimprovement.TheperformanceofUKsmallbusinesssectorsinexportingisdiscussedinmoredetailinchapter3.
START-UPS AS A PROPORTION OF ALL BUSINESSES AND PROPORTION OF START-UPS THAT GROW BEYOND 10 EMPLOYEES IN THREE YEARS
FIG 1.3
Source: OECD
2
1
4
3
6
5
8
7
9
NZL
UK
NLD
ITA
AUT
FRA
FIN
SWE
CAN
USA
BEL
LUX
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R
BRA
% of start-ups with 1-9 employees that grow to 10+ within 3 years
%
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40
35
45
FIN
ITA
NO
R
BEL
CAN
SWE
USA
AUT
NZL
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LUX
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FRA
BRA
Start-ups (0-2 years old) as a proportion of all firms
%
[CHART X: PRODUCTIVITY PER
HOUR WORKED IN G7 COUNTRIES
PRODUCTIVITY PER HOUR WORKED IN G7 COUNTRIES
FIG 1.2
Source: ONS
20
60
40
100
120
140Current price GDP per hour workedUK=100
80
Japan
UK (=
100)
Canada
Italy
G7 ex.UK
Germany
US
France
2014
2013
SMALL BUSINESS FINANCE MARKETS 2015/16 15
16 BRITISH BUSINESS BANK
1.3
ANALYSIS OF NEW DEBT APPLICATIONS
Problemsinaccesstofinancemarketsforsmallerbusinesseshavebeendiscussedearlierinthischapter.Theyfocusonreasonswhyfinancemarketsmaynotworkefficientlyforsomesmallerbusinesses,forexample:informationasymmetriesbetweenabusinessandalender,levelsofmarketcompetition,andunintendedconsequencesofregulation.Theseproblemsaretypicallystructuralinnature,butcanbeexacerbatedbycyclicalissues.Often,inacommercialcontext,therejecteddecisionmayhavebeenthecorrectoutcome,butthecommercialdecisiondoesnotincorporatethewidereconomicimpactsthatmayariseasaresultoftheprovisionoffinancetoviablesmallerbusinesses.Thiscanmeanthatnotallproductivesmallerbusinesses’demandforfinanceismet,whichcanleadtosub-optimallevelsofeconomicactivity.
Itisusefultoconsidertheoutcomesoffinanceapplications.Whereapplicationsarerejected,itisworthwhiletoconsiderameasureof‘viability’,i.e.whereapotentiallyproductiveorviablesmallbusinesscouldhavereceivedfinance,butastructuralprobleminfinancemarketsforsmallerbusinessesmeantthatthisfinancewasnotavailable.However,itisrecognisedthatmanyrejectionswillhavebeenbasedonarationalcommercialdecisionand,inmanycases,theeconomicandcommercialdecisionsonfinancearelikelytobealigned.
ThissectionsummarisestheresultsofourproposednewmethodologyforquantifyingthevolumeofSMEsrejectedfornewdebt(loanandoverdraft)applicationsandthevalueofthoseapplications.SMEFinanceMonitordataisusedforthepurposeofthisanalysis,11drawingonatenquarterdataset(periodendingQ22015)todeterminethenumberofSMEsrejectedforanewloanoroverdraftandmultiplyingthesebythemid-pointoftheapplicationvalueband.Theunderlyingmethodologyisexplainedinaseparatenote,whichalsocontainsadiscussiononapotentialapproachtoestimating‘viability’.TheBritishBusinessBankwouldwelcomediscussionsonsuchamethodologywithanyinterestedstakeholder.
• Surveyevidencesuggestsnearly100,000SMEsandapproximately£4bnworthofapplicationsfordebtareestimatedtoberejectedeachyear
• Start-upsaremorelikelytobeunsuccessfulintheirapplicationsfornewdebtfacilities,comparedwithscale-upandstayaheadfirms
• However,byvalueofrejectedapplications,start-upsarethesmallestsegment
• Assessmentofthepotentialviabilityofrejectedloansisinherentlydifficult
Furthermore, we recognise that there are other methodologiesthataimtocalculatethesizeofthefinancegapfordebtfunding.Someoftheseotherapproachesareconsideredinthebenchmarkingdiscussion.Itshouldbenotedthatourmethodologyfocusesonnewapplicationsfortraditionaldebtproductsand,therefore,doesnotconsidertheextentofan‘equitygap’orspecificgapsforotherlendingproducts,norwheresmallerbusinesseshavebeendiscouragedfromapplying.Therefore,thisisastartingpointfromwhichweaimtodevelopthemethodologyfurtherforvaluingfinancegaps.
SURVEY EVIDENCE SUGGESTS NEARLY 100,000 SMES AND APPROXIMATELY£4BNOFAPPLICATIONSFORDEBTAREESTIMATEDTOBEREJECTEDEACHYEAR
SMEFinanceMonitordataindicatesthat16%12ofSMEshadany‘borrowingevent’ina12-monthperiod.AfundingeventcanbeinitiatedbytheSMEortheSME’sbankandrelatetoexistingornewfinance.TheproportionofSMEsapplyingforanewdebtfacilityissmallerstill(lessthan3%foreachofloansandoverdrafts).
Applicationsfornewdebtfacilitieshavemuchlowerapprovalratesonaveragethanthoserelatingtorenewalofexistingfacilities.Forexample,SMEFinanceMonitor13 analysisofcombinedloanandoverdraftapplicationsindicatesthatsuccessratesforrenewedfacilitiesareconsistentlyhigh(>94%).Successratesfornewmoneyaremorevariableovertheperiod(andarerelativelyhighin2014–equaltoorabove65%).ProvisionalresultsforQ12015indicatethat55%ofSMEsweresuccessfulinapplyingfornewmoney.
Inquantifyingthevalueofrejecteddebtapplications,wefocusonnewfacilities,wherethelowerthanaveragesuccessratessuggestthatstructuralproblemsinaccessingfinancemarketsaremorelikely.Forexample,whereabusinessisrenewinganexistingfacility,weassumethattherelevantfinanceproviderhasadditionalinformationorinsighttomakethecreditdecision(e.g.informationonprincipalandinterestpayments)anditislesslikelythatthereareinformationasymmetriesbetweenborrowerandlender.14
OurspecificanalysisofSMEFinanceMonitordatasuggeststhatofallSMEsseekinganewloanfacility,roughly55%weresuccessfulwhilst45%wereunsuccessfulinobtainingexternalfinancefortheirbusinessoverthe10quarterperiod.15Thisequatestoaround55,00016SMEsrejectedfornewloansina12-monthperiod.Usingdataonthemid-pointofvaluebandsappliedfor,thisequatestoroughly£3.7bnworthofrejectedloanapplications.Thiscompareswitharound£24bnofloanapprovalsreportedbytheBBAinthefourquarterstoQ22015.
SMALL BUSINESS FINANCE MARKETS 2015/16 17
AslightlylowerproportionofSMEsapplyingforanewoverdraftareunsuccessful(c40%,comparedwithnearly60%thatweresuccessful)inobtainingsomeformofexternalfundingfortheirbusinessfollowingtheirnewoverdraftapplication.ThisequatestoasimilarnumberofSMEsbeingrejectedforanewoverdraftina12-monthperiodthanforloans(c55,000).However,thevalueofthoserejectedapplicationsissignificantlylowerthanforloansatc£0.8bn,reflectingloweraverageapplicationvalues.Thiscompareswitharound£5bnofoverdraftapprovalsreportedbytheBBAinthefourquarters toQ22015.
SomeSMEsapplyforbothloansandoverdraftsina12-monthperiod.Forprudence,weexcludetherejectionforonetypeoffacility(wheretheotherapplicationwassuccessful)orthe‘duplicate’rejection(wherebothapplicationswereunsuccessful)fromtheanalysis.Approximately15,000SMEsareexcludedonthisbasis,withanequivalentrejectedapplicationvalueofc£0.5bn.Therefore,thetotalnumberofSMEsrejectedfornewdebtapplicationsisjustunder100,000peryearandtheequivalentvalueofrejectedfinanceisc£4bnperyear.
START-UPSAREMORELIKELYTOBEUNSUCCESSFULIN THEIR APPLICATIONS FOR NEW DEBT FACILITIES, COMPAREDWITHSCALE-UPANDSTAYAHEADFIRMS
TheBritishBusinessBankfocusesonthreemainsegmentsofSMEs:
• Start-up–SMEstradingupto5years.17
• Scale-up – SMEs trading for more than 5yearswithsomeambitiontogrow.
• Stay ahead – SMEs trading for more than 5yearswithnoambitiontogrow.
CuttingtheSMEFinanceMonitordatainlinewiththeabovedefinitionsindicatesthatc40%ofSMEsareclassifiedasstart-ups,justover20%arescale-ups,withtheremainingbeingstayaheadSMEs.Start-Upsweredefinedasupto5yearstoreflectfinanceproviders’preferenceforseveralyearsfinancialtrackrecordwhenconsideringapplications.
Theapplicationrateamongststart-upsfornewloansisinlinewiththeirproportionofthepopulation(i.e.c40%ofnewloanapplicationsaremadebystart-ups).Scale-upsareover-represented(makingupaboutone-thirdofapplications)andstayaheadbusinessesunder-represented(aboutonequarterofapplications).
Bothscale-upsandstayaheadSMEsaremorelikelytoseetheirnewloanapplicationapproved(successratesarearound60%),whilestart-upsaremorelikelytobeunsuccessful.Againthisisconsistentwitheconomictheoriesofinformationproblemsforlendersattemptingtoassessloanapplications.
18 BRITISH BUSINESS BANK
NUMBER OF SMES AND VALUE OF REJECTED DEBT APPLICATIONS
FIG 1.4
Source: BBB analysis, SME FM
40,000
20,000
80,000
60,000
120,000
100,000
Loan Overdraft Overlap Total
No. of SMEs
2
1
4
3
5
Loan Overdraft Overlap Total
£ billion
NEW LOANS – SHARE OF POPULATION / APPLICATIONS / SUCCESSFUL AND REJECTED APPLICATIONS BY BBB SEGMENT
FIG 1.5
Source: BBB analysis, SME FM
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%
50
Population Applications Successful Unsuccessful
Scale-up
Stay ahead
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Whenconsideringnewoverdraftsapplications,asimilartrendisevidentwherescale-upandstayaheadSMEsaremorelikelytobesuccessful.
HOWEVER,BYVALUEOFREJECTEDFINANCE,START-UPSARE THE SMALLEST SEGMENT
Giventheshareofunsuccessfulapplicationsbetweenthesegments,start-upsaccountforthelargestshareofnewloanrejectionsbyvolume.However,scale-upsandstayaheadbusinessesaremorelikelytoapplyforhigherloanvaluesonaverage.Therefore,byvalue,start-upshavethesmallestshareofrejectednewloanapplications.
Start-upsalsorepresentthelargestshareofrejectedoverdraftapplicationsbyvolume.Duetolowervariancesinaverageapplicationvaluesfornewoverdraftsbetweenthesegments,start-upsarealsothelargestgroupbyvalue.
Thecombinedvolumesandvaluesofrejecteddebtapplications(loansandoverdraftswithoverlapremoved)mirrorthetrendforunsuccessfulloanapplications.
ASSESSMENT OF THE POTENTIAL VIABILITY OF REJECTEDLOANSISINHERENTLYDIFFICULT
Inmanycases,thedecisionmadebythebank(orotherlendingprovider)willbelegitimatebasedontheirassessmentofanSME’sabilitytoservicetheloanrequested.However,therewillbeaproportionoffacilitiesthatweredeclinedduetostructuralproblemsinthemarket,meaningthatthereisamis-matchbetweensupplyanddemand.
Itisinherentlydifficulttodeterminepotentially‘viable’demandfrom‘non-viable’demand(i.e.thoserejectedbasedonsufficientinformationabouttheviabilityoftheloan)–ifthiswereaneasyexercise,costsassociatedwithassessingcreditworthinesswouldbeminimalandloanapplicationswouldnotberejectedduetoinformationasymmetriesorotherstructuralproblems.
TheestablishedtheorysuggeststhatanSME’slackoftrackrecord(abilitytoprovetheycanservicethefinancebasedonhistoricperformance)andlackofcollateral(tode-riskthelending)aresymptomaticofalackofinformationinthecreditdecisionprocess.Thiscanbeparticularlyproblematicforyoungbusinesses,orSMEslookingforastep-changeintheirbusinessperformance.Inbothcases,therelevanttrackrecordand,insomecases,valueofsecurityisstillbeingaccumulated.
Thecosttothelenderofverifyingthecreditworthinessofasmallerbusinessand/ortherequiredreturnduetopotentialhigherriskcanstarttooutweightheincomethatcanbederivedfromlending.Inacommercialsense,therejectedloanoutcomeisthereforereasonable,particularlywheresomeSMEswillhavehigherrisk
VOLUME AND VALUE OF TOTAL REJECTED NEW DEBT (LOAN AND OVERDRAFT) APPLICATIONS BY BBB SEGMENT
FIG 1.7
Source: BBB analysis, SME FM
Start-up Scale-up Stay ahead
20
10
40
30
60 2
1
50
Value (RHS)
Volume (LHS)
No. of SMEs (000s) £ billion
VOLUME AND VALUE OF NEW LOAN REJECTIONS BY BBB SEGMENT
FIG 1.6
Source: BBB analysis, SME FM
Volume: Value:
Stay ahead 18%
Scale-up 30%
Start-up 52%
Stay ahead 41%
Scale-up 38%
Start-up 21%
SMALL BUSINESS FINANCE MARKETS 2015/16 19
ratings.However,thisdoesprovidearationaleforgovernmentintervention,wherethewidereconomicbenefitsoffinancingthesebusinessesoutweighthecostsofdoingso.
Wewouldthereforeexpectthatpotentiallyviabledemandwithinrejectednewdebtapplicationswouldbehigherforthestart-upsegmentcomparedwithscale-uporstayaheadbusinesses.However,wewouldalsoexpectthatscale-upbusinesseswouldbepronetostructuralproblems,particularlyinformationasymmetries,wheretheirexistingtrackrecorddoesnotverifytheirintendedperformance.
BENCHMARKING AGAINST OTHER METHODS
Inputtingforwardthismethodologyasastartingpointforestimatingthevalueofrejectednewdebtapplications,werecognisethatothermethodologiesandattemptshavebeenmade.18,19 There are also ways in whichtheresultsofouranalysiscanbesense-checkedagainst other benchmarks.
A2013staffworkingpaperfromtheEuropeanCommissionmakesanex-anteassessmentoftheEUSMEInitiative.Inthereport,thereisanassessmentofSMEfinancialgapsintheEU.Thismethodologyalsodrawsfromsurveydata,notingthat,“Surveydata,withalltheirlimitations,areusedextensivelyinstudiesonfinancinggapswhentimeanddataconstraintspreventthequantitativeassessmentofdemandandsupplythroughdeepanalysesofthedata.”
ThemethodologyadoptedintheworkingpaperaimstoidentifythenumberoffinanciallyviableSMEs–benefittedfromturnovergrowthinthelastsixmonths–thatwereunsuccessfulinobtainingloanfinancing.Unsuccessfulisdeterminedbyneedand,therefore,doesnotdifferentiatebetweenSMEsthathaveorhavenotappliedforaloan20.Thevalueofthefinancinggapisdeterminedbyderivinganaverageloanamountthatisorwouldhavebeenrequested.
TheworkingpaperindicatesacomparativelyhigherfinancegapfortheUKthanthatsuggestedbyouranalysis,bearinginmindthatthe£4bnvalueforrejectednewdebtapplicationsisnotadjustedfor‘viability’.Thisdifferencemaybepartlyexplainedbytheearliertime
20 BRITISH BUSINESS BANK
periodforwhichtheanalysiswasundertaken,whencyclicalfactorswerecompoundingunderlyingstructuralissuesinSMEaccesstofinance.TheestimatedintervalfortheSMEloanfinancinggapwas€1.3bn-€8.8bnfortheUKduring2009-2011.Itisworthnotingthattheupperboundreflectsthedefinitionsoutlinedabove(e.g.positiveturnovergrowthinlastsixmonthsandunsuccessful,whereunsuccessfulisbasedonneed).ThelowerboundrepresentsthedebtfinanceneedsofhighgrowthSMEsunsuccessfulinobtainingloanfinance.
AdifferentapproachwasconsideredintheRBSIndependentLendingReview(2013),completedbySirAndrewLarge.Here,thefundinggapwasestimatedbyassessingUKSMEdebtcapacitycomparedwithactualbanklendingtoUKSMEs.UKSMEdebtcapacitywasconsideredinthecontextofthelevelofbankdebtthatSMEscouldprudentlysupport,basedonDebtServiceCoverageRatioof1.5andpricingateconomiccost.Thismethodologyestimatedthatthefundinggapin2013wasc£30bn-£35bn.Again,cyclicalfactorswerelikelytohaveincreasedthesizeofthegapin2013,soitisreasonabletoexpectthatthisgapwouldhavereducedsince2013.
Dataontheappealsprocess,whichcommencedin2011,isanotherwayofassessingapossiblebenchmarkforpotentialviabilitywithinrejectedapplications.Datacollectionisinitsfifthyear,withthereportnotingthat,“Appealsnumberscontinuetobesteadyandtheoverturnratecontinuestofall.”Thereportindicatesthatinyear1(Apr2011–Mar2012),theoverturnratewas39.5%(32.6%excludingcreditcards)comparedwith24.4%(17.5%excludingcreditcards)forthesixmonthsendingSeptember2015,givingsupportfortheviewthatasmallbutsignificantpercentageofrejectedloansmaybeviable.
Furthermore,the2014fullyearappealsprocessreportnotesthat,“Intermsofthesizeoflending,sizeofcompanyandtherelationthatthishastothenumberofdeclines,appeals,andoverturns,[…]thoseSMEswhohavetheresourceandtheexperiencetohavemoreinformeddiscussionswithlenderstendtodobetterthanothers.”Thedatasuggestthatoverturnratesarehighestforsmallerbusinesseswithaturnoveroflessthan£100kandforbusinessesthatrequestlendingvaluesoflessthan£10k.Indeed,thereasonsforrejectionappeartobedifferentforloanrequestsbelowandabove£25k.
SMALL BUSINESS FINANCE MARKETS 2015/16 21
1.4
DEMAND SIDE – AWARENESS & DEMAND FOR FINANCE
Forfinancemarketstoworkeffectively,boththesupplyanddemandsideneedtointeractefficiently.Thischaptersummarisesnewsurveyevidencewhichprovidesanoverviewofdemandforexternalfinancefromsmallerbusinesses.21
AWARENESS OF ALTERNATIVE SOURCES OF FINANCE OUTSIDE OF BANKS CONTINUES TO INCREASE OVER THE YEAR, BUT ONLY A SMALL PROPORTION OF BUSINESSES ARE ACTUALLY USING THESE ALTERNATIVE SOURCES
Therehavebeensignificantincreasesinbusinessawarenessoffinanceproductssuchasventurecapital,crowdfundingplatformsandPeertoPeerplatformssince2014,whichbuildsonthepreviousincreasesseenfromthe2012survey.Forinstance,49%ofSMEshavenowheardofcrowdfundingplatformsin2015,asignificantincreasefrom13%recordedin2012.
Whilstawarenessofsourcesoffinancehasimproved,roughlyhalfofbusinessesthatareawareofthetypeoffinanceareactuallyawareofaspecificsupplierofthattypeoffinance,suggestingbetterawarenessisneeded.Forinstance,whilst60%ofsmallerbusinessesareawareofVenturecapitalasafinancetype,only22%areawareofaspecificfundtoapproach.Similarly40%areawareofpeertopeerlendingbut19%areawareofaspecificplatform.
Importantlyhigherawarenesshasnottranslatedintohigheruseofthesealternativesourcesoffinance,whichremainslowcomparedtoothersources.Forinstance,only1%ofbusinesseshadusedequityfinanceand1%hadusedfinancefromapeertopeerlenderinthepreviousthree years.
INCREASED INFORMATION ABOUT SUITABLE TYPES OF FINANCE AND HOW TO APPLY COULD HELP TO MAKE SME FINANCE MARKETS WORK MORE EFFECTIVELY
InformationisneededforSMEfinancemarketstoworkeffectively,butonlyaminorityofSMEs(19%)useexternaladvicewhenapplyingforfinance,largelyunchangedfrompreviousyears.WhilstSMEsarelargelyconfidentinassessingfinancialproductsofferedbytheirownbank,theyarelessconfidentassessingotherproviders’products.Thismayexplainwhy61%
AWARENESS OF DIFFERENT TYPES OF EXTERNAL FINANCE
FIG 1.8
Source: British Business Bank 2015 Finance Survey
20 40 60 80 100%
2014
2013
2015
Credit cards
Leasing/HP
Gov./LA grants
Venture capitalists
IF/Factoring
Crowd funding platforms (a)
Trade finance (b)
P2P lending platforms
Business angels
Mezzanine finance
• Awarenessofalternativesourcesoffinanceoutsideofbankscontinuestoincrease,butonlyasmallproportionofbusinessesareactuallyusingthesesourcesoffinance
• IncreasedinformationaboutsuitabletypesoffinanceandhowtoapplycouldhelptomakeSMEfinancemarketsworkmoreeffectively
• Smallerbusinessesreducedtheiruseof externalfinanceduringtherecession,butthere issomeevidencethatdemandforfinancehas begun to increase
• Businessconfidencehasincreasedandthe mainreasonforseekingfinanceistofund workingcapital
• Businessescontinuetounderestimatethelikelihoodofobtainingfinance,withasmallbutsignificantproportionofbusinessesbeingdiscouragedfromseekingfinance
ofSMEsonlycontactoneprovideroffinancewhenseekingfinance.Thoughhigh,thisisadeclinefrom66%contactingoneproviderin2014and71%in2012,suggestingmoreSMEsareengagingwiththemarketandareshoppingaroundforexternalfinancethanpreviously.
SMALLER BUSINESSES REDUCED THEIR USE OF EXTERNAL FINANCE DURING THE RECESSION, BUT THERE IS SOME EVIDENCE THAT DEMAND FOR FINANCE HAS BEGUN TO INCREASE
Demandforexternalfinancefromsmallerbusinessesreducedduringtherecession,asbusinessesbecamemorecautiousabouttakingonadditionaldebtandscaledbacktheirexpansionplans.Furthermore,astherecoverytookhold,businesseshaveincreasedcashreservesinthebusiness,whichhasfurtherledtoadeclineintheuseofexternalsourcesoffinance.22
Confidenceisneededforasustainedincreaseinthenumberofbusinessesinvestingforexpansion.ThismaybebeginningtohappenasthelatestBritishBusinessBankFinancesurveyshowstherehasbeenanincreaseintheproportionsofbusinessesusingexternalfinanceto60%upfrom56%in2014.Thisincreaseisseenacrossbothzeroemployeebusinessesandbusinesseswithemployees.Thisislikelytobedrivenbytheproportionofbusinessesseekingfinanceinthelast12months.Thishasincreasedfrom12%in2014to18%inthelatestsurveygivingfurtherevidenceofthechangeindemand,albeittothesamelevelseenin2012.23
However,thisincreasemustbeputintocontextasalargeproportionoftheobservedincreaseisduetothegreateruseofcreditcardfinance(28%upfrom22%in2014)andalsoloansfromincreasedborrowingfromfamilyandcolleagues(23%upfrom13%in2014).Thesearelikelytobeflexibleshorttermborrowingonalreadyagreedfacilitiesandinformalsourcesoffinance,whicharenotlikelytoshowupinotherlendingdatasources.
BUSINESS CONFIDENCE HAS INCREASED AND THE MAIN REASON FOR SEEKING FINANCE IS TO FUND WORKING CAPITAL
Furthermore,surveyevidencesuggestsoverallbusinessconfidencecontinuestoimprovewithbusinessespositiveaboutfutureeconomicconditions.Forinstance,44%ofbusinessesexpecttradingconditionswillimproveinthenext12months,comparedtoonly11%expectingthemtogetworse.Thishascontributedtoa
22 BRITISH BUSINESS BANK
higherproportionofbusinessesplanningtogrowtheirturnoverinthenext12monthscomparedtoayearago.56%ofsmallbusinessesplantogrowtheirturnoverinthenext12months,asignificantincreasefrom46%ayearago.However,itisimportanttonotemost(68%)willnotuseanyexternalfinancetofundthisgrowth.
Theprevious2014surveyidentifiedachange24 in the profileofdemandforfinance,shiftingawayfromfinanceforworkingcapitaltofinancetofundfixedassets.Thislatestsurveyshowsaswingbacktoseekingfinanceforworkingcapital,whichispredominantlybeingdrivenbySMEswithnoemployeeswhichmakeupthemajorityofthebusinesspopulationbynumber,buthavedifferentcharacteristicstoemployerbusinesses.Itistoosimplistictoassumetheincreaseinbusinessesseekingfinanceforworkingcapitalimpliesadeteriorationofbusinessesseekingfundingforinvestmentandgrowth.
Workingcapitalcoversawiderangeofdifferentreasons,includingcashflowtofundgrowth,aswellascashflowtocoverunexpectedexpenses.Ofthoseseekingworkingcapital,therehasbeenanincreaseinbusinessesseekingworkingcapitaltofundbusinessgrowth(33%upfrom27%in2014),whichisconsistentwithanexpansionarymacro-economicclimate.
Whilsttheoverallproportionofbusinessesseekingfinanceforworkingcapitalhasincreasedfrom33%to53%ofthoseseekingfinance,therehasnotbeenadeclineintheproportionofbusinesseswithemployeesseekingfinanceforassetsasthisremainsat38%ofthoseseekingfinancein2015comparedto2014.Therefore,itisnotthecasethatfeweremployerbusinessesareinvestingthanpreviously.
RecentONSdatasupportstherobusttrendsinbusinessinvestmentasbusinessinvestmenthasincreasedby6.6%comparedtoayearagoinQ32015.25 This was thefourthconsecutivequarterofpositivegrowthinbusinessinvestment.
Thereversalinthereasonforseekingfinancehasalsoledtoadeclineintheproportionofbusinessesseekingbankloans,whicharepredominantlyusedtofundassets.Therehasbeenanincreaseintheproportionsofbusinessesseekinggrantsandloan/equityfromfriendsandotherproviders,whichmayexplainsomeoftheincreaseinfinancesoughtseeninthissurvey,butnotseeninotherdatasources.
SMALL BUSINESS FINANCE MARKETS 2015/16 23
MAIN REASON FOR SEEKING FINANCE (LAST OCCASION IN LAST THREE YEARS)
FIG 1.9
Source: British Business Bank Finance Survey
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cashflow
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TYPE OF FINANCE SOUGHT (LAST OCCASION IN LAST THREE YEARS)Source: British Business Bank Finance Survey
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ortgage
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BUSINESSES UNDERESTIMATE THE LIKELIHOOD OF OBTAINING FINANCE, WITH A SMALL BUT SIGNIFICANT PROPORTION BEING DISCOURAGED FROM SEEKING FINANCE
Followingtherecessionandon-goingcoverageoflendingconditionsinthemedia,thereremainsacontinuedperceptionamongstsmallerbusinessesthatbanksarenotlendingsufficiently.Forinstance,55%ofbusinessesperceivethatitisfairly,orverydifficulttoobtainfunding,aslightimprovementfrom58%in2014.In2015smallbusinessesperceivedthat(onaverage)38%ofthosethatapplyforbankfinanceweresuccessfulingettingit,slightlylowerthanthelevelreportedin2014(42%),buthigherthanlevelsreportedin2012(32%).Thisisdespitethemajority(over70%)ofsmallerbusinessesthatactuallyappliedforfinanceinthethreeyearspriorto2015gettingthefullamountrequestedfromthefirstprovidertheyapproached(86%gettingsomefinance).
OthersurveyevidencefromtheSMEFinanceMonitorsurveyshows75%ofSMEsaimtopaydowndebtandremaindebtfree,andlessthanhalf(44%)arehappytouseexternalfinancetohelpbusinessgrowth.26 This confirmsthatmanysmallerbusinessesremaincautiousaboutusingexternalsourcesoffunding.
Amismatchinperceptionremainsandislikelytobeabarrierholdingsomebusinessesbackfromapplyingforfinance.Asmallbutsignificantproportionofthesesmallbusinessesarediscouragedfromapplyingforfinance.ThelatestBritishBusinessBankfinancesurveyestimatesthistobearound4%ofallSMEs,predominantlymicrobusinesses.
FIG 1.10
24 BRITISH BUSINESS BANK
1.5
SUPPLY SIDE – BANK LENDING
THE AVAILABILITY OF BANK LENDING FOR SMALLER BUSINESSES IS IMPROVING
Banklendingremainsthesinglelargestformoflendingtosmallerbusinesses,andthusdevelopmentsinthissectorhaveamajorimpactonSMEs’accesstofinance.ThissectionexploreshowbanklendinghasdevelopedastheUKeconomycontinuestorecoverfromtherecession.Recentdebatehasfocusedonwhetherlendingmarketsareimproving.TheBankofEnglandnotedinitsQ3CreditConditionsReview27thatbothitsCreditConditionsSurveyandtheFederationofSmallBusinessesVoiceofSmallBusinessIndexwereconsistentwithreportsfromtheBank’sAgentsthatcreditavailabilityforsmallerfirmshadincreased,andwasapproachingnormal,althoughitremainedtighterthanforotherfirms.
Thissectionreviewstheevidence,whichsupportstheconclusionthatsmallbusinessesbankcreditmarketshaveimprovedover2015.Butacceptingtheargumentthatthecyclicalimpactofrecessiononcreditavailabilityhasretreateddoesnotmeanthatstructuralproblemsinthemarkethavebeenresolved.Additionally,issuesaroundthediversityofsupplyoffinancearelong-standing(seechapter4fordiscussion).
Ithaslongbeenacceptedthatstructuralissuesinaccessingfinancemarketsexist,meaningthatthereisaproportionofviablesmallerbusinessesthatareunderserved.Wherealackofinformationimpedesacreditdecision,firmswithlimitedtrackrecordorinsufficientsecurityaremorelikelytobedeniedbankloansoroverdrafts,becausetheyarelessabletodemonstratetheviabilityoftheirbusinesstobanks.Arestrictedsupplyoffinancetoviablebusinesses,causedbythisinformationfailure,islikelytoleadtolowerlevelsofinvestment,andthereforegrowth,bythosebusinesses.Inaggregate,thismayleadtolowerlevelsofeconomicoutputandemploymentintheshortandlong-term.
• Theavailabilityofbanklendingforsmallerbusinessesisimproving
• GrosslendingtoSMEshasexceededrepaymentsresultinginfourquartersofpositivenetlending
• Useofoverdraftshasstabilised,butSMEscontinue to strengthen balance sheets by increasingdeposits
• Latestresearchfindsthatthemarketforloanstosmallerbusinessesremainsconcentrated
SMALL BUSINESS FINANCE MARKETS 2015/16 25
GROSS LENDING TO SMES HAS EXCEEDED REPAYMENTS RESULTINGINFOURQUARTERSOFPOSITIVENETLENDING
AccordingtotheBankofEngland(BoE)banklendingdata,thegrossflowofloans(exc.overdrafts)toSMEsreached£53bnbytheendofNovember,continuingtheupwardtrendofrecentyears.28Repaymentshavefollowedasimilartrend.However,grossloanshaveexceededrepaymentsineachofthelastfourquartersforwhichfulldataisavailableresultinginanincreaseinnetlending.
LENDINGTOMEDIUM-SIZEDBUSINESSESISDRIVINGTHEIMPROVEMENT IN SME NET LENDING
EvidencefromtheBBAallowsananalysisofflowsofbanklendingwithinthewiderSME,orsmallerbusiness,population.Thedatasuggeststhatimprovementsinoveralllendingtosmallerbusinessesismuchmorepronouncedamongmediumfirmscomparedtothesmallestfirms,wherethevalueofquarterlygrosstermloansisyettopickupandnetlendingremainsnegative.29
AccordingtotheBBA,thecommercialrealestatesector(CRE)accountsforaround29%ofthestockofloansinSeptember2015foroverallsmallerbusinesslending.Sinceatleastlate2011,negativenetlendingintheformoftermloanstoCREhasdraggedonoverallnetlendingfiguresforSMEloans,asbankstypicallylookedtoreducetheirexposuretothissector.Ingeneral,thistrendhasbeenlessprominentin2015whennetCRElendinghasbeenpositive.
USE OF OVERDRAFTS HAS STABILISED IN 2015, BUT SMES CONTINUE TO STRENGTHEN BALANCE SHEETS BY INCREASING DEPOSITS
Thevalueofoutstandingoverdraftshasbeendecreasingovertime,asSMEsreducetheirlevelsofdebt.Thedeclineinthestockofoverdraftsseemstohaveslowedin2015.AccordingtoSMEFinanceMonitor,inH1201516%ofSMEshadanoverdraft,comparedwith26%in2011,andapplicationsaswellasrenewalsofoverdraftfacilitiesbySMEshavedeclinedsince2011.30
Depositshoweverhavecontinuedtogrowin2015asSMEscontinuetostrengthentheirbalancesheets,supportedbypositivetradingconditions.InQ3201580%ofsmallerbusinessesreportedaprofitintheirlatesttradingperiodand23%ofallsmallerbusinessesheldacreditbalanceover£10,000in2015,upfrom17%in2011.31
QUARTERLY GROSS AND NET FLOWS OF BANK LOANS TO SMES
FIG 1.11
Source: Bank of England Bankstats table A8.1
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llion
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NET LENDING TO MEDIUM AND SMALL SMES
FIG 1.12
Source: BBA SME Statistics: https://www.bba.org.uk/news/statistics/sme-statistics/
Q3 2011
Q4 2011
Q1 2012
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Net lending small - CRE Net lending all SMEs
Notes: Loansexcludeoverdrafts.CommercialrealestatesectorreferstoSICcode10ainBBAstatistics:Buying,selling&rentingownorleasedrealestate
26 BRITISH BUSINESS BANK
Thischaptersofarhasreviewedthelatestevidencefrom2015insmallbusinessfinancemarkets.Overallflowsoffinancehaveincreased,withariseinnetbanklendingtosmallerbusinessesandstrongergrowthinflowsoffinanceinareassuchasassetfinanceandotherdebtproducts.
Theanalysisofrejectedloansapplicationssuggeststhataproportionofrejectedbusinessesmaypotentiallybeviablelendingopportunities,butthatalackoftrackrecordorlackofcollateralmayhavepreventedthemfromobtainingfinance.
Economicgrowthisexpectedtocontinuewithasignificantnumberofsmallerbusinessesexpectingtogrow.Surveyevidencesuggeststhat,whilstawarenessoffinanceproductsinrising,effectivedemandwouldincreaseifsmallerbusinesseshadmoreinformationandunderstandingofhowtoobtainfinance.
ThisprovidesevidencefortheBusinessBanktocontinuetopursueitsobjectives.Existingprogrammesarealreadyhelpingtoreducetheextenttowhichpotentiallyviablesmallerbusinesseshaveproblemsinaccessingfinance.However,theBusinessBankwillcontinuetodevelopandrefineitsprogrammestohelpaddressthegapintheprovisionofdebtfinance.Forexample,inhelpingtosupportbanklending,theEnterpriseFinanceGuaranteecancontinuetofacilitatesuccessfulapplicationsfornewlendingandHelptoGrowwillenableexpandingbusinessestoobtainfinancewheretheirpropositionmaybeconsideredhigherriskforacommercialprovider.
Furthermore,thecontinuationoftheStart-UpLoansprogrammewillhelptoensurethatfundingisavailablefornewbusinesses,wherethelendingpropositionisinherentlysubjecttogreaterrisk,andsometimesbeyondthereasonableappetiteofcommerciallenders,butwherethebenefitstotheeconomyofthesenewstartsaremeasurable.
STOCK OF OVERDRAFTS AND VALUE OF DEPOSITS, ALL SMES
FIG 1.13
Source: BBA SME Statistics
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llion
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SMALL BUSINESS FINANCE MARKETS 2015/16 27
1.6
SUPPLY SIDE - EQUITY FINANCE
Equityfinance32isusedbyasmallproportion(around1%inthepreviousthreeyears33)ofsmallerbusinesses,butitisparticularlyimportantforstart-upbusinessesandbusinesswithhighgrowthpotential.Thesebusinessesmaybetooriskyorlacksecurityandtrackrecordfordebtfinance.Trendsinthedifferentequitystages(start-up,ventureandgrowth)areexploredinspecificsectionslateroninthereport,butthissectionprovidesabriefoverviewofhowequitymarketshavechangedoveralloverthelastyear.
ThissectionusesdatafromBeauhurst34 on the number andvalueofpublishedequityinvestmentswhichcoversawiderrangeofequityinvestorsthanjustVCfunds.35 ItisimportanttoacknowledgethatanumberofotherdatasourcesalsocoverequityinvestmentsincludingtheBritishVentureCapitalAssociation(BVCA)andInvestEurope.Thesepredominantlymeasuretheinvestmentactivitiesoftheirmembers,whicharemainlycomprisedofprivateequityandventurecapitalfunds.
Therefore,thedatasourceshavedifferentcoverageofinvestorsandarenotalwaysconsistentwithoneanother.Therearelikelytobedifferencesinobservedtrendsandscaleofinvestments.Forinstance:
• BVCAshowsadeclineinthevalueoffundingbetween2011and2014,butfundingisincreasingintheBeauhurstdata,whichisduetothepresenceofotherequityinvestorslikecrowdfundersandbusiness angels. Beauhurst data shows a decline in thenumberofinvestmentsmadebyPrivateEquity/VentureCapitalfundsbetween2011and2014,whichis consistent with the wider trends seen in the BVCA data.
• Infacttheproportionofdealsinvolvingprivateequityfundsdeclinedfrom56%ofthetotalequitymarketin2011to30%inQ1-Q32015showingtheincreasingimportanceofotherprovidersintheequitymarket.The other consideration for explaining some of the trends in the BVCA data is that BVCA membership has declinedbetween2007and2014,sothatfewerdealsarepickedupinthefigures.
• ItisimportanttoacknowledgethatInvestEuropeinvestmentvolumesareoriginallyderivedinEurosandareconvertedbacktoSterlingatcurrentexchangerates. This may obscure underlying trends due to exchangeratemovements.HowevertheInvestEurope data does tell a similar story to the Beauhurst data,withactivityinthelaterstageVCrelativelyweak,but early and growth stages are increasing.
COMPARISON OF TRENDS IN DIFFERENT EQUITY DATA SOURCES
FIG 1.14
Source: BVCA, Invest Europe and Beauhurst
£1,000
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Invest Europe Beauhurst
Growth capital
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• Thevolumeofequityinvestmentis increasing in 2015 with increases seeninallstagesoffunding,butisparticulardrivenbyincreasedventurestagefinancing
• TheUKperformsrelativelywellintermsofVCactivitycomparedtorestofEurope,significantlylagsbehindthe US
28 BRITISH BUSINESS BANK
• BVCA also shows a decline in growth capital between 2011and2014,whichisnotseenintheInvestEuropeandBeauhurstdata.Growthcapitalinvestmentsareveryvolatileduetothesmallnumberofverylargedeals.Itispossiblethatdifferencesinthewaydealsareclassifiedmayexplainsomeofthisdivergenttrendwith some of the BVCA later stage VC deals falling underBeauhurst’sdefinitionofgrowthstage.36
TheBritishBusinessBankhasuseddatafromBeauhursttoexploredetailedtrendsinequitymarketsintheUK.ThisisbecauseBeauhursthasawidercoverageofinvestorsbeyondVC/PEfundsandalsobecausethedataisavailableatthemicroinvestmentlevel,allowingmoredetailedanalysis.BVCAandInvestEuropedataisonlyavailableatanaggregatedlevel.
However,theBeauhurstdatapresentedincludesonlypublisheddeals,butmanydealsarenotformallymadepublicbytheirinvestors.37 ThisthereforemeansthattheBeauhurstdata(alongsideotherdatasets)doesnothavecompletecoverageofthetotalequitymarket.Forinstance, the UK Business Angel Association estimates thatprivateinvestorsaccountforbetween£800millionand£1billionofearlystageinvestmenteachyearintheUK–thesinglelargestsourceofearlystagecapitalinthiscountry.38
THEVOLUMEOFEQUITYINVESTMENTISINCREASINGIN2015 WITH INCREASES SEEN IN ALL STAGES OF FUNDING, BUT IS PARTICULAR DRIVEN BY INCREASED VENTURE STAGE FINANCING
Overall,UKequitymarketshaveperformedwellover2014withincreasednumberandvalueofinvestmentsandhaveperformedevenmorestronglyoverthefirstthreequartersof2015.Beauhurstdatashows870equitydealsinQ1-Q32015comparedto779inthesamequartersin2014,a12%increasebynumber.Invaluetermsforknowninvestmentamounts,theincreaseseeninthefirstthreequartersof2015isevengreaterat43%comparedtothesametimeperiodin2014.Thetotalinvestmentvolumeforthefirstthreequartersof2015(£2.4bn)alreadyexceedsthetotalfor2014withonequarterfiguresstilltogo.
Whilsttheincreasesinventurestagefundinghavebeenrelativelylowbetween2011and2014,venturestagefinancinghasalsoseenalargeincreasein2015.Venturestagefinancingincreasedby118%comparedtothefirstthreequartersof2014.Thefirstthreequartersdata(£882m)exceeds2014wholeyearfigures(£595m),suggesting2015willbeaverystrongyearforventurecategoryoverall.Thisisexploredfurtherintheventuresectionbutcautionisneededasitisbeingdistortedbyasmallnumberofpharmaceuticalcompanieswithdealsizessignificantlyexceeding£10m.Infactonepharmaceuticalcompanyreceivedfundingof£205min
NUMBER OF EQUITY DEALS AND VALUE OF INVESTMENT OVER TIME
EQUITY DEALS INVOLVING VENTURE CAPITAL/PRIVATE EQUITY
FIG 1.15
FIG 1.16
Source: Beauhurst
Source: Beauhurst
100
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Deals all equity providersDeals involving PE/VC
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SMALL BUSINESS FINANCE MARKETS 2015/16 29
2015,whichformsasubstantialproportionoftheincreaseinvalueseeninthefirstthreequartersof2015.39, 40
Itiswidelyrecognisedthatequityinvestmentsin2015areattractinghighervaluationsthanpreviouslyduetogreaterconfidenceinthemarket,whichisleadingtolargerdealsizes.Forinstance,theaveragedealsizeforventurestagewas£3.6min2015,upfrom£2.4min2014.Forgrowthcapitalinvestments,averagedealsizesarenow£9.8m,upfrom£6.9min2014.However,seedstagesremainssmaller,withaveragedealsizesremainingaround£600,000to£700,000.Theincreasevaluations,particularlyatlaterVCstageshaveledtomarketcommentatorstofocustheirattentiononthegrowingnumberof“unicorn”businesses,41ofwhichtheUKcurrentlyhas5outoftheworldwidetotalof145.42
THE UK PERFORMS RELATIVELY WELL IN TERMS OF VC ACTIVITY COMPARED TO REST OF EUROPE, SIGNIFICANTLY LAGS BEHIND THE US
ThebestwaytoassessinternationaldifferencesinventurecapitalistolookatVCinvestmentasaproportionofGDP,asthistakesintoaccountdifferencesinthesizeofacountry’seconomy.CombiningInvestEuropedatawithNVCAdatashowstheUKperformsrelativelywellintermsofVCactivitycomparedtorestofEurope,butEuropelagsbehindtheUS.
TheUShasaVentureCapitaltoGDPratioof0.29%in2014,whichissignificantlyhigherthanEuropeanaverageof0.024%.TheUK’sVentureCapitaltoGDPratioof0.038%ishigherthantheEuropeanaverage,butislowerthanSweden(0.066%),Finland(0.060%)andIreland(0.049%).ItisimportanttoacknowledgethatVCactivityintheUSin2014wasverystrongincreasingby68%fromthepreviousyearduetohighervaluations.WhilsttheVentureCapitaltoGDPratioislowerat0.180%in2013whichismoretypicaloftheUSperformance,thisdoesnotchangethemainconclusionoftheanalysisthatVCactivitylevelsaremuchhigherintheUS.
CONCLUSIONS
BeauhurstdatashowsUKequitymarketscontinuetoperformstronglyintermsoftheoverallnumberandvalueofdeals.Inpartthisisduetothestrongstart-upenvironmentandinvestors’confidenceofimprovingconditions.Moreevidenceisprovidedontheextenttowhichequityinvestmentsupportsstart-upsandbusinesseswithhigh-growthpotentialinchapters2and3respectively.
Furthermore,theBritishBusinessBankwillpublishamoredetailedassessmentofequitymarketscoveringinvestmentsoverthefull2015yearinspring2016throughtheEquityTrackerReport.
£400
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VALUE OF INVESTMENT OVER TIME BY STAGE
FIG 1.18
Source: Beauhurst
2011-14 PERCENTAGE CHANGE IN VALUE OF INVESTMENTS BETWEEN DIFFERENT EQUITY DATA SOURCES
FIG 1.17
Source: British Business Bank analysis of BVCA, Invest Europe and Beauhurst data
% BVCA Invest Beauhurst Europe UK
Early Stage VC -60 31 200
Later Stage VC -5 -11 46
GrowthCapital -49 26 142
2014 VENTURE CAPITAL INVESTMENTS AS A PROPORTION OF GDP
FIG 1.19
Source: Invest Europe, NVCA, World Bank
0.05
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Other CEE
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30 BRITISH BUSINESS BANK
Thissectionexploresregionaldifferencesinsmallerbusinessgrowthperformanceandflowsoffinance.
Growthperformanceismeasuredbyproportionofbusinessesachievinghighgrowthandalsotheproportionofstart-upsscalingupinthreeyears.ThedistributionofbanklendingandequityinvestmentsacrossdifferentregionsintheUKisthenconsidered.Totakeintoaccountdifferencesintherelativesizeofregions,theanalysiscalculatestheregionalshareofbanklendingandequityinvestmentandthencomparesittotheshareofbusinessstart-upsandnumberofenterpriseslocatedintheregion.
Thisprovidesinsightintothequestionofwhetherlendingandinvestmentareunderoroverrepresentedcomparedtothesmallerbusinesspopulation,butitdoesnotdeterminewhattheoptimalleveloffinanceisforthatregionasitmaybeexplainedbysectoraldifferences.
NEW BUSINESS BIRTHS ARE CONCENTRATED IN LONDON, WITH VARIATION BETWEEN OTHER REGIONS RELATIVELY LESS MARKED
GrowingbusinessesarelocatedinallregionsandsectorswithintheUK.Thefollowingchartshowstheregionalshareofbusinessstart-ups,businesspopulationandGrossValueAdded(GVA)againsttheshareofthepopulation.Theproportionofbusinessstart-upsandthenumberofbusinessesoverallisclearlyoverrepresentedinLondon(25%and18%respectively)comparedtotheshareofpopulation(13%).Forotherregionstheshareofstart-upsisrelativelyinlinewithbusinesspopulationandGVA,albeitlaggingbehinditspopulationshare.ThismayreflectLondon’sroleasthecapitalcity,whichcanleadtoheadofficesbeinglocatedhere,evenifbusinessactivityoccurs throughout the UK.
THE REGIONAL SHARE OF HIGH GROWTH BUSINESSES SHOWS LITTLE VARIATION OUTSIDE OF LONDON BUT THERE ARE WIDE VARIATIONS IN BUSINESS PERFORMANCEINSUB-REGIONALAREAS
WhilstLondonhasoneofthehighestproportionsoffastgrowingbusinesses(18.6%),highgrowthbusinessesarefoundinallregionsoftheUKwithvariationrelativelylowbetweenregions.ExcludingLondon,theproportionofhighgrowthbusinessesisapproximately15%inmostEnglishregions.Similarlytheproportionofbusinessesreaching£1mturnoverisrelativelyconstant(around6%),whereasthefigureforLondonis7.9%.
PROPORTION OF BUSINESS START-UPS, BUSINESS POPULATION, GROSS VALUE ADDED AND POPULATION BY REGION
FIG 1.20
Source: ONS
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umber
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1.7
REGIONAL PERSPECTIVE
• New business births are concentratedinLondon,withvariationbetweenotherregionsrelativelylessmarked
• TheregionalshareofhighgrowthbusinessesshowslittlevariationoutsideofLondonbuttherearewidevariationsinbusinessperformanceinsub-regionalareas
• Theflowofbanklendingtosmallerbusinesseslargelyfollowsthebackgroundshareofbusinesses
• PrivateEquityfinanceisconcentratedinLondonandSouthEastbutisunder-representedinsome regions
SMALL BUSINESS FINANCE MARKETS 2015/16 31
Regionalfiguresobscurethehighvariationinbusinessperformancethatoccurswithinregions,assomeareasperformrelativelywell.Forinstance,thereareanumberofareasintheMidlandsandNorthwithanaboveaverageproportionoffastgrowingfirms.ThisincludesLeicesterandLeicestershire(17%),GreaterBirminghamandSolihull16%),GreaterManchester(16%).43
Howeversomesub-regionalareasintheNorthperformverypoorly.Forinstance,NorthEast,SheffieldCity,Humber,TeesValleyandCheshireandWarrington LEPperformrelativelypoorlyintermsoftheproportionoffastgrowingbusinessescomparedto16%forEnglandas a whole.
Asimilarpictureexistsforstart-upsshowinghighgrowthbyreachingturnovergreaterthan£1minthreeyearsofstart-up.AgainLondonisoneofthehighestareas(7.9%),butNortherncitiesincludingNewcastle,Leeds,ManchesterandSheffieldarealsonearthetoptherankings.Thisdemonstratesthattherearehighqualitybusinessesintheseareascapableofachievinghighgrowth,buttherearelargevariationsinbusinessperformance.
Cumbrialagsbehindontheproportionofstart-upsscalingupwherejust2%ofstart-upbusinessesin2011reached£1mturnoverinthreeyears.SimilarlyinYork,NorthYorkshireandEastRidingthefigurewas5%comparedto6%forEnglandasawhole.Thisvariationshowsthereisroomforimprovementintheseregions.
Morerecentbusinessconfidencesurveysshowadivergenceinbusinessconfidencebetweensomenorthernandsouthernregions,whichsuggestssmallerbusinessesfacemorechallengingconditionsinsomenorthern regions. The ICAEW/ Grant Thornton Business ConfidenceMonitor44showsconfidencehasbeensteadyinLondon,SouthEastandSouthWestover2015,butinsomeregionsinnorthernEnglandhasbeendecliningsincethestartof2014.Anoptimismreadingof+12.8wasrecordedinthelatestquarter(Q42015)forNorthernEngland,downfrom+25.1ayearbeforeandfromahighof+45.5atthebeginningof2014.
THE FLOW OF BANK LENDING TO SMALLER BUSINESSES LARGELY FOLLOWS THE BACKGROUND SHARE OF BUSINESSES
Figure1.22showstheregionalshareofbanklendingtosmallerbusinesseslargelyreflectsthebusinesspopulationinmostregions,althoughtheshareoflendingintheSouthEast(9%)lagstheshareofbusinesseslocatedintheregion(17%).Toalesserextent,thisisalsothecasefortheNorthWestandSouthWestregions.
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PROPORTION OF FAST GROWING BUSINESSES AND SURVIVING START-UPS GROWING TO £1M TURNOVER IN THREE YEARS
FIG 1.21
Source: Enterprise Research Centre Growth Dashboard 2015
32 BRITISH BUSINESS BANK
PRIVATEEQUITYFINANCEISCONCENTRATED IN LONDON AND SOUTH EAST BUT IS UNDER-REPRESENTEDINSOMEREGIONS
EquitydealsarenotspreaduniformlyacrosstheUK.EquityinvestmentisheavilyconcentratedinLondonandtheSouthEast,with53%ofdealsworth71%ofinvestmentin2014andQ1-Q32015.Incomparison,34%ofallbusinessesarelocatedinLondonandtheSouthEast,showingtheseregionsareoverrepresentedcomparedtothebackgroundpopulationofbusinessesandshareofbusinessstart-ups.TheexistenceofotherequityproviderslikecrowdfundingplatformsandprivateinvestorsintheBeauhurstdataoffsetsslightlythePrivateEquityindustrybeingconcentratedinLondonandtheSouthEast.FocusingoninvestmentsmadebyPrivateEquityfundsonly,LondonandtheSouthhaveashareof60%bynumberand73%byvalue.
Interpretingtheregionaldifferencesinequityfinanceisdifficultastheuseofequityfinanceisrelatedtobothsupplyanddemandsidefactors.Forinstance,manyofthemajorVentureCapitalfundsarelocatedinLondonandtheSouthEast,whichcanleadtoinnovativebusinessesclusteringaroundotherinnovativebusinessesandfunders.Itispossiblethatfundmanagersaremorelikelytoinvestclosertotheirgeographiclocation,especiallyforsmallerdealsizes.Additionalcareisalsoneededastheoverallequityfiguresarelikelytoincludesourcesofgovernmentfunding;someofitsuchasERDFfundingismandatedtobetargetedatspecificregions.TheNorthernPowerhouseInvestmentFundannouncedatAutumnStatement2015willhelpincreasethesupplyoffinanceinNorthernRegions.
Althoughdemandsidefactorsmayexplainsomeofthedifferences,smallerbusinessesoutsideofLondonandtheSouthEastarerelativelyunder-suppliedwithVentureCapitalfinancecomparedtothedistributionofbusinessstart-upsandthebusinesspopulation.
PROPORTION OF EQUITY DEALS BY REGION
FIG 1.23
Source: Beauhurst
20
10
40
30
%
50
Number of businesses (2015)
Share of births of new enterprises (2014)
Number of deals (2014-2015)
Value of equity investments (2014-2015)
North East
North W
est
Yorkshire and The H
umber
East Midlands
West M
idlands
East of England
London
South East
South West
Wales
Scotland
Northern Ireland
PROPORTION OF BANK LENDING APPROVED BY REGION
FIG 1.22
Source: BBA Q3 2015 and BIS
4
2
8
6
12
14
16
18
20
%
10
Number of businesses (2015)
Value of bank lending approved (Q3 2015)
North East
North W
est
Yorkshire and The H
umber
East Midlands
West M
idlands
East of England
London
South East
South West
Wales
Scotland
CHAPTER TWO START-UP BUSINESSES
Start-upbusinessesplayacrucialroleintheeconomy.Theybringnewinnovationstomarket,increasecompetitionandfillgapsinthemarket.Theyplayanessentialpartinsupportingeconomicgrowthandjobcreation.ForthepurposesofanalysisusingtheBusinessBanksegments,start-upsaredefinedashavingnomorethan5yearstradingactivity.However,itisrecognisedthatsuchdefinitionsarefluid,becauseitcanbedifficulttodefinewhenabusinesshasbeencreatedversusanactivitythatisahobbyofanindividual.
Start-upbusinessesaremostlikelytohavedifficultiesraisingexternalfinance.Lendersandinvestorswillhavelessinformationonwhichtoassessthepotentialcreditworthinessofnewbusinesses,andthebusinessesmayhavelesscollateraltoofferassecurity.Particularlyforthoseapplyingforfinancethefirsttimetheremaybeaknowledgebarrierfortheentrepreneur,meaningthattherelevantinformationislesslikelytobepresentedtothepotentialfinanceprovider.
Chapter2thereforelooksatthefinancemarketforstart-upsinmoredetail.Section2.1reviewstheevidenceonnewbusinessstart-upsfindingthatin2014newenterprisenumbersremainedhighbyrecenthistoricalcomparisons.
Section2.3reviewstheresultsoftheBusinessBankFinanceSurveytoidentifywherestart-upsexperienceinaccessingandusingfinanceisdifferenttothewidersmallbusinesspopulation.Findingsincludethatstart-upsaremorelikelybothtoapply,andberejected,forfinance,unsurprisinggiventheexpectedgreatermarketproblemsfacingstart-upbusinesses.
Section2.4providesastart-upbreakdownofexperienceofapplyingfortraditionaldebtfinance.Olderstart-ups(2-5years)haveasimilarexperiencetoyoungerstart-ups(0-2years).
Finally,theevidenceonseedstageequityinvestmentisreviewedinsection2.5.Thishighlightstheincreasednumberandvalueofseedstagedealsandtheincreaseduseofcrowdfundingplatformsasamechanismbywhichstart-upsobtainequityfinance.
SMALL BUSINESS FINANCE MARKETS 2015/16 33
2.1
TRENDS IN START-UPS
34 BRITISH BUSINESS BANK
• Thefluidnatureofthestart-upprocessmeansthereisnodefinitivemeasureofstart-upactivity
• ONSdatasuggestsimilarnumberofbusinessbirths in 2014 to 2013, when strong growth wasrecorded
• BusinessbirthsareconcentratedinLondon,withvariationbetweenotherregionsrelativelylessmarked
• Businessbirthsasaproportionoftotalactiveenterpriseshasincreasedsince2009
THEFLUIDNATUREOFTHESTART-UPPROCESSMEANSTHEREISNODEFINITIVEMEASUREOFSTART-UPACTIVITY
Thereisnodefinitiveindicatorofthenumberofnewbusiness starts in the UK economy, because measuring thenumberofstart-upsinaneconomycanbeverydifficult.Thisisduetotwomainfactors:
• Theprocessofstartingupabusinessisveryfluid,anditcanbedifficulttodefinewhenahobbyofanindividualbecomesa‘start-up’.
• Manydatasetsdonotcaptureinitialstart-upactivity,althoughtheseventurescouldlegitimatelybeconsideredtohavebeencreated.
ONSbusinessdemographydataonbirthsofnewenterprisescapturesbusinessesthathavereachedcertainthresholds(i.e.registeringforVATorPAYE).However,theprocessofstartingupabusinesscantakemanymonthsand/oryears,withdifferententrepreneursreachingthosethresholdsatdifferenttimes,ordifferencesinbusinessmodelsinfluencingtherelevanceofregistration.SomelegitimatebusinesseswillnevermeetthethresholdstobeincludedinONSdata.
ONS DATA SUGGEST SIMILAR NUMBER OF BUSINESS BIRTHS IN 2014 TO 2013, WHEN STRONG GROWTH WAS RECORDED
ONSbusinessdemographydataonbirthsofnewenterprises–ameasureofbusinessesregisteringforVATorPAYE–indicatesthatnewbusinesscreationin2014(c350,000newbusinesses)wasbroadlyunchangedfrom2013(althoughtherewasaslightdecreaseinthebirthrate45from14.1%in2013to13.7%in2014).However,underlyingthisisageneralincreaseinnewbusinessstartsinrecentyears,wherethenumberofbirthsin2014wasc50%higherthanin2010.
However,asindicatedabove,ONSdatamaynotpickupsomeveryearlystagestart-ups,orthosethatdonottriggerthresholdstobeincludedinofficialstatistics.BankSearchstatistics,whichcovertheopeningofnew
SMALL BUSINESS FINANCE MARKETS 2015/16 35
BIRTHS OF NEW ENTERPRISES PER 10,000 POPULATIONFIG 2.1
Source: BBB analysis, ONS Business Demography Data
40
20
80
60
120
100Number of new businessesfor every 10,000 people
North East
North W
est
Yorkshire and The Hum
ber
East Midlands
West M
idlands
East
London
South East
South West
Wales
Scotland
Northern Ireland
BUSINESS BIRTHS AS A PROPORTION OF TOTAL ACTIVE ENTERPRISES HAS INCREASED SINCE 2009
Businessbirthsasaproportionofactiveenterprises(whichincludesbirthsanddeaths)haveincreasedsince2009.In2014,newenterprisesrepresented13.7%ofactiveenterprises.
Eachofthebroadsectors–production,constructionandservices–alsorecordedanincreaseintheproportionofnewenterprisessince2009.However,comparing2014with2013asmalldecreaseinnewregistrationsasaproportionofactiveenterpriseswasreportedforservicesandproductionwasflat,whiletheconstructionsectorsawafurtherincreaseinitsproportionofbusinessbirths.
businessbankaccounts,potentiallyofferafullerpictureofearlierstart-upactivity.BankSearchdata,incontrasttoONSdata,indicatethatthenumberofnewstartsfellin2014,continuingthetrendsincethe2011peak,withlevelslowerthanthoserecordedin2010.
TheGlobalEntrepreneurshipMonitor(GEM),measuresentrepreneurialactivityintheUKandothercountries.Itbreaksdownentrepreneurialactivityintocategories:
• Intend to start a business in next three years
• Nascent entrepreneurs (paying wages for no more thanthreemonths,thereforecanbeconsideredtobeearly/initialset-upstage)
• New business owner (paying wages for more than threemonths,butlessthan42months–stilllikelytobearelativelynewventure,butlikelytobefurtherprogressed in the start-up process
GEMUK2014datasuggeststhattheproportionoftheUKworkingageadultpopulationthatintendedtostartabusinessincreasedineachyearbetween2010and2012,butthenreducedin2013and2014.Thepercentagesofnascententrepreneursandnewbusinessownersalsodecreasedin2013,butrosein2014andremainrelativelystrong.
Combined,itwouldseemthatincreasedlevelsofentrepreneurialismduringtheeconomicdownturnhavehelpedtoboostnewbusinesscreation,withrelativelystronglevelsofVAT/PAYEregistrationsstillbeingrecorded.
BUSINESS BIRTHS ARE CONCENTRATED IN LONDON, WITH VARIATION BETWEEN OTHER REGIONS RELATIVELY LESS MARKED
TheregionalONSbusinessdemographydatasuggestthatLondonandtheSouthEastleadthewayintermsofbirthsofnewenterprises(newVATandPAYEregistrations),contributing40%ofnewstartsbetweenthemin2014.Furthermore,theproportionofnewUKbusinessesregisteringforVATorPAYEinLondonoutweighstheproportionofdeaths(orde-registrations),whichshouldaddtothebusinessstockandcompetitiveenvironment.
TheNorthEastcontinuestohavethelowestshareofnewenterprisesoftheEnglishregions,withNorthernIrelandandWalesalsoseeingrelativelylowlevels.However,whenlookingatthenumberofnewbusinessesforeach10,000peopleinaspecificregion,thedisparitybetweentheregionsislessened.Londonstilloutpacesotherregionsintermsofnewregistrationsandactiveenterprises,andhasabout60%morebusinessesper10,000populationthantheUKaverage.
NEW ENTERPRISES AS A PROPORTION OF ACTIVE ENTERPRISES
FIG 2.2
Source: BBB analysis, ONS Business Demography Data
4
2
8
6
12
14
16
%
10
2009 2010 2011 2012 2013 2014
Services
Construction
Production
36 BRITISH BUSINESS BANK
A SMALL PERCENTAGE OF NEW STARTS SURVIVE FOR 15 YEARS, WITH AN EVEN SMALLER PROPORTION OF THESE CONTRIBUTINGDISPROPORTIONATELYTOJOBGROWTH
Datawouldsuggestthatthenumberofnewenterprisesintheeconomyisencouraging.However,itisimportanttoensurethatnewbusinessessurviveandcontinuetodevelopandgrow,supportingUKproductivitygrowth.
AnalysisconductedbytheEnterpriseResearchCentre46
indicatesthat,overa15-yearhorizon(1998-2013),just11%ofstart-upfirmsbornin1998surviveduntil2013,addingabout230,000netjobs.Underlyingthis,about60%ofsurvivingfirmswerenetjobcreators,withthebulkofthesebornverysmall(lessthanfiveemployees)andremainingverysmall.However,withinthisclassofstart-ups(lessthan5employees),around6%accountfor90,000addedjobs(40%ofjobcreationfromall15-yearsurvivors).
COUNTRY COMPARISONS WOULD SUGGEST THAT GROWTH OF MICROS COULD BE BETTER, BUT AMBITION APPEARS TO HOLD THIS BACK
Asmallriseinthepercentageofverysmallstart-upsdisproportionatelycontributingtonetjobcreationoverthat15-yearperiodcouldhavehadalargeimpactontheabsolutenumberofjobscreated.EvidencefromotherOECDcountrieswouldsuggestthereispotentialtoimprovegrowthofmicroenterprises(lessthan10employees),witharecentpublicationnoting,“TheUKhasoneofthelowestproportionsofmicroenterprisesthatgrowtomorethan10employeesinthreeyears.”47 Therefore,youngbusinessescouldplayanevenbiggerroleinboostingUKgrowthandproductivity.
However,thegrowthambitionofearlystageentrepreneursintheUK,“LagsbehindintermsofgrowthexpectationcomparedtoallbutoneoftheG8countries”.48Thegapbetweenstart-upactivityintheUSandtheUKisoftencited.TheGlobalEntrepreneurshipMonitormeasureof‘highjobexpectation’49indicatesthataround18%ofearlystageentrepreneursintheUKmetthisdefinitionin2014comparedwith27%intheUS.
2.2
START-UPS AND THE ECONOMY
• Asmallpercentageofnewstartssurvivefor15years,withanevensmallerproportionofthesecontributingdisproportionatelytojobgrowth
• Countrycomparisonswouldsuggestthatgrowthofmicroscouldbebetter,butambitionappearstoholdthisback
• Accesstofinancecanbeanenablerforincreasingproductivity
SMALL BUSINESS FINANCE MARKETS 2015/16 37
Theseexpectationsaremuchhigherforearlystageentrepreneurscomparedwiththoseofestablishedbusinessowners(18%earlystagevs4%establishedbusinessowners).Therefore,totheextentthatthesehigh growth ambitions will be met, harnessing this potentialfromearlystageentrepreneursisimportant.
ACCESS TO FINANCE CAN BE AN ENABLER FOR INCREASING PRODUCTIVITY
AnotherwayofboostingtheproductivityofsmallerbusinessesintheUKistoincreasetheproportionengagedwithinternationalisationandinnovation.
TheGlobalEntrepreneurshipMonitorsuggeststhatroughly25%ofearlystageentrepreneursintheUKreportthattheyoperateinnewproductmarkets.Thisiscomparedwith40%inFranceand37%intheUS.Similarly,16%ofearlystageentrepreneursreportthatmorethan25%oftheircustomersareoutsideofthecountry.Thiscompareswith22%and21%inFranceandGermany,respectively,althoughisabovethe15%reportedbyearlystageentrepreneursintheUS.
Accesstofinance(andcapital)isoneenablerthatcouldhelpboostentrepreneurialambitiontoexportandinnovate,whereevidencesuggeststhatinternationalandinnovativeactivityenhancesfirmperformanceandproductivitygrowth.
38 BRITISH BUSINESS BANK
2.3
START-UPS DEMAND FOR FINANCE
TheanalysisinthissectionisbasedontheBusinessBanksegmentsofSMEs.Therefore,start-upsaredefinedasSMEswithtradingactivityofnomorethanfiveyears.
START-UPSMORELIKELYTHANOTHERSMESTOHAVESOUGHT FINANCE IN LAST 12 MONTHS AND TO HAVE BEENREJECTED
TheproportionofSMEsseekingexternalfinanceinthelast12monthshasincreasedsince2014(2015:18%,2014:12%).Therehasalsobeenariseintheproportionofstart-upsseekingexternalfinanceinthelastyear,increasingfrom12%to25%.However,successratesremainlowerforstart-upsthanforSMEsasawhole.Forallapplicationsforexternalfinanceinthelastthreeyears,61%ofstart-upswereofferedwhattheywantedcomparedwith71%fortheoverallSMEpopulation.
AWARENESS OF ALTERNATIVE SOURCES OF FINANCE IS ABOVE SME AVERAGE
Awarenessoftraditionaldebtproductsamongststart-upsishighandbroadlyinlinewithlevelsreportedfortheoverallSMEpopulation.However,awarenessofotherdebtproducts,suchasinvoiceandtradefinance,andsourcesofgrowthcapital(e.g.venturecapital)islower.Incontrast,awarenessofnewerchannelsoffinance(e.g.peer-to-peerlending)arehigherthanthosereportedbySMEsonaverage.
Awarenessofwhotoapproachforparticularformsoffinancewasgenerallyinlinewiththatoftheoverallsmallbusinesspopulation.
AWARENESS OF EXTERNAL FORMS OF FINANCE
FIG 2.3
Source: Business Bank Finance Survey
Mezzanine
Corporate bonds
Other
P2P
Business Angels
Crowd funding
Invoice finance
Venture capital
Grants
Leasing/hire purchase
Credit cards
Trade finance
% 10 20 30 40 50 60 70 80 90 100
Total
Start-up
• Start-upsmorelikelythanotherSMEstohavesoughtfinanceinlast12monthsandtohavebeenrejected
• AwarenessofalternativesourcesoffinanceisabovetheSMEaverage
• Start-upsremainmoredependentonloansfromfamilythanotherSMEs
• Start-upsaremorelikelytobefirsttimeseekersoffinance,butarenomorelikelytoobtainadvice
START-UPSREMAINMOREDEPENDENTONLOANSFROMFAMILY THAN OTHER SMES
ForthetotalSMEpopulation,bankoverdraftsandcreditcardsarethetwomostusedformsofexternalfinanceoverthepastthreeyears.Start-upshavereportedincreasedusageofcreditcardsin2015.However,loansfromfamilyorbusinesscolleaguesremainthemostusedformoffundingforstart-ups(usagehasrisencomparedwithlastyearforbothstart-upsandtheoverallSMEpopulation).Notably,whereanentrepreneurdoesnothaveaccesstofundsfromfamilyorbusinesscolleagues,theymaybeatasignificantdisadvantage.
MirroringtheoveralltrendinSMEapplicationsforfinance,wherefinancewassought,thiswasmostlikelytobeforworkingcapitalpurposes.However,thereweredifferencesinthepurposeforwhichtheworkingcapitalwasrequired,withstart-upsmorelikelytoreportthatthiswasforgrowthortofundunexpectedshort-termgaps(i.e.addressingtheeffectsoflatepayments).
START-UPSAREMORELIKELYTOBEFIRSTTIMESEEKERSOF FINANCE, BUT ARE NO MORE LIKELY TO OBTAIN ADVICE
Start-upsarejustasconfidentintheirabilitytoapplyforexternalfinancefromdifferentprovidersasotherSMEs(basedonthoseratingthemselvesas‘veryconfident’or‘somewhatconfident’).Theyarelesslikelytoratethemselvesas‘veryconfident’inassessingfinanceproductsofferedbytheirownbank.
Approximatelyoneinfivestart-upswouldbe‘verylikely’totakeadviceiftheyweretohavedifficultiesinobtainingfinance(asimilarproportiontothetotalSMEpopulation).However,theyaremorelikelytobefirsttimeapplicantsforfinanceandtobeunsuccessfulintheirapplication.Thismayimplythattheirpropensitytoseekadviceshouldbehighershouldtheyhavedifficultiesobtainingfinance,whichinturnmayincreasetherateofsuccessfulapplications.
REASONS FOR SEEKING WORKING CAPITAL
FIG 2.4
Source: Business Bank Finance Survey
20
10
40
30
60
%
50
Planned short-term gap
Growth Safety net Unexpected short-term gap
Other
Start-up
Total
CONFIDENCE IN ASSESSING AND APPLYING FOR FINANCEFIG 2.5
Source: Business Bank Finance Survey
Total
Start-UpApplying for external finance fromdifferent providers
Assessing financeproducts offeredby other providers
Assessing financeproducts offeredby own bank
Total
Start-Up
Start-Up
Total
% 10 20 30 40 50 60 70 80 90 100
Not at allconfident
Don’t know
Somewhatunconfident
Neither
Veryconfident
Somewhatconfident
SMALL BUSINESS FINANCE MARKETS 2015/16 39
40 BRITISH BUSINESS BANK
2.4
ANALYSIS OF NEW DEBT FINANCE APPLICATIONS BY START-UPS
TheanalysisinthissectionisbasedontheBusinessBanksegmentsofSMEs.Therefore,start-upsaredefinedasSMEswithtradingactivityofnomorethan 5 years.
START-UPSAREMORELIKELYTHANTHEAVERAGESMETO BE UNSUCCESSFUL IN THEIR APPLICATION FOR NEW DEBT FINANCE
OuranalysisofrejectednewloanandoverdraftapplicationsusingSMEFinanceMonitordatasuggeststhatstart-upsaremorelikelytoberejectedinseekingnewdebtfinancethantheaverageSME.OfthethreeBusinessBankmarketsegments,start-upsalsohavethehighestnumberofapplicationsfornewdebt(c40%ofnewloanapplicationsandnearly50%ofnewoverdraftapplicationsaremadebystart-ups),meaningthattheyalsorepresentthelargestshareofrejecteddemandbyvolume.
START-UPSHAVETHELOWESTVALUEOFTOTALREJECTEDDEMANDOFTHESEGMENTS
Onaverage,start-upsapplyforlowervaluesoffinancethanotherSMEs.ThedisparitiesinaveragenewloanvaluesbetweenthethreeBusinessBanksegmentsmeanthat,despitenotablyhighernumbersofstart-upsbeingrejected,thevalueofrejectednewdebtapplicationsfromstart-upsislowerthanfortheotherBusinessBanksegments.
However,start-upsarealsolikelytobeparticularlypronetostructuralproblemsinaccessingfinancemarketsthatwillpersistevenwhencyclicalpressuresease.Thisisduetothehighriskpropositionthattheypresenttolenders,givenhighfailureratesofnewbusinessstarts.Compoundingthis,newstartsarestillaccumulatingaperformancerecordand/orsecurity.Therefore,demonstratingthatbusinessplansareachievableislikelytobeparticularlydifficultforthisgroupofbusinesses.
RELATIVE SUCCESS RATES FOR NEW LOANS AND OVERDRAFTS
FIG 2.6
Source: BBB analysis, SME FM
20
10
40
30
60
70
80
%
50
New loan New overdraft
Success rate
Scale-up
Stay ahead
Start-up
• Start-upsaremorelikelythantheaverageSMEtobeunsuccessfulintheirapplicationfornewdebtfinance
• Start-upshavethelowestvalueoftotalrejecteddemandofthesegments
• Problemsinaccessingfinanceremainforearlystagebusinesseswith2-5yearstradinghistory
PROBLEMS IN ACCESSING FINANCE REMAIN FOR EARLY STAGEBUSINESSESWITH2-5YEARSTRADINGHISTORY
IntheBusinessBank’ssegmentation,‘start-ups’encompassanySMEtradingfornomorethanfiveyears.Asnotedearlierinthesection,thestart-upprocessisquitefluidandsomebusinessesmaytradeformanyyearsbeforereachingthethresholdsthattriggertheirappearanceinofficialstatistics,ortheymayneverreachthosethresholds.
Conceptually,itmaybeconsideredthatthestart-upphaseiscompletebeforefiveyearsoftradinghaselapsed.However,manyfinanceprovidersrequire2-3yearsoftradinghistoryinordertobeabletoconsiderapplicationsforfinance.Asalreadynoted,intheveryearlystagesofstart-uptheremaynotbesufficientactivityforthebusinesstobeabletoproducemeaningfulrecords.Thismeansthatbusinessesthathavebeentradingbetween2and5yearsarelikelytofindtheabilitytoprovetheirtrackrecordwhenapplyingforfinancesimilarlychallenging.Onthatbasis,ouranalysisofSMEFinanceMonitordataincludesthe2-5agegroupwithinthedefinitionofstart-up,aswellasthe0-2agegroup.
Splittingdownthestart-upsegmentbetweenSMEstradingupto2years(newstarts)andthosetradingbetween2-5years(earlystagebusinesses)isdifficult,becausealowunderlyingsamplesizepreventsrobustanalysisofthenewstartssub-segment.
Whilecautionshouldbeexercisedregardingtherobustnessoftheresults,theanalysisindicatesthatearlystagebusinesses(2-5years)actuallyhavealowersuccessratewhenapplyingforanewloan,andabroadlysimilarsuccessratefornewoverdraftapplications,comparedwithnewstarts.Bothsub-segmentshaverelativelylowsuccessratescomparedwithscale-uporstayaheadbusinesses.
CONCLUSIONS
TheBritishBusinessBankoverseestheStart-UpLoansprogrammeonbehalfoftheDepartmentforBusiness,InnovationandSkills.TheStart-UpLoansprogrammeisfocusedonnewstartstradinguptotwoyearsandprovidesaccesstofinanceandpre-applicationandpost-loansupport.Thestart-upanalysissuggeststhereiscontinuingneedforaccesstofinancefornewstartsaswellasskillsprovisiontohelpensurethatviablenewbusinessesstartonthebestpossiblecourseforsurvivalandcontributiontoeconomicgrowth.
Despitethesegmentdefinition,thefocusoftheStart-UpLoansprogrammeonthenewestbusinessesremainsrelevanttohelpsustainthestrengthoftheflowofnewstartsintheeconomy.However,acontinuedneedforsupportinaccessingfinancemarketsfor
AVERAGE APPLICATION VALUE
FIG 2.7
Source: BBB analysis, SME FM
40
20
80
60
120
140
160
100
New loan New overdraft
Application in value £000
Scale-up
Stay ahead
Start-up
SMALL BUSINESS FINANCE MARKETS 2015/16 41
earlystagebusinessesisalsorecognised,particularlywhereachievinggrowthambitionscanbeparticularlybeneficialforUKproductivity.Atthisstage,supportingtheprogressionofyoungbusinessesisofkeyimportance.ManyoftheproductsofferedbytheBritishBusinessBankareavailabletothesebusinessesfromtheEnterpriseFinanceGuaranteetoequityschemesandotherinitiativessuchasHelpToGrowaimedatboostingthesupplyoffinancetosmallerbusinesses.
42 BRITISH BUSINESS BANK
2.5
EQUITY FINANCE FOR START-UP BUSINESSES
Equityfinanceisanimportantsourceoffundingfornewbusinessstart-upsthatofferthepotentialforhighgrowth.Thesebusinessesareveryriskyastheymaynotyethaveaworkingproductorhaveanycustomersleadingtoahighlikelihoodofbusinessfailure.However,iftheyaresuccessfultheyhavethepotentialforgeneratingveryhighreturns,whichiswhyequityfinanceisasuitableformoffinanceforhighgrowthpotentialstart-ups.Earlystagefundingisknownasseedfunding.
STRONG INCREASES SEEN IN SEED STAGE FUNDING SET TO CONTINUE IN 2015 AND BEYOND
Seedstageinvestmentsaregenerallyverysmallwithaveragedealsizesoflessthan£700,000.In2015todate,87%ofseedinvestments(forknowndealsizesonly)werebelow£1minsize,althoughonvaluetermstheyonlyformed31%ofthemarket.Thisisbecausewhilesomeseedstageinvestmentscanbeverylarge,forinstanceseedstagepharmaceuticalcompaniesdevelopingnewproductsrequirealargeramountofcapitalbeforetheproductisviable,mostareverysmall.
Seedstagefundinghasshownstrongincreasesovertimefrom2011to2014,increasingby236%bynumberand200%byvalue.Thispositivetrendlookstocontinuein2015withthefirstthreequartersdatabeing21%higherbynumberand49%byvaluecomparedtothefirstthreequartersof2014.
CROWDFUNDING HAS GROWN TO BECOME THE LARGEST FUNDER OF SEED STAGE BUSINESSES IN TERMS OF NUMBER OF BUSINESS FUNDED, ALTHOUGH THEIR DEALSIZESAREMUCHSMALLERTHANOTHEREQUITYFUNDERS
Therehasbeenasustainedincreaseinthenumberofcrowdfundingdealsovertime,sothatby2014crowdfundingplatformsfundsthelargestnumberofpubliclyknownseedstagebusinesses,evenmorethan
100
150
200
50
300
350
250
Undisclosed Up to £1m £1m to £5m £5m to £10m Above £10m
2013
20142012
2011
NUMBER OF SEED STAGE DEALS BY DEAL SIZE
FIG 2.8
Source: Beauhurst
• Strongincreasesseeninseedstagefunding settocontinuein2015andbeyond
• Crowdfundinghasgrowntobecomethelargestfunderofseedstagebusinessesintermsofnumberofbusinessfunded,althoughdealsizesaremuchsmallerthanotherequityfunders
SMALL BUSINESS FINANCE MARKETS 2015/16 43
privateequityfunds.Inthefirstthreequartersof2015therewere136dealsinvolvingcrowdfunderscomparedto71involvingprivateequityfunds.However,crowdfundingplatformsgenerallyprovidesmalleramountsoffinancethanothertypesofequityfundingsoprivateequityfundsstillprovidetwiceasmuchseedfundingascrowdfundingplatforms(£80mcomparedto£34minQ1-Q32015).Nevertheless,only17%ofseedinvestmentsnowinvolveprivateequityinvestorsdownfrom29%in2011.
Privateinvestors,includingbusinessangelsareinvestinginagrowingnumberofdeals.ResearchbytheEnterpriseResearchCentrefindsthatangelsaremakingmoreinvestmentsthanbefore,withthemediannumberofinvestmentsrisingto5.TheUKBusinessAngelAssociationestimatesthatprivateinvestorsaccountforbetween£800millionand£1billionofearlystageinvestmenteachyearintheUK–thesinglelargestsourceofearlystagecapitalinthiscountry.
CONCLUSION
Whilsttherehavebeenimprovementsinequityfundingconditionsforseedstagebusinessesoverthelastfewyears,thereremainanumberofstructuralissuesinthesupplyofequityfinancetoSMEswhichrestrictspotentiallyviableSMEsfromraisingfinance.ThisisnotedbythePrivateequityfundsonlybeinginvolvedinaminorityofseedstagedeals,withtheirshareofthemarketdeclininginnumbersterms.Thispartlyisaresultofincreasingimportanceofotherequityprovidersincludingprivateinvestorsandbusinessangels,andtheuseofcrowdfunding.
ThisdemonstratesthereisanongoingneedforcontinuedBritishBusinessBankinvolvementinintheearlystageequitymarket.Forinstance,EnterpriseCapitalFunds(ECF)hasanimportantroleforencouragingVentureCapitalFundmanagerstoestablishVentureCapitalfundsmakingsmallerequityinvestmentsbusinessesaffectedbythe‘equitygap’.TheAngelCo-Fundalsomakesinitialinvestmentsofbetween£100Kand£1Mintogrowingcompanies,alongsidesyndicatesofbusinessangelstoincreasethesupplyoffinancehighpotentialbusinesses.Inaddition,HMTandHMRC’sSeedEnterpriseInvestmentScheme(SEIS)isanimportantsourceoffundingforseedstagecompaniesandfurtherinformationontaxreliefschemesiscontainedinsection3.4.
NUMBER OF DEALS BY TYPE OF INVESTORFIG 2.10
Source: Beauhurst
40
20
80
60
120
140
160Number of deals invested in year
100
2011 2012 2013 2014
Corporate
Crowdfunding
Government led
Angel Network
Private investor
Other
Private equity
100
50
200
150
300
350
400
450
500
£50
£100
£150
£200
£250
£m
250
2011 2012 2013 2014
Deals Investment £
NUMBER AND VALUE OF SEED INVESTMENTS OVER TIMEFIG 2.9
Source: Beauhurst
CHAPTER THREE SCALE-UP BUSINESSES
Scale-upbusinessesaredefinedasbusinessesolderthan5yearsthatarelookingtogrow.Itcanbemoredifficultforfinanceproviderstoassessthebusinesspropositionsofgrowingbusinessesiftheyinvolvenewproductsandprocessesormovingintonewmarkets,withoutincurringgreaterduediligencecosts.Theseparticularlyaffectsmallerloansandequityinvestments.Expansionmayalsobemore risky with uncertain outcomes.
Scaleupbusinesseshaveslightlylowersuccessratesobtainingfinancethanstayaheadbusinesses,butaremorelikelytoobtainfinancecomparedtostart-upbusinesses.Whilstseniordebtfundingfromabankorpeertopeerlendingplatformmeetsthefundingneedsofmostgrowingbusinesses,somegrowingbusinessesarelookingtoexpandmoreaggressivelyandintheseinstances,specialistdebtandequityfinanceismoresuitable.
Chapter3presentsanalysisofexternalfinancesourcesthatareappropriateforinnovativegrowingfirmsthatarelookingtoscaleuprapidly.Thischapterwillfocusonflexibledebtprovidedbydebtfunds(section3.2).Theincreasedavailabilityanduseoffinancebymid-capbusinessesisalsodiscussed(section3.3).
Theroleexternalfinanceplaysinhelpingsmallbusinessesexportisdiscussedinmoredetail,asexportingcanhelpunlockincreasedgrowth.Equityfinanceisasuitablesourceoffinanceforsmallerbusinesseswithhighgrowthpotentialandiscoveredinsection3.5.Thechapterconcludeswithadiscussionoftheavailabilityoflong-termfinanceincluding‘patientcapital’(section3.6).
44 BRITISH BUSINESS BANK
SMALL BUSINESS FINANCE MARKETS 2015/16 45
3.1
GROWTH PERFORMANCE OF SME SECTOR
Thecontributionofbusinessstart-upstotheeconomyhasbeendiscussedinanearlierchapter,butitisalsoimportanttoconsiderthegrowthperformanceofestablishedbusinessesastheyalso make a large contribution to economic growth andjobcreation.Thisisbecausemanystart-upbusinesseswillcloseearlyintheirlife.Ofthosebusinessesthatstartedin2009,only62.5%survivedforthreeyears.Inaddition,manystart-upbusinessesremainsmallanddonotgrowsufficientlylarge.Forinstance,only4.1%ofthebusinessesstartedin2009grewtoatleast£1mturnoverinthethree years.50Businessgrowthcanbemeasuredinanumberofways,butthemainwaysforlookingatgrowtharethroughincreasesinemploymentorturnover.
MANY BUSINESSES EXPERIENCE GROWTH AND THIS IS INCREASING OVER TIME AS THE ECONOMIC RECOVERY IS SUSTAINED
SurveyevidencefromtheBISSmallBusinessSurvey201451shows22%ofSMEemployersemployedmorepeoplethantheydid12monthsearlier.Themajorityofbusiness(62%)employedthesamenumber,but16%employedfewer.Theproportionofbusinessesreportingemploymentgrowthwashigherin2014thanpreviously,showingtheeconomicrecoveryhasbeensustained.
Growthhasoccurredinallsizesofbusinessbutthe largerthebusiness,themorelikelyitistohavegrowninthelast12months,with46%ofmediumbusinesseshavingincreasedtheiremploymentin2014compared to a year ago.
Growthperformanceisevenmorepositivewhenlookingatturnover.40%ofSMEemployershadgreatersalesturnoverthanayearpreviously,39%hadapproximatelythesameturnover,but18%hadlowerturnover.Comparedwith2012,therehasbeenasignificantincreaseintheproportionwithhigherturnover(up11%points),andadecreaseintheproportionreportinglowerturnover(down13%points).Thisincreaseoccurredacrossallsizebands,butwasmostnotableinthemicropopulationofbusinesses.
ThestrengthoftheSMEsectorcanalsobeconsideredbylookingatprofitability.TheSMEFinanceMonitorsurveyshows74%ofSMEswereprofitableinthelasttradingyear,withjust9%makingaloss.52Theproportionmaking
PROPORTION OF SME EMPLOYER BUSINESSES THAT INCREASED NUMBER OF PEOPLE EMPLOYED OVER PREVIOUS 12 MONTHS
FIG 3.1
Source: BIS Small Business Survey 2014: Business with employees
10
5
20
15
30
35
40
45
50
%
25
All SME employers Micro Small Medium
SBS 2012
SBS 2014
SBS 2010
SBS 2007/08
• Manybusinessesexperiencegrowthandthisisincreasingovertimeastheeconomicrecoveryissustained
• Increasednumbersofbusinessesarenowaimingtogrowcomparedto2014,withsomeexternalfinancebeingusedtofundit
• Althoughonlyasmallproportionofbusinessesarehighgrowthbusinesses,theyareveryimportantforjobcreation
46 BRITISH BUSINESS BANK
aprofithasincreasedfrom62%inQ32012to75%inQ32015,reflectingtheimprovedeconomicenvironment.
INCREASED NUMBERS OF BUSINESSES ARE NOW AIMING TO GROW COMPARED TO 2014, WITH SOME EXTERNAL FINANCE BEING USED TO FUND IT
TheBritishBusinessBankFinancesurveyshowsoverhalfofbusinesses(56%)areaimingtogrowtheirbusinessturnoverinthenext12months.Thisisanincreasefromthe46%reportedinthe2014SMEJourneysurveys,showingbusinessesaremoreconfident.Mediumsizedbusinessesarethemostlikelybysizetowanttogrow(77%)comparedto54%ofzeroemployeebusinesses.
Ofthoseaimingtogrow,mostwilldothisthroughdomesticexpansionorbyintroducingnewproductsandservices.Fewerwillachievethisbyinvestinginstaffandassetsorbyexpandinginternationally.
Whilstexternalfinanceisimportantforsupportingbusinessgrowth,themajorityofbusinesses(68%)willonlyuseinternalsourcesoffinancetofundit,i.e.frombuiltupcashreserves.Only29%ofbusinessesintendtousesomesourcesofexternalfinancetosupportfuturegrowth.Thereissomeindicationthatagreaterproportionofbusinessesin2015willnowconsiderusingexternalsourcesoffinancetosupportgrowthcomparedtopreviously.
ALTHOUGH ONLY A SMALL PROPORTION OF BUSINESSES ARE HIGH GROWTH BUSINESSES, THEY ARE VERY IMPORTANTFORJOBCREATION
Highgrowthbusinessesaredefinedasbusinesseswithannualisedaveragegrowthinemploymentof20%ormoreoverathreeyearperiod.Therewereover10,000highgrowthbusinessesin2011-14,forming7%ofthebusinesspopulationofbusinessesthatsurviveforatleast three years.
Theincidenceofhighgrowthbusinessesaveraged7.2%between2002-05and2007-10,butdeclinedto5.9%duringtheeconomicdownturnbeforerecoveringto6.6%in2010-13.Therefore,theproportionofhighgrowthbusinesseshasrecoveredtothelevelitwasbeforetherecession.
Highgrowthbusinesseshavealargeanddisproportionateimpactonjobcreation.Ofallthenewjobscreatedamongstestablishedbusinesses,highgrowthSMEscontribute20%ofalljobgrowthintheeconomy.Thisproportionhasremainedvirtuallyunchangedsincethelate1990sandwasnotaffectedbythe recession.53Itwillbeimportanttoensurethesehighgrowthbusinesses,andbusinesseswiththepotentialforhighgrowthcanaccesstheexternalfinancetheyneed.
PROPORTION OF SME EMPLOYER BUSINESSES THAT INCREASED TURNOVER OVER PREVIOUS 12 MONTHS
FIG 3.2
Source: BIS Small Business Survey 2014: Business with employees
20
30
40
10
60
70
%
50
All SME employers Micro Small Medium
SBS 2012
SBS 2014
SBS 2010
SBS 2007/08
WAYS IN WHICH FUTURE GROWTH WILL BE ACHIEVED IN 2015
FIG 3.3
Source: Business Bank 2015 Business Finance Survey
20
30
40
10
60
70
%
50
Expandin the UK
Introducenew productsand services
Investmentin staff
Investmentin assets
Expandinternationally
SMALL BUSINESS FINANCE MARKETS 2015/16 47
• DebtfundsofferavarietyofflexibledebtproductstogrowthorientatedbusinessesandhavebecomeestablishedintheUKmarket,althoughmostofthesefundsfocusonmid-capsbusinesses
• InstitutionalinvestorshavebecomeanimportantsourceoffundingintheEuropeanleveragedloanmarketformid-marketbusinesses
• TheBritishBusinessBankhasanumberofprogrammesdesignedtoincreasethesupplyofdebtfinanceforgrowingsmallerbusinesses
3.2
DEBT FINANCE FOR HIGH GROWTH BUSINESSES
NUMBER OF EUROPEAN PRIVATE DEBT DEALS PER QUARTER
FIG 3.4
Source: Deloitte LLP
20
10
40
30
60
70
80
90
50
Q42012
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Q32015
Debtfundsprovidebusinesseswithbespokedebtfinancethatoffersanalternativesourceoffundingtobanks.Whilstseniordebtlendingfrombanksistargetedatbusinesseswithinawell-definedriskspectrumwithrelativelylowermargins,debtfundstendtoaccommodategreaterlevelsofriskandlendathigherinterestrates.Thespeedoflending,flexibilityindealstructureincludingdeferralofcapitalandinterestrepaymentsandgreaterleveragearealsokeyfactorswhythis typeoffinancemeetstheneedsofsome growing businesses.
DEBT FUNDS OFFER A VARIETY OF FLEXIBLE DEBT PRODUCTS TO GROWTH ORIENTATED BUSINESSES AND HAVE BECOME ESTABLISHED IN THE UK MARKET, ALTHOUGHMOSTOFTHESEFUNDSFOCUSONMID-CAPSBUSINESSES
WhilethetotalvolumeofcapitalraisedforprivatedebtinEuropeisrelativelylowcomparedtoothertypesofdebtfinance,therehasbeenalargeincreaseinthenumberoffundsinvestinginmid-marketbusinessesoverthelastfewyears.TheDeloitteAlternativeLenderDealTrackershowstheprivatedebtmarketiswellestablishedinEuropewithincreasednumbersofdealsovertime.Forinstancetherewere212dealsin2014,upfrom118in2013.54Thesemainlyrelatetomid-marketcompanies,butthereislimiteddataavailableontheactivityofdebtfundstosmallerbusinesses.55
TheUKremainsthelargestmarketforprivatedebtfundsinEuropewith45%ofthetransactions,followedbyFrance(24%)andGermany(12%).Themajorityofdealsarestructuredasfirstlien(seniordebtorunitranche),withtheremaining16%ofdealsaresubordinated(mezzanineandsecondlien)behindotherlenders.Thereisanincreasingtrendofsponsorlessdealswith25%ofdealsnotinvolvingaprivateequitysponsorinthelatestquarter,upfromthe21%long-termaverage.
48 BRITISH BUSINESS BANK
INSTITUTIONAL INVESTORS HAVE BECOME AN IMPORTANT SOURCE OF FUNDING IN THE EUROPEAN LEVERAGEDLOANMARKETFORMID-MARKETBUSINESSES
PartofthereasonfortheincreaseindebtfundsinEuropeisthattherehasbeenanincreaseintheinvolvementofinstitutionalinvestorsinthemid-marketspace.Theshareofinstitutionalfundingincreasedfrom25%in2008to61%in2015.InQ32015,78%ofdealsinvolvedinstitutionalfunding.Asaresult,bankshaveadecliningshareintheprovisionoffinancetotheEuropeanleveragedloanmarket.Inthefirstthreequartersof2015,bankshada33%shareofthemarketdownfrom72%in2008.
ThedeclineinbanklendinginthismarketispartlyduetoEuropeanbankshavingtoholdagreateramountofcapitalcomparedtoinvestmentgradelending,whichreducesitsrelativeattractiveness.TheEuropeanmarketisbecomingmorecomparabletotheUSmarketwhereinstitutionalinvestorsform86%oftheUSleveragedloanmarket.Thisisexpectedtocontinue.Arecentsurvey56showsEuropehasovertakenNorthAmericaasthemostsought-afterregionforinvestmentinprivatedebtfundswith73%ofinvestorsconsideringinvestinginfundsfocusingonthisregionoverthenext12monthscomparedto68%forNorthAmerica.
TheroleofinstitutionalinvestorsintheleveragedloanmarketintheUSiswellestablished,butinEuropebankstraditionallyoriginatedloans.Whilstleveragedlendingbecameestablishedintheearlypartof2000’sitdeclinedsharplyin2008and2009astheimpactofthefinancialcrisistriggeredtheunwindingoftheexcessleveragebuiltuponbankandhedgefundsbalancesheetassetsandsecuritisationmarketsclosed.Thisledtoafurtherdownwardspiralinloanassetpricestriggeringfurtherselling.58Theleveragedloanmarkethasnowrecoveredincreasingto€80bn,upfrom€28.5bnin2012,restoringthemid-marketloanmarketliquidity.
EUROPEAN LEVERAGED LOAN MARKET BROAD INVESTOR TYPE
FIG 3.5
Source: LCD Leveraged Loan Review, Q3 2015.57
20
10
40
30
60
70
80
90
100
%
50
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
2011
2012
2014
LTM 9/30/15
2013
Non-european banks
Institutional investors
Securities firms
European banks
EUROPEAN LEVERAGED LOAN MARKET FUNDING AMOUNTS
FIG 3.6
Source: LCD Leveraged Loan Review, Q3 2015.59
40
20
80
60
120
140
160
180
100
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2013
2014
2012
Estimate of bank funding
Estimate of institutional funding
Yearly total
SMALL BUSINESS FINANCE MARKETS 2015/16 49
THE BRITISH BUSINESS BANK HAS A NUMBER OF PROGRAMMES DESIGNED TO INCREASE THE SUPPLY OF DEBT FINANCE FOR GROWING SMALLER BUSINESSES
Whilstmid-marketfundingconditionsarerelativelystrong,structuralissuesremainforsmallerbusinesses.TheInvestmentProgrammealongwithitspredecessortheBusinessFinancePartnershipSmallCapTrancheaimstopromotediversityoflendingsupplythroughsupportingavarietyofpotentialfinanceprovidersincludingprivatedebt.AnumberofcommercialdebtfundsfocusingonSMEshavebeensupportedincludingBeechbrook,BMSFinance,Boost,Praesidian,MuzinichandEuropeanCapital.TheBritishBusinessBankhasalsoannouncedtheHelptoGrowpilottospecificallyencouragetheprovisionofsmallergrowthloansbetween£0.5mand£5m,withafocusonsub£2mdealsizes.
Inadditiontotheaboveprogrammesfocusingonsmallerbusinesses,theBusinessFinancePartnershipMid-capTranchehasinvested£863malongsideover£1bnfromprivateinvestorsacross6debtfundmanagersfocusedondirectlendingtomid-caps.Themid-captranchewasannouncedin2011toimproveliquidityconditionsformid-capbusinessesandhasbeencatalyticindevelopingtheassetclassintheUKandisrecognisedintheindustryashavingplayedameaningfulroleinacceleratinginvestmentindirectlendingfunds.
Theaboveassetclasshasgrownsignificantlyoverthelastfewyears,withanestimated€50billionofcapitalnowcommittedtoEuropeandirectlendingfundsandafurther€15billiontargetedinfundraisingoverthenexttwelvemonths.Givenmarketliquiditywearecurrentlyexploringoptionsforbuildingonthesuccessoftheportfolio.Thecharacteristicsofmid-capbusinessesareexploredfurtherinthenextsection.
• Mid-capbusinessesmakeanimportantcontribution to the UK economy
• Mid-capbusinesseshavecomplexorganisationalstructures,andaremorelikelytohaveformalbusinessprocessesanddedicatedfinancestaffcomparedtoSMEs
• Mid-capbusinessesaremoreconfidentintheirabilitytoraisefinanceandalsohavegreaterawarenessofdifferenttypesoffinanceproductsavailabletothemthansmallerbusinesses
• Mid-capbusinessesaresignificantlymorelikelytouseexternalfinancethanSMEs
• Financemarketsformid-capbusinessesgenerallyworkwellwithveryfewbusinesseshavingproblemsraisingfinance
50 BRITISH BUSINESS BANK
3.3
MID-CAP BUSINESSES
MID-CAPBUSINESSESMAKEANIMPORTANTCONTRIBUTION TO THE UK ECONOMY
Mid-capbusinessesaregenerallylargerthanSMEsandcoverbusinesseswithanannualturnoverofbetween£25m-£500m,buthavenotyetreachedthesizeofthelargest businesses.60Mid-capbusinesseshavedifferentcharacteristicsandfinancingneedscomparedtoSMEs,andthissectionexploresthesefurtherusingfindingsfromthelatestBusinessBankfinancesurveywhichsurveyed300mid-capbusinesses.
Therearearound10,000mid-capbusinessesintheUK,contributing£875bnturnoverandemploying4.5mpeople.61Therehasbeensignificantinterestintheperformanceofmid-capbusinessesfromGovernmentandstakeholderorganisations62overthelastfewyears,asthisgroupofbusinessescanhelpdelivergrowthtotheUKeconomy.Forinstance,moremid-capbusinessesareaimingtogrowinthenext12months(79%),comparedto56%ofSMEs.Thisisdespitemid-capbusinesseshavingbroadlysimilarexpectationsasSMEsaboutfuturetradingconditionsinthenext12months.Ahigherproportionofmid-capbusinessesarealreadyexportingandinnovatingwhichcanleadtofurthereconomicbenefitsincludingimprovementsinproductivity.Forinstance,57%ofmid-capbusinessesexportand40%63innovatebyintroducinganeworsignificantlyimprovedgoodorserviceinthelastthreeyears.Incomparison20%ofSMEsexportand26%haveintroducednewproducts.
MID-CAPBUSINESSESHAVECOMPLEXORGANISATIONALSTRUCTURES, AND ARE MORE LIKELY TO HAVE FORMAL BUSINESS PROCESSES AND DEDICATED FINANCE STAFF COMPARED TO SMEs
Mid-capbusinesseshavemoreformalisedbusinessprocessesthanSMEs.Forinstance,99%ofmid-capbusinessesproduceregularmonthlyorquarterlymanagementaccounts,95%haveadedicatedfinancepersonthatmanagestheaccountsorcompilestaxreturns,93%makeregularcashflowforecastsand84%haveaformalwrittenbusinessplan.
TURNOVER GROWTH OBJECTIVES OVER NEXT 12 MONTHS
FIG 3.7
Source: British Business Bank 2015 Finance Survey
SMEs
Mid-caps
% 10 20 30 40 50 60 70 80 90 100
Shrink/sell/close
Other/dk
Same size
Grow moderately(up to 10%)
Grow substantially(20%+)
Grow significantly(10-20%)
MID-CAPBUSINESSESAREMORECONFIDENTINTHEIRABILITY TO RAISE FINANCE AND ALSO HAVE GREATER AWARENESS OF DIFFERENT TYPES OF FINANCE PRODUCTS AVAILABLE TO THEM THAN SMALLER BUSINESSES.
Whilstonlyaslightlylowerproportionofmid-capbusinessesareusingexternaladvicewhenseekingfinance(17%ofmid-capscomparedto19%ofSMEs),mid-capbusinesseslargelyhavededicatedfinancedirectorswhoareresponsibleforoverseeingthebusinesscashflowandseekingexternalfinanceonbehalfofthebusiness.Assuch,mid-capbusinessesaremoreconfidentinraisingfinancethanSMEs.82%ofmid-capsareconfidentatassessingproductsofferedbyownbank,withjust3%notbeingconfident.
Mid-capsalsohavehigherawarenessofdifferenttypesoffinance.Forinstance,69%ofmid-capsareawareofcrowdfundingplatforms,63%areawareofpeertopeerlending,63%areawareofbusinessangels,and52%areawareofmezzaninefinance.
Thereisalsoevidencetosuggestmid-capbusinessesaremorelikelytoshoparoundforfinancethanSMEs.Only37%ofmid-capbusinessesonlycontactedoneprovideroffinancecomparedto61%ofSMEs.Mid-capscontacted2.43providersonaveragecomparedto1.7forSMEs.However,51%ofmid-capsonlycontactedprovidersfromthefourlargestbanks,asimilarproportiontoSMEs,showingthefourlargestbanksarestillaveryimportantsourceoffinanceformid-capbusinesses.
MID-CAPBUSINESSESARESIGNIFICANTLYMORELIKELYTO USE EXTERNAL FINANCE THAN SMES
Themajorityofmid-capbusinesses(85%)haveusedexternalfinanceinthepreviousthreeyearscomparedto60%ofSMEs.Mid-capbusinessesaremostlikelytohaveusedleasingorhirepurchase(61%),followedbycreditcards(53%)andoverdrafts(42%).Incontrast,SMEsaremostlikelytousecreditcards(28%),bankoverdrafts(28%)andloansfromfriends/colleagues(23%).
Thehigheruseoffinancealsotranslatesintohigherdemandforexternalfinance,with47%ofmid-capbusinesseshavingsoughtexternalfinanceinthelastyear.Thiscomparestojust18%ofSMEsseekingfinanceoverthesametimeperiod,showingexternalfinanceis
MID-CAP BUSINESSES USE OF FINANCE IN LAST THREE YEARS
FIG 3.8
Source: British Business Bank 2015 Finance Survey
Bank overdraft
Credit card finance
Leasing/HP
Grants
Bank loan/mortgage
Family/colleague loan
Equity finance
Trade finance
Corporate bonds
P2P lending
Mezzanine finance
Asset finance
% 10 20 30 40 50 60 70
Mid-caps
SMEs
SMALL BUSINESS FINANCE MARKETS 2015/16 51
52 BRITISH BUSINESS BANK
veryimportantforlargerbusinesses.Themainreasonmid-capsseekfinancewasforworkingcapital/cashflow(45%),followedbypurchaseoffixedassets(27%)andexpansion(11%).7%wereseekingfinanceforacquisitionofanotherfirm.Ofthoseseekingworkingcapital,overhalfofbusinesseswereseekingittofundgeneralgrowth,whilst37%wereseekingfinancetocoverashorttermfundinggapduetolatepaymentbycustomers.
Ofthoseseekingfinance,mid-capbusinessesaremostlikelytohavesoughtbankloans,followedbyhirepurchaseandoverdrafts.ThisissimilartoSMEs,whoaremorelikelytoseekoverdrafts,butSMEsaremuchmorelikelytoseekgrantfinancecomparedtomid-capbusinesses.Unsurprisingly,mid-capsseeklargeramountsoffinancethanSMEswiththemedianaverageamountoffinancesoughtbeing£2.78mcomparedto£12,000forSMEs.
Thereissomeevidencetosuggestmid-capsdemandforexternalfinancehasincreasedcomparedto2010,64 when32%soughtexternalfinance,butsimilarto2009levelswhen41%soughtexternalfinance.Therehasalsobeenamoveawayfromoverdraftswhichformed60%offinanceproductssoughtin2010.
FINANCEMARKETSFORMID-CAPBUSINESSESGENERALLY WORK WELL WITH VERY FEW BUSINESSES HAVING PROBLEMS RAISING FINANCE.
92%ofmid-capbusinessesobtainedsomefinancefromtheirinitialapplication,withjust1%beingunsuccessful.ThisismuchhigherthanforSMEswhere86%weresuccessfuloverall(71%wereofferedwhattheywanted),but9%wererejected.
Thereisevidencetosuggesttheavailabilityoffinancetomid-capbusinesseshasimprovedovertimefrom2009and2010.65Whilstitisnotpossibletocompareindividualfinanceproductsinthelatestsurveyduetosmallsamplesizes,in20108%ofloansand5%ofoverdraftswerecompletelyrefusedfromtheinitialsourceapproached.In2009rejectionrateswereevenhigherat22%forloansand14%foroverdrafts.
Givenmid-capshigherawarenessoffinanceproductsandgreaterresources,thereiscurrentlynoindicationofmid-capbusinessesbeingdiscouragedfromseekingfinance.Ofthosemid-capbusinessesthatdidnotapplyforfinanceonly1%reportedtheyhadaneedforfinanceinthelast12months,butdidnotseekanyfinance.
FINANCE PRODUCTS SOUGHT IN LAST THREE YEARS
FIG 3.9
Source: British Business Bank 2015 Finance Survey
5
15
10
25
30
35
40
%
20
Bank loan/m
ortgage
Bank overdraft
Leasing/ H
P
Asset finance
Loan/equity3rd parties
Corporatebonds
Credit cards
Grants
Mid-caps
SMEs
FINANCE INSTITUTION’S INITIAL RESPONSE TO THE FINANCE APPLICATION
FIG 3.10
Source: British Business Bank 2015 Finance Survey
SMEs
Mid-caps
% 10 20 30 40 50 60 70 80 90 100
Other
Dk/ref
Turned down
Rejected offer
Offered all
Offered smallamount
EXPORTING IS ASSOCIATED WITH IMPROVED PRODUCTIVITY AND HIGHER GROWTH
BritishBusinessBankresearchwithGoldmanSachsandEnterpriseResearchCentre66 suggests there are a numberofmechanismsbywhichexportingmayimprovetheproductivityofsmallerbusinesses.Theseinclude:
• Competition in non-domestic markets forces exporterstoincreaseproductivity
• Smallerbusinesses‘learnbyexporting’
• Spreadingfixedcostsoveralargergeographicalmarket helps reduce costs
• Exportingspreadsriskoveragreaternumberofmarkets
Causationmayworkbothways,withhighproductivityhelpingbusinessestobecomemorecompetitiveinexportmarkets,aswellasexportinghelpingtoimproveproductivity.Theevidencealsoshowsthatgrowingfirmsweremuchmorelikely(37%)tobeexportersthantheaveragesmallerbusiness(19%).67
Forthosesmallerbusinessesthathaveplanstogrow,asignificantnumberexpectexportstoaccountforpartofthatgrowth.Forexample,theSMEFinanceMonitor68 finds12%ofallSMEsplanningtogrowthoughttheywoulddosobysellingmoreoverseas.Manyofthesewerealreadyexporting,highlightingthatincreasedoverallsmallerbusinessexportswillfrequentlybedrivenbyexistingexportersincreasingtheiroverseassales.
AROUND 1 IN 5 SMALLER BUSINESSES EXPORT, MORE COULD DO SO
Availabledatasuggeststhatapproximately1in5smallerbusinessesexport.Forexample,theBISSmallBusinessSurveyfoundthat19%ofSMEswereexportersinboth2012and2014.
Smallerbusinesses,bothinthegoodsandservicessectors,arelesslikelytoexportthanlargebusinesses.ForexampleONSAnnualBusinessSurveydatafindsthatsmallbusinessesaremuchlesslikelytoexportthanmediumsizedbusinesses,whichareinturnlesslikelytoexportthanlargefirms.
SMALL BUSINESS FINANCE MARKETS 2015/16 53
3.4
SMALLER BUSINESSES EXPORTS AND EXPORT FINANCE
• Exportingisassociatedwithimprovedproductivityandhighergrowth
• Around1in5smallerbusinessesexport,morecoulddoso
• Accesstofinanceisanimportantenablerofexportingbuttherearemanyotherbarriers
• Financeforexportscomesinmanydifferentforms,notjustspecialistexportfinanceproducts
EXPORTING BY FIRM SIZEFIG 3.11
Source: ONS Annual Business Inquiry
Firm No.of No. of Exporters as Employment Enterprises exporters share of enterprises
1 838,000 70,200 8.4
2-9 963,700 96,300 10.0
10-19 132,000 23,700 18.0
20-49 70,100 16,700 23.8
59-99 21,700 6,700 30.9
100-249 11,800 4,400 37.8
250+ 7,800 3,200 40.8
54 BRITISH BUSINESS BANK
Whilesmallerbusinesseshavealowerpropensitytoexportthanlargerones,SMEsmadeupover90%ofallUKexportersin2012.However,byvaluejustover35percentoftotalUKexportscamefrombusinesseswithlessthan250employees.69
Andasbusinesssizeincreases,itbecomeslesslikelythatSMEswhohaveexportableproductsdonotexport.Thissuggeststhatmicroandsmallbusinessesfinditmoredifficulttoexport,comparedtomedium-sizedbusinesses.
Thereareasignificantproportionofsmallerbusinessesthatbelievetheyhavethepotentialtoexport.Exportingmaynotbesuitableforallbusinesses-around65%ofsmallerbusinessesnotexportingreportedtheydidnothaveaproductorservicesuitabletoexport.
Arecentreportsuggestedthatsomebusinessesmaylacktheambitiontoexport.70Andthereisevidencethatsomesmallerbusinessesarenotfulfillingtheirpotential:
• Amongstsmallerbusinessesnotexporting,around20%saiditwasnotpartoftheirbusinessplan,andjustover10%statedthattheyhadsufficientbusiness in the UK already. In some cases this could holdbackfirms’growthpotential.
• Onlyaround10percentofsmallerbusinessesreceivinganunsolicitedenquiryfromanoverseasbuyer think it likely that they will make any export sales as a result of these enquiries.
ACCESS TO FINANCE IS AN IMPORTANT ENABLER OF EXPORT BUT THERE ARE MANY OTHER BARRIERS
Surveyevidencedoesnottypicallyfindthatalackofexternalfinanceisamongstthemostimportantbarrierstoexporting.ThelatestBritishBusinessBanksurveyreportsthatonly9%ofSMEsciteexternalfinanceasabarrier.
Overseasregulationsarethemostfrequentlycitedbarrier,butitisnoticeablethatthreeofthetopsevenbarriersrelatetofinance–gettingpaid(25%),timetogetpaid(18%)andlackofinternalfunds(14%).Thissuggeststhatfinanceandfinancialproducts,couldplayaroleinhelpingovercomeproblemsaroundpaymentandlackoffundingforexports.
Howeverstructuralproblemsinfinancemarketsaremorelikelytoapplywhensmallerbusinessesarelookingtoexport.Wellknowninformationasymmetries–whenviablebusinessesaresometimesdeniedfinance,orchargedhigherpricesthantheirtrueriskprofileshouldreflect–canbeamplifiedforfirmslookingforexternalfinanceforexporting,asthefinanceproviderfindsitmoredifficulttoassessthepotentialrepaymentrisk.
Small (10-49)
Medium (50–249)
Micro (1–9)
No employees
All
% 10 20 30 40 50 60 70 80 90 100
Have exportable goods/servicesExport already Neither
EXPORTERS AND POTENTIAL EXPORTERS BY FIRM SIZE
FIG 3.12
Source: British Business Bank 2015 Business Finance Survey
BARRIERS TO EXPORTING
FIG 3.13
Source: British Business Bank 2015 Business Finance Survey
Lack of external finance
Cultural differences
No barriers
Protecting IP
Language barriers
Time to get paid
Customs/paperwork
Lack of knowledge
Getting paid
Overseas regulations
Lack of internal funds
% 10 20 30 40
Exporters
Non-exporters
All
FINANCE FOR EXPORTS COMES IN MANY DIFFERENT FORMS,NOTJUSTSPECIALISTEXPORTFINANCEPRODUCTS
Therearespecifictradefinanceproductsavailablethathelpfacilitateinternationaltrade.However,SMEsmakerelativelylittleuseoftheseproducts,forexampleonly1%ofallexportersappliedfortradefinanceinthepast3 years.71Byfarthemostcommonapproachtofinancingexportsistousegeneralbusinesscashflow.
Smallerbusinessesalsomakeuseofcoretraditionallendingproducts,mostnotablyoverdraftsandotherformsofcreditline.Thissuggeststhatforsmallerbusinesseslookingtogrowwhoalsoexport,makingsurethattheyhaveaccesstogeneralfinanceproductsisparticularlyimportant.
TheBusinessBankisworkingwithUKExportFinance,toconsideroptionsforincreasingtheavailabilityoffinanceproductsforthosefirmsinvolvedinexportrelatedactivity,includingthoseinexportsupplychains.Aspartofthis,theBusinessBankisconsideringoptionsforincreasingworkingcapitalfinanceforexporters.
SMALL BUSINESS FINANCE MARKETS 2015/16 55
APPROACH TO FINANCING EXPORTS
FIG 3.14
Source: British Business Bank 2015 Business Finance Survey
20
30
40
10
60
70
80
%
50
Generalbusinesscashflow
Extendedoverdraft/credit line
Businesscreditcard
Personalcreditcard
Externalloan
Internalfinance
Otherfinance
Nofinanceneeded
56 BRITISH BUSINESS BANK
3.5
EQUITY FINANCE FOR GROWING BUSINESSES
ThissectionprovidesanoverviewofrecenttrendsinventureandgrowthcapitalfundinguptoQ32015usingdatafromBeauhurst.TheBritishBusinessBankwillpublishamoredetailedassessmentcoveringinvestmentsoverthefull2015yearinspring2016throughitsEquityTrackerReport.
• WhilstVenturestagefundinghaslaggedtheincreasesseeninotherequitystagesinrecentyears,2015hasbeenanexceptionallystrongyear,althoughpartlydrivenbyasmallnumberofverylargedeals
Althoughequityfinance72isusedbyasmallproportion(around1%)ofallsmallbusinesses,itsuseincreaseswithbusinesssize.Itisparticularlysuitableforgrowingbusinessesthatareeithertooriskyoroverleveragedtosecuredebtfinance.Equityfinanceisthereforeanimportantsourceoffinancetounlockbusinessgrowth,enablingthebusinesstosignificantlyscaleup.
WHILST VENTURE STAGE FUNDING HAS LAGGED THE INCREASESSEENINOTHEREQUITYSTAGESINRECENTYEARS, 2015 HAS BEEN AN EXCEPTIONALLY STRONG YEAR, ALTHOUGH PARTLY DRIVEN BY A SMALL NUMBER OF VERY LARGE DEALS
Venturestagefinancingcoverscompaniesthataremoredevelopedthanseedstagecompanies,withdevelopedproductsandsomecommercialsalesbutwhicharenotyetprofitable.Equityfundingcanthereforehelpthesecompaniestoscaleuptobecomethehouseholdnamesoftomorrow.Venturestageinvestmentsaregenerallylargerthanseedstageinvestments.In2015,89%ofventureinvestments(forknowndealsizesonly)werebelow£5minsize,althoughinvaluestermsonlyformed30%duetolargerdeals.
Althoughventurestagefundinghasincreasedby101%innumberofdealsand46%byvaluefrom2011to2014,theincreaseovertimehasbeenmuchlowerthanforseedandgrowthstages.However,theupwardtrendlookssettoacceleratewiththefirstthreequartersof2015databeing31%higherbynumberand118%byvaluecomparedtothefirstthreequartersof2014.
Whilst2015hasseenalargeincreaseinthevaluesofventurestageinvestmentsmoregenerally,caution
• WhilstVenturestagefundinghaslaggedtheincreasesseeninotherequitystagesinrecentyears,2015hasbeenanexceptionallystrongyear,althoughpartlydrivenbyasmallnumberofverylargedeals
• Largeincreasesingrowthfundingover time,althoughmarketappearstohave stabilisedin2015
• ThefinancialreturnsfrominvestinginVentureCapitalhaveimprovedin2014duetothestrongexitenvironmentbutVentureCapitalreturnsstilllagprivateequityreturns
• DemandsideissuescombinewithsupplysidestructuralissuestoimpedetheeffectivenessofequitymarketsforSMEs
• TheBritishBusinessBankandGovernmentmoregenerallyareactiveparticipantsinsmallerbusinessequitymarketstargetingspecificmarketproblems
isneededasitisbeingdistortedbyasmallnumberofpharmaceuticalcompanieswithdealsizessignificantlyexceeding£10m.Infactonepharmaceuticalcompanyreceivedfundingof£205min2015,whichformsasubstantialproportionoftheincreaseinvalueseeninthefirstthreequartersof2015.73 Some other recent datasources,forinstancePitchbookandCBIInsightshaveshownVCfundingdeclininginQ42015,whichmaysuggesttheVentureCapitalmarketisbeginningtoslowdown.ItwillbeimportanttoassessandmonitorthesemarketchangescarefullyintheforthcomingEquityTrackerReport.
LARGE INCREASES IN GROWTH FUNDING OVER TIME, ALTHOUGH MARKET APPEARS TO HAVE STABILISED IN 2015
Growthstagefinancingcoverscompaniesthataremoreestablishedthanventurestagecompanieswithdevelopedproducts.Thecompaniesarelikelytobeprofitable,butlookingtoexpandsignificantlyandtoenternewmarkets.Growthstageinvestmentsarelargerthanventurestagefundingwithanaveragedealsizeof£7m,althoughcaneasilystretchupto£10-£20morhigherforcompanieslargerthantheSMEdefinition.74
Growthstagefundinghasshownstrongincreasesbetween2011and2014with206%increaseand142%byvalueoverthistimeperiod.However,thistrendnowlookssettostabilisewiththefirstthreequartersof2015being23%lowerbynumberand15%higherbyvaluecomparedtothefirstthreequartersof2014.ItwillbeimportanttoseehowQ42015figurescompare,toseetowhatextentthegrowthcapitalmarketisslowing.
THE FINANCIAL RETURNS FROM INVESTING IN VENTURE CAPITAL HAVE IMPROVED IN 2014 DUE TO THE STRONG EXIT ENVIRONMENT BUT VENTURE CAPITAL RETURNS STILLLAGPRIVATEEQUITYRETURNS
Venturecapitalreturnshaveimprovedinrecentyearsduetothestrongexitenvironment,withincreasednumbersofIPOandtradesaleexits.Whilst2015figuresareslightlylowerthan2014figures,thereisanexpectationthatthebuoyantexitenvironmentwillcontinuethroughouttherestof2015andbeyond.75VCfundshavebeguntodivestsignificantamountsofcapital,withdivestmentsexceedingthevalueofnewinvestments.Forinstance,BVCAmembersinvested£13.4bngloballyin2014,but£21.6bnofcapitalwasreturnedinthesametimeperiod.However,publishedVCreturnsfigureslagtherecentupturnindivestmentactivityandVCmarketreturnsstilllooktoperformrelativelypoorly.BVCAfiguresshowthe10yearIRRreturnforventureis4.6%whichislowerthanthe7.6%returnfrominvestinginpublicmarketreturns.76
NUMBER AND VALUE OF VENTURE STAGE DEALS OVER TIME
FIG 3.16
Source: Beauhurst
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FIG 3.15
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SMALL BUSINESS FINANCE MARKETS 2015/16 57
58 BRITISH BUSINESS BANK
These10yearfiguresareloweredfurtherbypre-2002vintagefundsaffectedbythedotcombubbleburstingin2001,butpost-2002vintageVCfundsperformmuchbetterat7.1%IRRalthougharewellbelowthebroaderprivateequityreturnsfigureof14.9%.Neverthelessitisexpectedthatlong-termVCfundreturnswillcontinuetoimprovegoingforward,asindicatedbytheshorterterm3and5yearreturnsbeinghigher.
ItisimportanttorecognisethatVCfundreturnshaveahighdegreeofvariancewithtopquartileVCfundperformersgeneratinghighreturnsraisingthemarketaverage,butmanyVCfundsperformpoorly.OfVCfundswitha2002vintageonwards,upperquartilefundsgenerateareturnof8.4%IRR(upperdecilefundsgenerateareturnof18.5%),whilstthemedianfundhasanIRRof0%showingitjustreturnsitsinvestorscapital.LowerquartilefundshaveanIRRof-7.4%showingthattheylosemoneyfortheirinvestors.
It is too soon to tell,77buttheimprovingfinancialreturnsfrominvestinginVCshouldencouragegreaterVCfundraisingastheassetclassbecomesmoreattractivetoinstitutionalinvestorsafteralongperiodofdisappointingfinancialreturns,howeverreturnsstilllagwiderprivateequityreturns.
DEMAND SIDE ISSUES COMBINE WITH SUPPLY SIDE STRUCTURAL ISSUES TO IMPEDE THE EFFECTIVENESS OFEQUITYMARKETSFORSMES
ThereremainanumberofstructuralissuesinthesupplyofequityfinancetoSMEs.Thesestructuralmarketproblemsarewellestablished78andareduetoimperfectinformationbetweentheinvestorandbusinesswhichleadstotheexistenceofdue-diligencecosts.Duediligencecostsareahigherproportionofsmallerdeals,leadingtosomefundstomoveupstreamtofocusonasmallernumberoflargerlaterstageinvestments.ThereissomeevidencetosupportthisastheproportionofventurestagedealsinvolvingPE/VCfundshasdeclinedfrom63%in2011to31%inQ1-Q32015.
Marketproblemsalsoexistonthedemandsideasaresultofimperfectinformation,whichleadstoSMEsnotunderstandingwhotoapproachandhowbesttoseekit.
• First,whilst60%ofSMEsareawareofventurecapitalistsand38%areawareofbusinessangels,anincreasefrom55%and36%in2014,alowerproportionareawareofspecificsuppliersofequityfinance.Only22%ofbusinessesareawareofaspecificventurecapitalisttoapproachand18%are aware of a business angel to approach. There is someevidencefromthelatestBritishBusinessBankFinanceSurveytosuggestbusinessawarenessofGovernmentequityschemesincludingVCTs,EISandECF has increased recently.
NUMBER AND VALUE OF GROWTH DEALS BY DEAL SIZE
FIG 3.17
Source: Beauhurst
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• Second,manySMEsareunwillingtoseekexternalequityfinancebecausetheyareunwillingtogiveupcontroloftheirbusiness,despitetheadditionalvaluetothebusinessthatexternalinvestorscouldunlock.79
• Third,businessesmayalsolacktheknowledgeorexperiencetomakeagoodqualityinvestmentpropositiontopotentialinvestors,whichpreventsthemfromraisingfinancedespitetheirbusinessbeingpotentiallyviable.Thisaffectstheoverallefficiencyofequitymarkets.
THE BRITISH BUSINESS BANK AND GOVERNMENT MORE GENERALLY ARE ACTIVE PARTICIPANTS IN SMALLER BUSINESSEQUITYMARKETSTARGETINGSPECIFICMARKET PROBLEMS
TheBritishBusinessBankhasanumberofprogrammestargetedatimprovingspecificareasofthesmallerbusinessequitymarketandtargetedataddressingspecificmarketproblems.Forinstance,theEnterpriseCapitalFund(ECF)programmeisspecificallytargetedatfundsmakinginvestmentsinthe‘equitygap’forbusinessesseekingsmalleramountsofequityfinance.PreviousBusinessBankresearch80highlightedBritishBusinessBanksupportedfundswereinvolvedinaround6%ofalldeals(7%byvalue).
HMTandHMRChaveanumberofequityschemesincludingEnterpriseInvestmentScheme(EIS),SeedEnterpriseInvestmentScheme(SEIS)andVentureCapitalTrusts(VCTs).Theseschemesprovidetaxreliefforinvestorsandaredesignedtoincreasetheoverallsupplyofequityfinancetosmallerbusinessesraisingequityfinance.
TheEnterpriseInvestmentScheme(EIS)wasintroducedin1994byHMTandHMRCandisdesignedtohelpsmaller,higher-riskcompaniesraisefinancebyofferingarangeoftaxreliefstoinvestorswhopurchasesharesinthosecompanies.EISisimportantforsupportingbusinessangelsandotherprivateinvestorsinvestinginsmallgrowingcompanies.In2013-14,£1,529mwasinvestedin2,770companies(1,355wereraisingEISfundingforthefirsttime)showingithasalargecoverageoftheoverallmarket.Thisisanincreasefromthepreviousyear,althoughlowerthan2012-2013whentherewasasignificantincreaseintheannualinvestmentlimitpercompanyincreasingfrom£2mto£5m,whichenabledlargerdeals.
TheSeedEnterpriseInvestmentScheme(SEIS)wasintroducedin2012tocomplementEISandisintendedtorecognisetheparticulardifficultieswhichveryearlystagecompaniesfaceinattractinginvestment,byofferingtaxreliefatahigherratethanthatofferedbyEIS.82 1,160 companiesraisedfundingforthefirsttimein2012-13increasingto1,725in2013-14.83 Thetotalamountof
EIS INVESTMENT OVER TIME
FIG 3.20
Source: HMRC81
SMALL BUSINESS FINANCE MARKETS 2015/16 59
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NUMBER AND VALUE OF GROWTH STAGE DEALS OVER TIME
FIG 3.18
Source: Beauhurst
LONG-TERM RATES OF RETURN BY INVESTMENT CATEGORY AND SELECTED MARKETS
FIG 3.19
Source: BVCA
IRR %p.a. 3 years 5 years 10 years
Private equity 12.9 11.5 14.9 total
Venturecapital 10.9 9.2 4.6
Pre-2002vintagefunds 8.7 7.8 0.7
2002vintagefundsonwards 11.4 9.6 7.1
Small MBO 10.6 12.0 39.2
MediumMBO 17.7 14.3 19.1
Large MBO 11.8 10.9 14.5
Selected comparators
Totalpensionfund 10.3 9.4 7.8
Assets
FTSE all share 11.1 8.7 7.6
FTSEsmallcap 19.6 13.2 7.4
Cash 1.6 1.9 3.3
Retailpriceindex 2.5 3.4 3.1
60 BRITISH BUSINESS BANK
fundingraisedthroughtheschemehasalsoincreasedfrom£86mto£166mshowingitisanimportantsourceoffundingforearlystagecompanies.
VentureCapitalTrusts(VCTs)wereintroducedin1995toincreasethesupplyoffinancetohighgrowthpotentialcompaniesbyencouragingpotentialinvestorstoinvestbygivingtaxincentives.84Sincetheirintroductiontheyhaveraisednearly£6billionoffunds.In2014-15,VCTsissuedsharestothevalueof£435m.Thiswasaslightfallofjustoveronepercentfromthevalueof£440min2013-14,butishighbyhistoricallevels.ThenumberofVCTsraisingfundsalsofellin2014-15from66in2013-14to57.ThedecreaseinVCTsraisingfundsislikelytobeduetosomeVCTsmergingwithothersandsomeVCTsbeingwoundup.
RecentchangesannouncedinFinanceAct2015(2)86 are designedto‘encourageVCTstoonlymakeinvestmentsintendedtogrowanddevelopsmallbusinessesatanearlystageoftheirlife’andarelikelytohaveasignificantimpactontheVCTmarket.ChangesincludetheamountofqualifyingfundingthataVCTorEIS-qualifyingcompanycanreceiveoveritslifetimebeingreducedto£12million,or£20millionfor‘knowledgeintensive’companies.TobeeligibleforVCTorEISinvestment,companieswillnowhavetohavemadetheirfirstcommercialsaleinthepastsevenyears,ortenyearsfor‘knowledgeintensive’companies.Inaddition,VCTorEIScannolongerbeusedtofundmanagementbuyoutsoracquisitions.ThenewrulesonlyapplytoinvestmentsmadefromNovember2015,butwillhaveasignificantimpactontheinvestmentstrategyofexistingVCTsandshouldbenefityoungbusinesses.
CONCLUSION
Whilstthereisevidencetosuggestcyclicalimprovementsinequityfundingconditionsoverthelastfewyears,thereremainanumberofstructuralissuesinthesupplyofequityfinancetosmallerbusinesseswhichrestrictspotentiallyviablesmallerbusinessesfromraisingfinance.ThesestructuralmarketproblemsarewellestablishedandprovidearationaleforBusinessBankprogrammesliketheEnterpriseCapitalFunds,AngelCo-FundandVCCatalystFund.ItisimportanttoacknowledgethatgovernmentactionthroughtheBusinessBankandtaxbasedinvestmentschemessuchasEIS,SEISandVCTshavehelpedcontributetotherecentpositivefundingconditions.
VCT FUND RAISING OVER TIME
FIG 3.21
Source: HMRC85
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3.6
LONG-TERM FINANCE
AVERAGELOANTENORFORBANKSLOANSIS3-4YEARSBUTTHEMAJORITYOFBUSINESSESOBTAINLOANSATTHELOANTENORTHEYREQUIRE
Newsurveyevidence87revealsbankloans(excludingmortgages)tosmallerbusinessestypicallyhaveatenorof3-4yearswithonlyfivepercenthavingaperiodlastlongerthan7years.Infact,33%ofloanshaveatenoroflessthan2yearsshowinglendingisrelativelyshortterm.
Althoughsomebusinessesmayrequirelongertermfunding,thereisnoindicationthatthemajorityofbusinesseswantlongertermloansasthemajority (75%)ofsmallerbusinessesgettheloansatthe tenortheyrequested.
Obtainingashortertenormayreflectlendersbeingreluctanttoproviderlong-termfinance.Howeveronly8%ofsmallerbusinessesgotaloanatashortertenurethantheyrequested,thesameproportionthatgotitatalongertenorthanrequested.Longertenormayresultfromalongerrepaymentperiodfortheborrowertobeabletoaffordthepayment.Thedesire,particularlyofsmallerbusinesses,toreducedebtholdingsmaybereflectedinthefrequencyofshorterloanperiods.Somebusinesses,especiallymid-capbusinesses,maywanttoseeklongerloantenors.Overhalfofmid-capbusinessesseekingbankloanswereseekingloansoflongerthan7yearstenorand94%ofmid-capbusinessesobtainedaloanatthetenortheyrequired.Onlyasmallproportion(3%)wantedaloanatalongertenorthantheoneprovidedbythefinancialinstitution.TheEuropeanCommissionisduetoreportin2016ontheappropriatenessofCapitalRequirementsRegulationsinrelationtolong-termfinancingaspartofitsconsultationonhowrevisedbankcapitalrequirementshaveaffectedlending.88
PATIENTCAPITALISATYPEOFLONG-TERMFINANCETHAT FUNDS CAPITAL INTENSIVE BUSINESSES DEVELOPING PRODUCTS OR PROCESSES WITH LONG LEAD TIMES
TheBritishBusinessBankhasrecentlyundertakenprimaryresearch89andanalysisofsecondarydatasourcestoexplorethesupplyanddemandofpatientcapital.Thissectionprovidesasummaryoftheresearch.
Thereisnosingledefinitionofpatientcapital,butitiscommonlyusedtodescribetheprovisionoffundingtobusinessesthatarecapitalintensivewithlongproductleadtimes,typicallybutnotexclusivelyinlifesciences,cleantechnologiesandadvancedmanufacturingsectors.PatientcapitalfundingfollowsonfromproofofconceptandearlystageR&Dgrantfunding,andcoversbothdebtandequityfinance.
SMALL BUSINESS FINANCE MARKETS 2015/16 61
• Averageloantenorforbankloansis3-4yearsbutthemajorityofbusinessesobtainloansattheloantenortheyrequire
• PatientCapitalisatypeoflong-termfinancethatfundscapitalintensivebusinessesdevelopingproductsorprocesseswithlongleadtimes
• PatientCapitalcomesfromavarietyofdifferentfundingsourcesincludingangels,VentureCapitalfunds,listedinvestmentvehicles,corporateinvestorsandpublicequitymarkets.
• VentureCapitalisanimportantsourceofpatientcapital,buttheUKmarketislessdevelopedthanthe US
• Therearenumberofestablishedlistedinvestmentvehiclesprovidingpatientcapital,togetherwithrecentnewfundraisingsuggestinganincreaseinthesupplyofpatientcapitaloverthenextfewyears
• PublicequitymarketshaveopenedupwithincreasednumbersofInitialPublicOfferingsin2014,althoughvolumesareslowingdownin2015
62 BRITISH BUSINESS BANK
EmpiricalanalysisconfirmscertainsectorsrequiregreateramountsofVentureCapitalfinancethanothers.Forinstance,lifesciencecompaniesrequirethreetimesasmuchVCfundingasITcompanies,whilstcleantechnologycompaniesrequiretwiceasmuchfundingasITcompaniestogenerateasuccessfulexit.90However,thereislittledifferenceobservedinVCinvestmentdurationbetweendifferentsectorswiththeaverageinvestmentbeingaroundfiveandhalfyears.Thismayreflecttheexistenceofearlystagefundinge.g.grantsandangelspriortoVCfunding.
PATIENT CAPITAL COMES FROM A VARIETY OF DIFFERENT FUNDING SOURCES INCLUDING ANGELS, VC FUNDS, LISTED INVESTMENT VEHICLES, CORPORATE INVESTORSANDPUBLICEQUITYMARKETS.
Patientcapitalcomesfromavarietyofdifferentfundingsources.91
• BUSINESS ANGELS andotherprivateinvestorsareanimportantsourceoffundingandwereinvolvedinaround140dealsin2014(£230m).
• VC INVESTORS fund the greatest number of businessesandwereinvolvedin400deals(£1.7bn)in2014.Someoftheseinvestorscanbeidentifiedasprovidersofpatientcapitalduetotheirinvestmentstrategyofprovidingfinancetocapitalintensivesectors with long lead times.
• Therearearound70dealsinvolvingCorporateInvestorsin2014.CorporateventuringisgrowingintheUKmarketformingaround6%ofthetotalequitymarket.92
• UKPUBLICEQUITYMARKETS (LSE main market andAIM)funded137businessesin2014(£13.8bn).Whilstpublicmarketsprovidethegreatestamountoffundingtocompanies,notallofthisispatientcapitaland many of these companies are at a later stage of theirdevelopment.
Long-termdebtfinanceisalsoasourceofpatientcapital.Growthloanshavegreaterflexibilitythanseniordebt,andaresuitableforestablishedcompaniesthatareabletoservicedebtrepayments.Itisnotsuitableforearlystagebusinessesthatarenotyetgeneratingsales.Mezzanine
PROPORTION OF SME AND MID-CAP BUSINESS OBTAINING LOAN AT TENOR REQUESTED
FIG 3.23
Source: British Business Bank 2015 Finance Survey
No – shorter period 8%
Don’t know – 10%
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Yes – for period requested 75%
No – shorter period 0%
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SME AND MID-CAP LOAN TENOR SOUGHT
FIG 3.22
Source: British Business Bank 2015 Finance Survey
Longer
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SME bank loans Mid-cap bank loans
financeinvolvinganequitystakealignsinvestorinterestswiththelong-termgrowthofthecompany.
VENTURE CAPITAL IS AN IMPORTANT SOURCE OF PATIENT CAPITAL, BUT THE UK MARKET IS LESS DEVELOPED THAN THE US
ThesupplyofVentureCapitalhasincreasedsincethe recession. The US VC market is seen by many to workeffectivelyatfundingtheneedsofearlystagebusinesses,andsocomparisonsaremadetotheUSmarket.TheUSVCMarketismoredevelopedthantheUKmarketwithgreaternumberofventurecapitalfundsandgreaterfundspecialisationreflectingtheUSmarketbeingmoreestablishedandalsoitsgreatermarketsize.BritishBusinessBankanalysisofPreqinshowstheUSfundsareonaverage1.6timeslargerthanUKfunds,whichcontributestoUScompaniesreceivingnearlytwiceasmuchfundingasUKcompanies(averageinvestmentsizeof£29mcomparedto£16mforUKinvestments).Thiscanresultinbusinessesfindingtheprocessofraisingfinanceasdifficultandtimeconsuming,andadoptingcopingmechanismstosmooththeirjourneytowardsraisingfinance.
ThereisnoevidencetosuggesttheUKVentureCapitalmarketislesspatientthanintheUSasthereisasimilarbroadsectorcompositionofdealsandalsosimilaraverageinvestmentdurationsofaroundfiveandahalfyears.Forinstance,overhalfofallVCinvestmentsareinITrelatedsectors,withUKbeingsimilartotheUSintermsofthesectoralbreakdownofinvestments(52%comparedto56%fortheUS).Healthcareforms17%ofallUKVCinvestmentandcleantechnologyforms3%,thesameproportionastheUS.93
THERE ARE A NUMBER OF ESTABLISHED LISTED INVESTMENT VEHICLES PROVIDING PATIENT CAPITAL, WHICH TOGETHER WITH RECENT NEW FUND RAISING SUGGESTING AN INCREASE IN THE SUPPLY OF PATIENT CAPITAL OVER THE NEXT FEW YEARS
WhilstVCsprovideasubstantialamountofpatientcapitalfunding,evergreeninvestmentvehiclesmaybebetterabletoprovidepatientcapitalcomparedtofixedlifeLLPfundstructures,astheyhelpovercometheproblemofholdingilliquidassets.94
AVERAGE AMOUNT OF FUNDING PER SUCCESSFUL EXIT
FIG 3.24
Source: BBB analysis of Preqin
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SMALL BUSINESS FINANCE MARKETS 2015/16 63
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Thereareatleasttwowell-knownestablishedlistedinvestmentvehiclesfocusingonthecommercialisationofearlystagetechnology(ImperialInnovationsandIPGroup).Thesespunoutfromuniversitycommercialisationofficesandofferarangeofcommercialisationactivitiestoaddvaluetoportfoliocompanies,oftenwithcloselinkstouniversities.Portfoliosappeartobemoreearlystage,andinvestmentsplannedtobeheldforlongertoallowcompaniestimetodevelop.However,theyhaveasmallshareoftheoverallpatientcapitalequitymarket.
Inthelast12monthstherehasalsobeensignificantcapitalraisedbyanumberoflistedPatientCapitalprovidersincludingWoodfordPatientCapitalTrust(£812minApril2015)95,OxfordSciencesInnovation(£320minMay2015)96andMerciaTechnologies(£70minDec2014)97suggestinganincreaseintheamountofnewfundingreadytodeployinnextfewyears.98 Whilst this is apositivemarketdevelopment,themarketwouldbenefitfromevengreaterdiversification.
PUBLICEQUITYMARKETSHAVEOPENEDUPWITHINCREASED NUMBERS OF INITIAL PUBLIC OFFERINGS IN 2014, ALTHOUGH VOLUMES ARE SLOWING DOWN IN 2015
Followingdifficulttradingconditionsduringtherecession,publicequitymarketshavefinallyopenedup.Therewere95admissionsonAIMin2014,thehighestlevelsince2007,with£5.9bnraisedintotal.Fullyear2015figuresarenotyetavailable,butthereappearstobeaslowdowninnumberofIPOsonAIMin2015with47UKadmissionsuptoDecember2015.WhilsttheUShasthegreatestnumberofIPOs,UKcompaniesbackedbyVCarejustaslikelytoIPOasUScompanieswitharound10%ofallsuccessfulVentureCapitalexitsbeinganIPO.
WhilstlistingonUKpublicmarketsisseenasrelativelyattractiveintermsofeaseandcost,theAIMmarketismorevolatilethanthemainLSEmarketduetolowerliquidity.
NUMBER OF ADMISSIONS ON AIM OVER TIME
FIG 3.25
Source: London Stock Exchange
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CHAPTER FOUR FINANCE PRODUCTS AND DIVERSITY OF SUPPLY
Awell-functioningfinancemarketforsmallerbusinessesrequiresacompetitivemarketintheprovisionoffinance.Thisrequiresnotonlyarangeofavailableproductsthatsuitthedifferingfinanceneedsofsmallbusinessesbutalsoadiversityofsourcesofsupplytoensurethatthereisacompetitivemarket.IncreasingthediversityofsupplyoffinanceforsmallbusinessesisakeystrategicobjectiveoftheBusinessBank.
Chapter4considersuseoffinancethatisusedwidelyacrossalltheBusinessBankmarketsegmentssuchasassetfinance(section4.1)andalternativefinance,inparticularpeertopeerlenders(section4.2).
Thischapterthereforesummarisesthelatestevidenceofthediversityofdebtfinancesupply,drawinginparticularontheevidencegatheredandsummarisedbytheCompetition&MarketsAuthority.Section4.4thenlooksinmoredetailatthedevelopmentofchallengerbanks.
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4.1
ASSET FINANCE
Thissectionprovidesanupdateondevelopmentsintheassetfinancemarketin2014and2015highlightingthecontinuedincreaseinassetfinancevolumes,andalsoidentifyingwheremarketgapsremain.99Furtherinformationonthediversityofsupplyintheassetfinancemarketisincludedinthegeneraldiscussionofdiversityofsupplylater inthechapter.
THE STRONG RECOVERY AND FURTHER GROWTH IN ASSET FINANCE THROUGH THE PROVISION OF LEASING AND HIRE PURCHASE CONTINUED IN 2014 AND THROUGH 2015
FiguresfromtheFinance&LeasingAssociation(FLA)showthatassetfinancevolumeshavecontinuedtogrowstrongly.Asbusinessconfidenceintheeconomyincreasedandinvestmentpickedupduringtherecoverysohasnewassetfinancebusiness.Assetfinancenewbusinessfordealsupto£20mgrewto£25.2bnin2014,up13%on2013.Thefirstelevenmonthsof2015haveseensustainedgrowth,withtotalassetfinancenewbusinessfordealsofupto£20min2015asawholelikelytoreach£27.7bn,10%higherthanin2014.
TheFLAQ42015ConfidenceSurveyshowsthattheassetfinanceindustryexpectsnewbusinessin2016togrowbyupto10%.TheOBRforecastgrowthinbusinessinvestmentof7.4%in2016providingfurthersupportforthelikelygrowthindemandforassetfinance.
Assetfinanceremainsanessentialpartoftheinvestmentrecoverystoryasitincreasessmallbusinessescapacitytoinvest.TotalassetfinanceprovidedbyFLAmembersisequivalenttoalmost32%ofUKinvestmentinmachinery,equipmentandpurchasedsoftware.
TheFLAestimatesthatSMEassetfinanceaccountsforapproximately60%ofthetotalvalueofnewbusiness,almost£15bnofassetfinancewasprovidedtoSMEsin2014andforecasttoincreasetomorethan£16bnin2015.Thelatestdataalsoshowsthattheshifttowardshirepurchasefromfinanceleasingandoperatingleasing
• Thestrongrecoveryandfurthergrowthofassetfinancethroughtheprovisionofleasingandhirepurchasecontinuedin2014andthrough2015
• AssetFinanceremainsawidelyusedformofexternalfinance,particularlyformedium-sizedSMEsandmid-caps
• Ahighpercentageofbusinesseswhoapplyforassetfinancearesuccessfulinobtainingit,buttherecontinuestobesomeviablebusinessesthatareunabletosecureassetfinanceasaresultofproblemsinthemarket
alsocontinuedin2014and2015,reflecting,inpart,increasedinvestmentinplantandmachinery.
Growthduring2015hasbeenparticularlymarkedinITequipmentfinance,whichexceeded£1.7bninthe12monthstoNovember2015,up15%onthepreviousyear.Plantandmachineryfinanceandcarfinancecloselyfollowedtheoverallmarketwith11%and10%growthrespectivelyintheyeartoNovember,whilstbusinessequipmentfellslightlyto£2.1bn.
ASSET FINANCE REMAINS A WIDELY USED FORM OF EXTERNALFINANCEPARTICULARLYFORMEDIUMSIZEDSMESANDMID-CAPS
Mediumsizedbusinessesaremorelikelytobeusingleasing,hirepurchaseandvehiclefinancecomparedtosmallsizedbusinesses.TheSMEFinanceMonitorfindsthatintheyeartoendofQ22015,12%ofmicrobusinessesusedleasingorhirepurchase,risingto23%formediumsizedbusinesses.The2015BritishBusinessBankFinanceSurveyresultsshowthatofthemid-capbusinessessurveyed61%usedleasingorhirepurchaseoverthelastthreeyears.
TheSMEFinanceMonitorfindsthattheshareofSMEsusingassetfinanceremainsstable.Formicro-businessesthisissimilartotheuseofbankloans,butlowerthantheuseofoverdraftsorcreditcards.However,forsmallandmedium-sizedbusinessestheuseofleasingismorelikelythanbankloansandsimilartotheuseofoverdrafts.
OxfordEconomics100hasexaminedtheuseofleasefinancingamongstEuropeanSMEs.TheyfindoftheSMEssurveyedacrosseightEuropeancountries(Germany,Spain,France,Italy,Netherlands,Poland,SwedenandtheUK)42.5%usedleasingin2013comparedto40%in2010,withUKusageexceedingtheEuropeanaverage.TheOxfordEconomicsreportalsofindsthatexportingSMEs,whoseinvestmentneedsaregenerallyhigher,makegreateruseofleasingthanotherfirmsintheUK.
Assetfinanceismostpopularincapital-intensivesectorssuchastransport,agricultureandmanufacturing.Thisislikelytobelinkedtotheappropriatenessofleasing/hirepurchaseforthefinancingofequipmentthattendstobeusedatasectorlevel.
A HIGH PERCENTAGE OF BUSINESSES WHO APPLY FOR ASSET FINANCE ARE SUCCESSFUL IN OBTAINING IT, BUT THERE CONTINUES TO BE SOME VIABLE BUSINESSES THAT ARE UNABLE TO SECURE ASSET FINANCE AS A RESULT OF PROBLEMS IN THE MARKET
Asdescribedinour2014SmallBusinessFinanceMarketsReport,leasingcanbeseenasamarketsolutiontoamarketfailureinthesmallbusinesslendingmarketswiththeassetbeingfinancedactingasthesecurity,i.e.intheeventofadefaulttheassetfinanceprovidercan
SMALL BUSINESS FINANCE MARKETS 2015/16 67
SIZE OF UK ASSET FINANCE MARKET FOR BUSINESSES 2007-2015
FIG 4.1
Source: FLA, BBB. New business written by FLA members, deal size up to £20m
10
5
20
15
30
25
2007
2008
2009
2010
2011
2013
2014
2015*
2012
Hire Purchase
Leasing
Total
Other Finance
SME Asset Finance
£ Bi
llion
Notes: SMEassetfinancebefore2012isassumedtobe60%ofthetotalsizeoftheassetfinancemarket;*estimatesbasedonpublishedfiguresfor12monthstoNovember2015.
68 BRITISH BUSINESS BANK
reclaimtheassetback.Thisiscorroboratedbythewiderliteratureonassetfinance-ChigurupatiandHegde(2010)findthat‘lesseefirmswithhigherinformationasymmetryrelymoreonleasefinancing’.101
Thisisreflectedinsuccessratesforsmallbusinessesapplyingforassetfinancewhicharehigherthanotherformsoffinance.TheSMEFinanceMonitorreportslowersuccessratesforthe12monthstoQ22015,at83%downfrom91%inthepreviousyear,althoughthisisstillhighcomparedtootherformsoffinance.
Lowerrejectionratesforassetfinancecomparedtootherexternalfinanceimpliesthatthepoolofunderservedbusinessesseekingassetfinanceissmallerthanothertypesoffinance.However,youngerfirmswithlimitedabilitytofunddepositsandwhohaveassetsthatareoflowvalueandwithalimitedsecondarymarket,willfacegreaterscrutinywhenseekingtoaccessassetfinance.Forsuchfirmsothercriteria,especiallyaffordability,alsoneedtobedemonstrated.
Thisisonlyamarketfailurewherebusinessesareviableandunabletoobtainfinanceasaresultofinformationasymmetriesbetweenthelenderandborrower.Whereitisa‘hardasset’thatrequiresfunding(e.g.wheeledassetssuchasvehicles),anassetthatisbusinesscritical(e.g.barrelsinabrewery)orarevenuegeneratingasset(e.g.coffeemachine),withstrongsecondarymarkets,greaterreliancecanbeplacedonthestrengthofthecollateralforthefinanceprovided.
Discouragedandlatentdemandarealsoimportantinpotentialdemandforassetfinance,i.e.thosewhodonotapplybecausetheyarenotawareoftheoptionsornotconfidentofsuccess.
Awarenessofassetfinanceisrelativelyhigh,witharound85%ofsmallerbusinessesawareofleasingandhirepurchaseasafinanceoption.102 Amongst those likely toseekfinance,thereissignificantshareofsmallerbusinessesthatwouldconsiderassetfinance.TheSMEFinanceMonitorfindsthataround1in4smallerbusinessesseekingfinancewouldconsiderleasingorhirepurchase.Thisrisesto1in3formediumsizedbusinesses.103Thislimitedwillingnesstoconsiderassetfinancemaypointtodemandsideconstraintsduetoimperfectinformationforbusinessesseekingfinance.
20
10
40
30
60
70
80
90
%
50
Leasing / Hire Purchase / Vehicle Finance
Invoice financing
2014 Q2
2015 Q2
2013 Q2
PERCENTAGE OF SMALLER BUSINESS APPLICANTS WHO SUCCESSFULLY APPLIED FOR ASSET FINANCE
FIG 4.2
Source: FLA, BBB. New business written by FLA members, deal size up to £20m.
4.2
ONLINE PLATFORMS
EncouraginglyforSMEs,P2PbusinesslendingvolumesintheUKremainstrongandwerethelargestsub-setofoverallonlineplatformactivityin2015,accountingforapproximately45%ofthetotalfundingof£2.8bnfacilitated.
P2PbusinesslendingenabledthroughonlineplatformscontinuedtogrowstronglyintheUK,withgrossflowsofapproximately£1.3bnrecordedin2015,accordingtoAltFiData.Nonetheless,thisremainsaverysmallproportionofoverallgrosslendingtoSMEsbybanks(£53bngrosslendingJan-Nov2015).However,thecontinuedgrowthinthischanneloffundingisimportantforthediversificationofSMEfinancemarketsintheUK.
TheamountoffundingenabledbyUKplatformsissignificantlyhigherthanthoseseeninotherEuropeancountries.Inabsoluteterms,theUSmarketforonlinelendingisestimatedtobeapproximatelyfivetimeslargerthanintheUK.However,adjustedpercapita,averagevaluesfacilitatedintheUSandUKarebroadlysimilar.
APPROXIMATELY£2.8BNGROSSLENDINGFACILITATEDBY ONLINE PLATFORMS IN 2015
ThevalueofnewfinanceoriginatedthroughUKonlineplatformscontinuestoriseexponentially.TheLiberumAltFiVolumeIndexrecordedcumulativegrossfundingofapproximately£2.8bnthroughUKplatformsattheendof2015.Thisrepresentedadoublingofthecumulativeindex(whichstartedin2005)toroughly£5.5bn.
Year-on-yeargrowthoffundingfacilitatedwasalsoimpressive.AltFiDataestimatethat2015lendingvalueswereapproximately76%higherthanthosein2014.
SMALL BUSINESS FINANCE MARKETS 2015/16 69
• Approximately£2.8bngrosslendingfacilitatedbyonlineplatformsin2015
• P2Pbusinesslendinghasthegreatestshareofgrossflowsoffinanceataround£1.3bn
• P2PFAestimate£90mofnetlendingflowsfacilitatedbymemberstoSMEsinQ32015,excludingpropertylending
• OnlineplatformscanplayanincreasinglyimportantroleindiversificationofSMEfinancemarkets
• FinancefacilitatedthroughUKonlineplatformsoutstripsamountsrecordedforotherEuropeancountries
70 BRITISH BUSINESS BANK
P2P BUSINESS LENDING HAS THE GREATEST SHARE OF GROSSFLOWSOFFINANCEATAROUND£1.3BN
Crowdfunding,104whichgenerallyreferstotheraisingofequity,representsaverysmallportionofoverallplatformactivity(c5%),buthasrecordedthefastestrateofyear-on-yeargrowthinfinancefacilitatedofaround135%.105
Peer-to-peer(P2P)lending,whereinvestorslendmoneyonlineusuallytoindividualsorSMEs,continuestorepresentthegreatestshareofoveralllendingvolumes(approximately95%).Growthinlendingvaluesin2015werebroadlyinlinewiththatrecordedbytheheadlineindex(c75%).
P2Plendingactivitycanbebrokendownby:businesslending(£1.3bn),consumerlending(£1.1bn)andonlineinvoicefinancing(£0.3bn).
Historically,P2Pconsumerlendingwasthedominantsub-categoryofonlineplatformactivity.However,thebalancetippedinfavourofbusinesslendinginearly2014,withbothchannelscombinedrepresentingthemajorityofallfundingrecordedbytheAltFiVolumeIndex(P2Pbusinesslending(c45%),P2Pconsumerlending(c40%)).However,grossflowsoffinancetobusinessesremainanextremelysmallpercentageofgrossflowsoflendingtoSMEsfrombankswhichtotaled£53bnfromJanuarytoNovember2015..
P2PFAESTIMATE£90MOFNETLENDINGFLOWSFACILITATEDBYMEMBERSTOSMESINQ32015,EXCLUDING PROPERTY LENDING
ThePeer-to-PeerFinanceAssociation(P2PFA)isanindustrybodyrepresentingpeer-to-peerlendingplatforms.Itaimstopromotehighstandardsofconductandconsumerprotection.TheP2PFAreportsthatitrepresentsover90%ofthepeer-to-peerlendingmarketintheUK,includingconsumerlending,businesslendingandinvoicefinancefundingforsmallbusinesses.
TheP2PFAcollectsdatafromitsmembers.CumulativelendingreportedatQ32015wasc£3.7bn(therewillbevariancescomparedwiththeLiberumAltFiVolumeIndexduetodifferencesincoverage).
TheP2PFAestimatesnetlendingflowsfrommemberdata.ItreportsthatnetlendinginQ32015wasc£250m(grosslendingwasc£600m).Justoverone-thirdofnetlendingwasestimatedtobetoSMEs(c£90m),althoughpropertylendingincludeslendingtobothSMEsandconsumers.BankofEnglanddataindicatenetflowsofnewloanstoSMEsinQ32015ofc£750m.Therefore,
0.00
1.00
0.50
2.00
2.50
Cum
ulat
ive
Lend
ing
(£bn
)
1.50
3.50
4.00
3.00
2010 Q1
2010 Q2
2010 Q3
2010 Q4
2011 Q1
2011 Q2
2011 Q3
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
2013 Q1
2013 Q2
2013 Q3
2013 Q4
201 4 Q1
2014 Q2
2014 Q3
2014 Q4
2015 Q1
2015 Q2
2015 Q3
P2PFA CUMULATIVE LENDINGFIG 4.3
Source: BP2PFA
assumingthefiguresonnetflowsarecomparable,lendingoriginatedthroughonlineplatformsremainsasmallpercentageofbanklendingat12%,albeithigherthanthatindicatedbythecomparisonofgrossflows.Overthelastfourquarters,netlendingtoSMEsbyP2PFAmembersisestimatedtobebroadlyconsistentandbetween£75-£90m.
ONLINE PLATFORMS CAN PLAY AN INCREASINGLY IMPORTANT ROLE IN DIVERSIFICATION OF SME FINANCE MARKETS
Therelativelysmall,butincreasingvolumeoffinancefacilitatedthroughonlineplatformshighlightsthevaluethattheyhaveindiversifyingfinancemarketsforSMEs.Thisisbothintermsoftherangeoffinanceavailable(fromloanstoequity)andintermsofprovidingthecompetitionrequiredtoinnovateandimprovethefunctioningofmarketsforSMEs.
LastyearwenotedthatmoreestablishedSMEswithlowerriskratingsweremorelikelytobesuccessfulintheirfundingbidonanonlineplatform.AnanalysisofthelatesttwoquartersofdatafromSMEFinanceMonitor106 suggeststhatusersofalternativeformsoffundingarelesslikelytobesoletraders,morelikelytobeusingotherformsofexternalfinance,tohaveanappetiteforfinancegenerallyandtobeplanningtogrow.However,whencomparedwithresultsfromH12014,thedatawouldindicatethatusersarenownolongermorelikelytohaveaminimal/low risk rating.
FINANCE FACILITATED THROUGH UK ONLINE PLATFORMS OUTSTRIPS AMOUNTS RECORDED FOR OTHER EUROPEAN COUNTRIES
TheUKhasbyfarthelargestonlinemarketplaceforfunding,whencomparedwithotherEuropeancountries.However,thischanneloffundingisrelativelyyoung,particularlyinmainlandEurope,withthepotentialforcontinuedhighgrowthacrossEurope.
EuropeanCommissionresearchanalysedcrowdfundingactivityinanumberofEUcountries,wherecrowdfundingreferstogeneralonlineplatformactivityencompassingavarietyofmodelsincludingloans,equityandrewards.Analysiswasbrokendownbyfundingtype.Loanprojectswerethelargestfundingtype,withtheUKseeingthelargestamountoflendingfacilitated.Estoniahadthesecondlargestamountofloanfundingraisedin2014,butthiswasonly1%ofthatraisedintheUKinthesameyear.
P2PFA NET LENDING FLOWS
FIG 4.4
Source: P2PFA
100
50
200
150
300
£m
250
Q42014
Q12015
Q22015
Q32015
Net lending flows secured on real estate
Net lending flows to SMEs
Net lending flows to individuals
SMALL BUSINESS FINANCE MARKETS 2015/16 71
72 BRITISH BUSINESS BANK
CrowdfundingforequityfinanceisalsomostprevalentintheUK,althoughtheextentofthegaptothesecondlargestcountryisnarrowerthanforloanfunding.Francesawthesecondlargestamountofequityfinancefacilitatedduring2014,whichwas20%ofthatenabledthroughUKplatforms.
Nonetheless,whenconsideringglobalmarkets,valuesoffinancefacilitatedthroughonlineplatformsintheUS(estimatedbyMorganStanleytobe$12bnin2014)arelargerthanUKvalues(equivalentestimatedfigureis$2.3bn).However,whenthesevaluesareadjustedforthegeneralpopulation,amountsoffinancepercapitaarebroadlysimilarintheUSandUK.
CONCLUSIONS
TheBritishBusinessBankpartnerswithanumberofonlineplatformsthatfacilitatelendingtosmallerbusinessesintheUK,tohelpcatalysevolumesoflendingthroughthesechannels.ThecontinuedgrowthoflendingfacilitatedthroughonlineplatformsoverallareencouragingindicatorsforamorediversifiedfinancemarketforSMEs(andotherbeneficiariesoffinancefacilitatedthroughonlineplatforms).However,asachanneloffinance,onlineplatformsarestillrelativelyyoungandvaluesoffundingremainsmallcomparedwithtraditionalsourcesoffinance.ThispointstocontinuedinvolvementinthisareafortheBritishBusinessBank.
AlternativefinanceplatformsalsostandtobenefitfortheSmallandMediumSizedBusiness(FinancePlatforms)Regulations2015whichaimstoopenupthemarketforlendingtobothbusinessesseekingfinanceandlenderswillingtoprovidefinance.HMTreasuryhasrequestedthattheBusinessBankconductaprocesstoassessthesuitabilityoffinanceplatforms(FPs)fordesignationundertheRegulations.AnFPisdefinedinsection7(2)oftheActasanorganisationthat“providesaservicefortheexchangeofinformationbetweenfinanceprovidersandbusinessesthatrequirefinance”.
4.3
DIVERSITY OF DEBT FINANCE SUPPLY
Therangeoffinancialproductsusedbysmallerbusinesseshasbeendiscussedearlierinthereport,inparticularlyinthereviewofaggregateflowsoffinancetosmallbusinessesinsection1.1.Thishighlightedtherapidgrowthintheuseofsomeformsoffinance,inparticularassetfinanceandalternativefinancewhichwerethendiscussedinmoredetailinthefirsttwosectionsofthischapter.
Aswellasadiverserangeofproducts,competitionbetweensuppliersofspecificproductsisalsoimportantfordeliveringacompetitivemarket.ThissectionthereforereviewstheevidenceofdiversityofsuppliersdrawingonthelatestevidencefromtheCompetition&MarketsAuthority(CMA).
LATEST RESEARCH FINDS THAT THE MARKET FOR DEBT FINANCE PROVISION TO SMALLER BUSINESSES REMAINS CONCENTRATED
DiversityofsupplyinSMEbanklendinghaslongbeenaconcernwithnumerousstudiesreviewingaspectsofcompetitionintheUKSMEbankingsector.ThecurrentfocusisontheCMAmarketinvestigationintothesupplyofretailbankingservicestoSMEsintheUKwhichisduetoconcludein2016.107
ThelatestCMAresearchpublishedintheirprovisionalfindingsreport108findscontinuedconcentrationamongasmallnumberoflargebanks.InGreatBritainandNorthernIreland,thelargestfourbankinggroupsaccountforover80%ofbusinesscurrentaccounts(BCAs).Around90%ofSMEsgototheirmainBCAbankforoverdrafts,generalpurposebusinessloansandcreditscards.Furthermore,theCMAresearchalsofindsthat60%ofSMEsconsideredonlyoneproviderwhenseekinglending.
SMALL BUSINESS FINANCE MARKETS 2015/16 73
• Latestresearchfindsthatthemarketfordebtfinanceprovisiontosmallerbusinessesremainsconcentrated
• Theprovisionofgeneralpurposebusinessloans to smaller businesses remains concentratedinthefourlargestproviders
• Assetfinanceshowsgreaterdiversificationthangeneralbusinesslendingbutconcentrationremainssignificant
74 BRITISH BUSINESS BANK
TheCMAreportidentifiesthreereasonswhySMEsusetheirexistingbankwhenseekingfinance:
• Firstly,thevalueoftheirexistingrelationship.SMEsbelievebanksaremorelikelytolendtoexistingcustomers,andbankshaveaccesstoamoredetailedfinancialhistoryoftheSMEandarethusabletobetter assess the risk of default.
• Secondly,SMEsarewaryofthetime,effortandconvenienceofapproachinganotherproviderwith25%notconsideringotherprovidersbecauseofthehassleassociatedwithapplyingforfinance.
• Thirdly,therearebarrierstosearching,withdifficultiesincomparingthepricingandothertermsand conditions associated with lending products acrossdifferentfinanceproviders.
TheabovereasonsmaymeanthatSMEsfinditdifficulttodistinguishbetweensuppliers,henceSMEshaverelativelylittleincentivetoshoparound.Onepossibleinterpretation109ofthisisthatmanylenderswhodonothaveanexistingrelationshipwiththeSMEwillofferasimilarpricebasedontheirlimitedabilitytoassesscreditrisk.
ThesefindingsarebackedupbytheresultsoftheBusinessBank’sSMEFinanceSurveywhichlooksattheextenttowhichsmallerbusinessesshoparoundwhenseekingfinance.Thesurveyfindsthatmorethan60%ofsmallerbusinessesonlycontactoneprovider,withthemainreasonbeingthattheyalreadyhavelongstandingrelations with their main bank.110Thisfigurehasimprovedsince2012,whenmorethan70%ofsmallerbusinessescontactedonlyoneprovider,butitisclearthatshoppingaroundisstilllimited.
ThisinertiaamongstSMEsexplainswhythehighconcentrationinprovisionofBCAsfeedsthroughintoahighconcentrationoftraditionallendingproductssuppliedtoSMEs.ThetendencyforSMEstoapproachtheirBCAproviderfortraditionallendingproducts,isfound,albeittoalesserextentforotherproducts,with69%ofSMEsgoingtotheirmainBCAbankforinvoicediscountingandfactoring,and76%forcommercialmortgages.
VOLUME SHARES OF BUSINESS LOANS IN ENGLAND AND WALES, YEAR TO Q1 2013
FIG 4.5
Source: CMA market study: 1999 figures from CC, 2013 figures from Charterhouse release Q1 2013
Others
Santander Group
HSBC
Barclays
RBSG
LBG
2013
1999
4%
7%
26%
19%
18%
26%
4% 5%
25%
23%
12%
31%
HHI: 2,073
HHI: 2,280
Notes: Percentagesmaynotsumto100becauseofrounding.Allbanksinthe‘others’asasingleentityforthepurposesofcalculatingtheHHIin2013.However,ifothersweretreatedseparatelyanditwasassumedthattheyeachhadamarketshareoflessthan1%,thentheHHIfigurewoulddropto2,057.Therearemethodologicaldifferencesbetweenthecalculationsmadein1999and2013,includingtheinclusionofcommercialmortgagesinthe1999figures.
THE PROVISION OF GENERAL PURPOSE BUSINESS LOANS REMAINS CONCENTRATED IN THE LARGEST FOUR PROVIDERS
Themarketforgeneralpurposebusinessloanshasbeenconcentratedforsometime.ThepreviousSmallBusinessFinanceMarketsReport,reporteddataonvolumesharesofSMEloansfor1999and2013.TherehadbeenaslightdeclineintheHerfindahl–HirschmanIndex(alsoknownasHHI),ameasureofthesizeoffirmsinrelationtotheindustryandanindicatoroftheamountofcompetitionamong them.
TheCMAprovisionalfindingsreportpublishedinOctobergivesinformationonSMEgeneralpurposebusinessloansharesfor2014,111presentedinmarketsharesizebrackets.Figure4.6providesthatdataforthebothstockofloansandthevalueofnewloansgranted.
OutsideofthefourlargestbanksonlyClydesdaleexceeds5%ofthemarketforthestockofloans.Onaflow,ratherthanstockmeasure,Handelsbankenalsoexceeded5%ofthemarketbyvalue.
NotalllendersprovidedlendingdatabysizeofSME.However,CMAcalculationssuggestthatthemarketforloanstosmallerSMEs,definedhereasthosewithturnoveroflessthan£2mn,ismoreconcentratedthanthemarketforbusinessloanswithhigherturnover.FortheseSMEs,RBSandLloydseachaccountformorethan30%ofthestockofloans.
Whileconcentratedmarketsdonotnecessarilyimplyalackofcompetition,orthattotallendingisreduced,theCMAprovisionalfindingisthatacombinationofissuesincludingbarrierstoSMEsearching,informationasymmetriesandotherincumbencyadvantageswithintheUKSMElendingmarketleadtoanadverseeffectoncompetition.
SMALL BUSINESS FINANCE MARKETS 2015/16 75
MARKET SHARES IN SME FINANCE MARKETS, 2014, BY VALUE
FIG 4.6
Source: : CMA Retail banking market investigation: provisional findings report, Appendix 6, pages 11 & 12
Banking Group General purpose Value of new Business Loans loans granted
RBS 20-30 20-30
LBG 20-30 10-20
Barclays 20-30 30-40
HSBC 5-10 5-10
Clydesdale 5-10 5-10
Santander 0-5 0-5
BoI 0-5 0-5
Danske 0-5 0-5
Handelsbanken 0-5 5-10
TSB 0-5 0-5
AIBG 0-5 0-5
Co-op 0-5 0-5
Metro 0-5 0-5
Aldermore 0-5 0-5
76 BRITISH BUSINESS BANK
ASSET FINANCE SHOWS GREATER DIVERSIFICATION THAN GENERAL BUSINESS LENDING BUT CONCENTRATION REMAINS SIGNIFICANT
Thetablein4.7reproducestheCMAmarketshareforassetfinance.Thissuggestsamorediversifiedmarketthanforgeneralpurposebusinessloans,Aldermore,Shawbrook,HitachiandInvestecfromoutsidethebigfourexceed5%ofthemarket.
ThestructureoftheassetfinancemarketwascoveredinmoredetailintheSmallBusinessFinanceMarketsreport2014.Chapter2.4ofthatreportsetoutastructureoftheassetfinancemarketshighlightingthatthelargenumberofassetfinanceproviderswereseparatedintothreetiers:
• Tier 1 comprises banks and large non-bank assetfinanceproviders.Borrowerswithstrongrepayment capacity and track record are targeted andassetsthataretypically‘hard’suchaswheeledassets are sought.
• Tier 2 comprises lenders with a broad range of appetites from those focusing on near prime deals to lenders with specific specialisms in asset classes or market segments.
• Tier3,the‘non-prime’endofthemarketisthesmallestinvalueterms,asdealsizestendtobesmaller.Theselendersaremorelikelytoservebusinessesfunding‘soft’assetssuchascateringequipment,softwareandfixturesandfittings(i.e.withlimitedresalevalue)andwithweakerbalancesheets/trackrecord.
Manyofthesmallerlendersinassetfinancemarketsobtainfundingfromotherfinanceproviders.Theavailabilityofsuchfundingmaybelimited,ormayplaceconstraintsontheabilityofthoseassetfinanceproviderstogrowtheiractivityincertainpartsofthemarket.Thismayhampercompetitioninassetfinancemarkets,particularlyatthemorehighriskendofmarkets.
TheBusinessBankhasdevelopedtheENABLEFundingprogrammetoaddressfundingissuesinassetfinancemarketsinorderincreasesignificantlythesupplyofleasingandassetfinancetosmallerbusinessesintheUK.
UK ASSET FINANCE MARKET SHARES IN 2014FIG 4.7
Source: : CMA Retail banking market investigation: provisional findings report, Appendix 6, pages 11 & 12
Banking Group Asset finance
RBS 30-40
LBG 10-20
HSBCG 5-10
Barclays 10-20
Aldermore 10-20
Clydesdale 0-5
Danske 0-5
Shawbrook 5-10
Santander 0-5
Close Brothers 0-5
Hitachi 5-10
BoI 0-5
AIBG 0-5
Investec 5-10
4.4
THE RISE OF CHALLENGER BANKS
Challengerbanksincreasethediversityofpotentialsuppliersoffinanceforsmallerbusinesses,andhaveadoptedawiderangeofbusinessmodelsintheireffortstoincreasemarketshare.Bothtechnologyandregulationhaveimpactedontheabilityofthechallengerbankstogrowandcompetewithlongestablishedfinanceproviders.
CHALLENGER BANKS HAVE ADOPTED A WIDE VARIETY OF BUSINESS MODELS
Challengerbanksincludenewentrantstothemarket,spin-offsordis-investmentsfromlargebanksandexistingsmallerbanksseekingtogrow.Giventhedifferingbackgroundsofchallengerbanks,itisnotsurprisingthattheyhaveadoptedawiderangeofbusinessmodelsintermsoftherangeofproductsandthemethodsofdelivery.Someareregionallybased,whilstothersprovideonlypersonalorsmallbusinessbankingratherthanthewiderangeofservicesprovidedbythelargerbanks.Somefocusondigitaldeliverychannelswhilstothersembracebranch banking.
KPMG analysis112distinguishestheBigFiveBanksfromthelargechallengers,forexampleClydesdale,andthesmaller challenger banks. New entrants continue to seek authorisationtoenterthemarket.Ashighlightedintheprevioussectionthelargerchallengershavesignificantmarketssharesinbusinesslendingbusiness.Forexample,Clydesdalereportedthatitsbusinesslendingportfolio,focusedprincipallyonSMElending,was£7.1bnatendSeptember2015.113
Someofthesmallerchallengerbanksaregrowingrapidly.Forexample,Aldermore,establishedin2009asanSMEfocusedbank,grewit’soveralllendingtoSMEsby32%to£2.2billionin2014,114whilstShawbrook’sassetfinancevolumesforSMEsgrewby27%to£564manditsbusinesscreditadvancedreached£170min2014.115
SMALL BUSINESS FINANCE MARKETS 2015/16 77
• Challengerbankshaveadoptedawidevarietyofbusinessmodels
• Financialtechnologyplaysanimportantroleinthedevelopmentofchallengerbanks
• Financialregulationandothergovernmentinterventionsmayimpactonthegrowthofchallenger banks
78 BRITISH BUSINESS BANK
FINANCIAL TECHNOLOGY PLAYS ARE IMPORTANT ROLE IN THE DEVELOPMENT OF CHALLENGER BANKS
Developmentsinfinancialtechnology,oftenreferredtoasFin-Tech,havethepotentialtointroduceinnovationsinthesmallerbusinessbanklendingmarket.Theseinnovationsinsomeinstancescanreducemarketentrycostsandoperationalcostsforchallengerbanks,increasingtheircompetitivenessinthemarketbyreducingthecosttomoreaccuratelyassessrisk.Technologyledinnovationmayalsoreduceasymmetryofinformationproblemsinthesmallerbusinesslendingmarketwhichcancreateopportunitiesforbothestablishedandchallengerbanks.
AspartofthecurrentCMAretailbankingmarketinvestigationDeloittewerecommissionedtoexaminetheimpactofinnovationintheUKretailbankingmarket.116TheobjectiveoftheDeloittestudywastounderstandinnovationsinthebankingsector,thedriversandbarrierstoinnovationandthepotentialimplicationsforcompetition.Thereportfocusedonfiveareasoftechnologicalinnovationwhichweremobilebanking,digitalwallet,aggregators,bigdataandbankinabox.Theseservicesareevolvingrapidlywhichmadeitdifficulttocollectup-to-datedataontake-upoftheseservicesandSMEusageoftechnology.Deloitte’smainfindingsandconclusionswhichaffectchallengerbanksarepresentedbelow.
• ‘Digitalwallet’isaservicethatfacilitatesthestorageof payment (and possibly other) credentials and enablesuserstomakepayments,eitheronlineorviaamobile,e.g.PayPal.
• Aggregatorsareservicesthatcollectandcollateinformation from a number of sources in order to facilitate comparisons. Deloitte considered twotypes,comparisonaggregatorsandaccountaggregators (allows customers to collate information acrossmultipleaccounts).Aggregatorshavethepotentialtoprovideamorecost-effectivechannelforchallenger banks to reach customers and compete alongside traditional banks.
• Bigdataisatermusedtodescribeavastamountofdata,complexdataorfrequentlyupdateddatainwhich traditional software such as spreadsheets are unable to process. Established banks may face high costs of updating IT systems. Therefore new entrants couldhaveanadvantageinsettingupbigdatasystems as they don’t face the burden of updating legacy IT systems.
• Bank in a box refers to licensed application software providingdeposittakingandlendingfunctionality.Users of bank in a box are usually new entrants rather thanlargeestablishedbanks,forexampleHampden&CoanewbanklaunchedintheUKinJune2015usescloud-basedservicesprovidedbyOracle.Bankin a box can reduce costs of entry. Barriers to entry are therefore lowered but there are constraints on productdifferentiationwhichcouldlimitbankinaboxuser’s ability to grow.
TheDeloittereportsuggeststheimpactofthesetechnologydevelopmentsonchallengerbankwilltakesometimetoplayout.However,thecombinedeffecthasthepotentialtohelpincreasethediversityofsupplyoffinanceproductstosmallbusinesses.
FINANCIAL REGULATION AND OTHER GOVERNMENT INTERVENTIONS MAY IMPACT ON THE GROWTH OF CHALLENGER BANKS
Theabilityofchallengerbankstoentersmallbusinessmarkets,andsubsequentlytogrowwithinthesemarketsisinfluencedbytheregulationofthebankingsector.Theprocessfornewbankingauthorisationshasbeenreformedinrecentyearstointroduceamoreflexibleapproach.117Asdiscussedinlastyear’sreport,theFinancialConductAuthority(FCA)haslaunched‘ProjectInnovate’withtheaimofencouraginginnovationintheinterestsofconsumersandpromotecompetitionthroughdisruptiveinnovation.AndmorerecentlytheNewBankStart-upUnithasbeenestablishedasajointinitiativefromthePrudentialRegulationAuthority(PRA)andtheFCA.
SMALL BUSINESS FINANCE MARKETS 2015/16 79
Challengerbankshavealsoarguedthattheregulatorycapitalrequirementshavethepotentialtodistortcompetitionbetweenbanksbyputtingthematacostdisadvantageandwillthereforelimittheabilityofsomebankstoexpandtheiractivity.TheCMAisundertakingfurtheranalysisontheimpactofthecapitalregulatoryregimeonSMElending.
SomechallengerbankshavealsomadeuseoftheBankofEngland’sFundingforLendingScheme118(FLS)toprovideadditionalfundingfortheirSMElendingactivities.FLSiscurrentlyusedby36participantswithtotaldrawdownson£63.6bngivingrisetonetextensionstoSMEsof£10.6bn.
ThelargestuserofFLSisLloydsBankingGroupwith£26bnoftotalFLSdrawdowns.ChallengerbanksthatmakeuseofFLSincludeAldermorewith£750moftotaloutstandingdrawingsandnetdrawingsof£265min2015,CloseBrotherswith£375mofoutstandingdrawingsallofwhichtookplacesinceQ42014andShawbrookwith£277moutstandingdrawings,with£137mnetdrawingsinceQ42014.
TheschemehasrecentlybeenextendeduntilFebruary2018,althoughtherewillbegradualphasingout,withborrowingallowancesreducedovertime.
CONCLUSION
Theevidencepresentedinchapterfourhasshowntheimportanceincreasingthediversityofsupplyamongstfinanceproviders.
TheBritishBusinessBankwillhelpimprovediversityofsupplyoffinanceforsmallerbusinessesbyexpandingoursupportforchallengerbanks,non-bankdebtfunds,marketplacelenders,invoiceandassetfinanceproviders.OurENABLEprogrammeshavenowsupportedover£225moflendingandourInvestmentProgramme hascommitted£353mofsupporttothese growingparticipants.
ASSET FINANCETheuseofcreditorleasingfacilitiesprovidedbyaleasingprovidertofinancetheacquisitionofassets.Theassetfinanceproviderwillnormallyrequiresecuritytobetakenontheassetitselfandthecostoftheassetfinancearrangementsisspreadoverthelifeofthe asset.
BANKCAPITALREQUIREMENTSStandardizedrequirementsforbanks,wherebytheymustholdliquidassetsforacertainleveloftotalassets.Theseareenforcedbyregulatoryauthorities.
BUSINESS ANGELSAhighnetworthindividualwhoprovidesfinancingtosmallbusinessesinexchangeforanequitystakeinthebusiness.Businessangelsareoftenthoughtofasabridgebetweenloansfromfamilyandfriendsandventurecapital.Businessangelsmayalsoprovideexpertiseinhelpingtorunthebusiness.
BUSINESS CHURN The rate at which new businesses start-upandexistingbusinesscloseoveraperiodoftime.Inacompetitiveeconomy,businesschurncanhelptofacilitateeconomicgrowthasinefficientbusinessesclosedownandarereplacedbyefficientones. CAPITAL MARKETSThemarketwheredebtandequityinstruments,suchasstocksandbonds,areissued,boughtandsold.Institutionsandsomebusinessescanuseprimarycapitalmarketstoraisefundsbyissuingbondsandequity.
CHALLENGER BANKSSmallerandnewerbankswhichprovidecompetitiontothelargeestablishedbigbankinggroups.
COLLATERALAssetspledgedbythebusinessassecurityforaloan,sothatintheeventthattheborrowerdefaults,thecollateralmaybesold,withtheproceedsusedtosatisfyanyremainingdebtobligations
CORE BANK LENDING PRODUCTS Traditionalformsofexternalfinancewhichinclude:Bankloans,overdraftsandcreditcards.
CROWDFUNDINGFundraisingforbusinessesandprojects,oftenwheresmallamountsofmoneyarelentorinvestedbylargeamountsofindividuals.Debtcrowdfundingiswherelendersbuyasecurityinreturnforinterestandcapitalrepayments,equitycrowdfundingiswhereinvestorsbuysharesinearly-stagebusinessesandstart-upswiththeexpectationofcapitalgrowthanddividends.Thisisgenerallyfacilitatedbyonlineplatforms.
DEBT FUNDSAlimitedliabilityinvestmentvehiclewhichinvestsinbusinessesusingdebtinstruments.Debtfundsprovidebusinesseswithbespokedebtfinancethatisoftenfocusedonprovidingflexiblefinancefor‘eventdriven’,growthorientatedcompanies.
DISCOURAGEMENTBusinesseswhichwouldliketoborrowbutwhichdonotapplyforbankfinancebecausetheyeitherfeeltheywouldbeturneddown(‘indirectlydiscouraged’),orthey’vemadeinformalenquiriesbutnotproceededwiththeirapplicationbecausethebankseemedreluctanttolend(‘directlydiscouraged’).
EQUITYGAPAnestimatedrangeofequitydealsizeswhichreceiverelativelylittleinvestmentfromprivateinvestors,oftenduetostructuralissuesorfeaturesoftheeconomydisincentivisinginvestment.
EXTERNAL FINANCEMoneyobtainedfromlendersorinvestorsoutsideofthebusinessanditsdirectorswithanexpectationofafinancialreturn.
FINTECHFinanceprovidersorfinancialserviceproviderswhichusetechnologyand/orinnovativedeliveryandassessmentmodels.
GLOSSARY
80 BRITISH BUSINESS BANK
SMALL BUSINESS FINANCE MARKETS 2015/16 81
FLOWS OF FINANCETheGrossflowoffinanceisthemovementofmoneyfromlendersorinvestorstobusinessesorindividuals(businessesonlyinthisreport)overaperiodoftime.Thenetflowreferstothegrossflow,netofrepaymentsoverthesametimeperiod.Forinstancethegrossflowsofbankloansreferstothevalueofnewloansissuedoveracertainperiod,whereasthenetflowofbankloansisthevalueofnewloansminusthevalueofrepaymentsoverthesameperiod.Intheory,thenetflowofbanklendingoveracertainperiodshouldequalthechangeinthestockoverthesameperiod,excludinganyotheradjustments.
GROWTH CAPITALEquityinvestmentusedformoredeveloped,profitablecompanieslookingtoexpandorenter new markets.
HIRE PURCHASEWhenafinancecompanybuystheassetonbehalfofthecustomer,whothenpaysaninitialdeposit.Theremainingbalance,plusinterest,isthenpaidoveranagreedperiod.Duringthisperiod,ownershiprestswiththefinancecompany,whichiseffectivelyhiringuseoftheassettothecustomer.Oncethefinalpaymentismade,ownershiptransferstothecustomer.
INITIALPUBLICOFFERING(IPO)Thefirsttimeaprivateownedcompanysellsitssharespubliclyonalistedstockexchange.
INSTITUTIONAL INVESTMENTThesearetypicallylargeorganisationsthatmakeinvestmentsindebtorequityfundsaspartofawiderportfolioofinvestments.Forexample,investmentbanks,insurers,pensionfundsandhedgefunds.
INVOICE FINANCEWhenathirdpartyagreestobuyabusiness’sunpaidinvoicesforafee.Therearetwotypesofinvoicefinancing;FactoringandDiscounting.Factoringiswhenthe3rdpartygivesapercentageoftheinvoiceandoncetheinitialcustomerpaysout,therestispaidtothebusinesses.Thisincursfeeand/orinterestcharges.Discountingiswhenathirdpartylendsagainstthebusinessesunpaidinvoices.Thethirdpartythenrecievesthemoneyandallowsthebusinesstoborrowmore,uptoanagreedpercentageofthetotalunpaidinvoices.
LEASE FINANCING A contractual agreement where a leasingcompany(lessor)makesanassetitownsavailableforusebyanotherparty(alessee),foracertaintimeperiodinexchangeforpayment.
MANAGEMENTBUYOUT(MBO)The senior management ofacompanybuyingallofthecompany’soutstandingshares.Amanagementbuyoutgivesthemanagementcompletecontrolofthecompanyandallowsittooperatewithoutrecoursetoshareholders.
MARKET FAILUREAsituationwherebytheallocationofresourcesviathefreemarketisnotefficient.Failuresresultinalossofbothsocialandeconomicwelfarewhichcouldbecapturedifthemarketwasstructureddifferently.
MEZZANINEFINANCEAformofdebt-financefinancethatcombinesfeaturesofbothdebtandequityinasingleinstrument.Whilstthereisnosinglemodel,mezzaninedebtusuallycontainsthreedistinctfeatures:cashcoupon;payment-in-kindorPIK,whichisonlypaidatthematurityoftheloan;and,warrantsorashareintheprofitsorgrowthofthecompany.
MID-CAPBUSINESSMid-capbusinessesaregenerallylargerthanSMEsandcoverbusinesseswithanannualturnoverofbetween£25m-£500m,buthavenotyetreachedthesizeofthelargestbusinesses.TheUKGovernmentdefinesSMEsaccordingtothenumberofemployees(249employeesorless),andsothereissomepossibleoverlapbetweenthetwodefinitionsforsomebusinesses.
NON-AMORTISING Payments where only the interest on aloanortheminimumpaymentsaremet,meaningthevalueoftheoriginalamount(capital)doesnotdecreaseuntil the loan matures.
ONLINE PLATFORMSPeertoPeerlending,crowdfundingandinvoicefinancewebsiteswherethemajorityoftransactionstakeplaceonline.Thesefacilitatethematchingoflenders/investorsandborrowers.
PATIENT CAPITALProvisionoffundingtobusinessesthatarecapitalintensivewithlongproductleadtimes,typicallybutnotexclusivelyinlifesciences,cleantechnologiesandadvancedmanufacturingsectors.PatientcapitalfundingfollowsonfromproofofconceptandearlystageR&Dgrantfunding,andcoversbothdebtandequityfinance.
PEER-TO-PEERLENDING(P2P)Whereindividualslendmoneytootherindividualsorbusinessesinreturnforinterestandcapitalrepayments.Thisisoftenachievedviaanonlineplatformthatfacilitatesthematchingofdifferinglendersandborrowersviaanetworkofpeers.
PRINCIPAL-AGENTPROBLEMSSub-optimaloutcomeasaresultofasymmetricinformationandmisalignedincentivesbetweentheprincipalandthehiredagent.Forinstance,moralhazardandadverseselection.
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PRIVATEEQUITY(PE)Equityownershipinabusinessthatisnotpublicly-traded.Privateequityinvolvesinvestinginprivatelyheldcompaniesandmostofthetime,privateequityinvestorsinvestinstitutionalmoney.
PUBLICLYLISTEDCOMPANY(PLC)Acompanyissuingshares,whicharetradedontheopenmarket,throughastockexchange.Individualandinstitutionalshareholdersconstitutetheownersofapubliclylistedcompany,inproportiontotheamountofsharestheyownasapercentageofalloutstandingshares.
SECURITISATIONAfinancialtechnologywhichpoolsindividualilliquidassetsintoliquidfinancialsecuritiesthatcanbesoldon.Itisusedbylenderstoraisefundsandmanagetheirriskexposure.
SEED CAPITALEquityinvestmentgenerallyusedforR&D,andinitialconceptorproductdevelopment.Usuallybusinessesreceivingtheinvestmentarepre-revenue.
SME/SMALLER BUSINESSES Thesetermsareusedinterchangeablyinthisreport.Thistypicallyreferstobusinesseswhichhavelessthan250employees.Analternativedefinitionisbusinesseswhichhaveanannualturnoveroflessthan£25m. SOVEREIGN WEALTH FUNDSAstate-ownedinvestmentfund
START-UP,SCALE-UPANDSTAYAHEAD This relates to the BritishBusinessBanksegmentationofSMEs,basedonbroadfinancingrequirements.Start-upsolutionsfocusonenablingbusinessset-up,scale-uponbusinessgrowthandstayaheadschemesaregenerallyaimedatbusinessesaimingtoretainorenhancetheirposition.Whenconsideringinthecontextofanalysingavailablesurveydata,start-upsareclassifiedastradingfornomorethanfiveyears,scale-upandstayaheadbusinessesaredefinedasthosetradingformorethanfiveyears,withscale-upsreportinganambitiontogrow.
STOCK OF LENDING Thetotalvalueofoutstandingdebtatagivenpointintime.
TRADE CREDITAnagreementbetweenabuyerandseller,wherebythebuyerofthegoodsorservicedoesnotneedtopayforthosegoodsorservicesimmediatelybutcandelaythepaymentforanagreedperiodoftime.Thiscanhelpalleviatethecashflowofthebuyer.
VENTURECAPITAL(VC)Theprovisionoffundingtoastart-uporyoungbusinesswithhighgrowthpotential.Venturecapitaldifferstobusinessangelsinthattheyinvestotherpeople’smoney(mainlyinstitutions).Theseinvestmentsareveryrisky,andsoventurecapitalistsarelookingforhighfinancialreturns.
WORKING CAPITAL Moneyavailableforthedaytodaycashflowoperationsofacompany.
SMALL BUSINESS FINANCE MARKETS 2015/16 83
1. BritishBusinessBank(2014)‘SmallBusinessFinanceMarkets2014’http://british-business-bank.co.uk/research/small-business-finance-markets-2014/
2. Notethatchangesinstockandflownumbersdonotreconcileduetodifferencesinstatisticalreporting
3. Figuresforinvoicefinancingarenotincludedinthetableastheshareaccountedforbysmallerbusinessesisnotpreciselyquantifiedoverthetimeperiod.
4. Thereisnostandarddefinitionofasmallbusinessandanumberofdefinitionsexist.Forinstance,theUKgovernmentdefinesasmallerbusinessascomprisingoflessthan250employees.Analternativedefinitionthatisusedbysomefinancialinstitutionsisbasedonbusinesseshavinganannualturnoveroflessthan£25m.ThereisalsoaEuropeandefinitionofsmallbusinesses.
5. EnterpriseResearchCentre,GoldmanSachsandBritishBusinessBank(2015)‘UnlockingUKProductivity–InternationalisationandInnovationinSMEs’http://www.enterpriseresearch.ac.uk/wp-content/uploads/2015/11/Internationalisation-and-Innovation-Report-web-pages-.pdf
6. BIS(2014)‘BusinesspopulationestimatesfortheUKandRegions2015’https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/467443/bpe_2015_statistical_release.pdf
7. ONS(2015)‘InternationalComparisonsofProductivity-FirstEstimates,2014’http://www.ons.gov.uk/ons/dcp171778_416704.pdf
8. ONS(2016)‘EconomicReview,January2016’http://www.ons.gov.uk/ons/dcp171766_429935.pdf?format=hi-vis
9. OrganisationforEconomicCo-OperationandDevelopment(OECD)(2014)‘TheDynamicsofEmploymentGrowth:NewEvidencefrom18Countries’http://www.keepeek.com/Digital-Asset-Management/oecd/science-and-technology/the-dynamics-of-employment-growth_5jz417hj6hg6-en#page1
10. EnterpriseResearchCentre,GoldmanSachsandBritishBusinessBank(2015)‘UnlockingUKProductivity–InternationalisationandInnovationinSMEs’http://www.enterpriseresearch.ac.uk/wp-content/uploads/2015/11/Internationalisation-and-Innovation-Report-web-pages-.pdf
11. Itshouldbenotedthatthisanalysisappliesonlytocorelending,i.e.termloansandoverdraftsthatarecoveredindetailbytheSMEFinanceMonitorsurvey.SMEFinanceMonitorisconsideredtobethemostcomprehensivedatasetintheUKonwhich to base this analysis.
12. BDRCContinental(2015)‘SMEFinanceMonitorQ22015’http://bdrc-continental.com/wp-content/uploads/2015/09/BDRCContinental_SME_FM_Q2_2015-FINAL.pdf
13. BDRCContinental(2015)‘SMEFinanceMonitorQ22015’http://bdrc-continental.com/wp-content/uploads/2015/09/BDRCContinental_SME_FM_Q2_2015-FINAL.pdf
14. Insomecases,adecisiontowithdrawafacilitymaybeduetofactorsbeyondtheSME’scontrol,e.g.abank’sriskappetite.However,identifyingthesecaseswouldbedifficultandapprovalratessuggestlessofaproblemcomparedwithnewfacilities.
15. DefinitionofsuccessfulisconsistentwithSMEFinanceMonitor.Rejectedapplicants,forthepurposeofthisanalysis,areSMEsnotobtainingafacilityorobtainingfundingfromfamily/friendsorinapersonalname.Subsequently,averysmallpercentageofSMEsthatobtainfundingfromelsewhere(butnotfamily/inapersonalname)arenotincludedinthesuccessfulorrejecteddefinitions.
16. ProportionsaregrossedupusingBISpopulationestimates.
17. SMEstradingupto5yearsisusedforthestart-updefinition,becauseanecdotalevidencesuggeststhatfinanceprovidersoftenrequiredatleast2-3yearsofperformancedatainordertoassesscreditworthiness.SomeveryyoungSMEswillnotbeproducingthese,thereforeinformationasymmetriesarelikelytobeissuesfacedbybusinessestradingbetween2and5years.
18. EuropeanCommission,CommissionStaffWorkingDocument,Ex-AnteAssessmentoftheEUSMEInitiative,2013
19. RBSIndependentLendingReview,2013
20. BusinessBankanalysisexcludesSMEsdiscouragedfromapplyingforfinance.
21. Unlessotherwisestated,thefiguresquotedinthissectionarefromthe‘BritishBusinessBank2015BusinessFinancesurvey’,asurveyof1608smallerbusinesses.ThesurveywasundertakenbyBMGResearchandwasspecificallycommissionedbytheBritishBusinessBanktoseehowthemarkethaschangedsince2014,buildingonfromthepreviousSMEjourneysurveysundertakenin2012and2014.
22. SMEFinancemonitorQ32015showssince2012,theproportionofSMEsholdingover£10,000incredithasincreasedfrom16%to23%,andwithinthisgroup,useofexternalfinancehasdeclinedfrom51%to43%anduseofoverdraftsspecificallyfrom18%to14%.
23. AlthoughthisincreaseindemandisnotseenintheSMEFinanceMonitorsurvey,thismaybebecausetheSMEFinanceMonitorfocusesonbankfinanceapplications,whilsttheBusinessBankfinancesurveycoversalltypesofexternalfinanceincludinggrants.Therefore,therearelikelytobedifferencesbetweenthetwosurveys
24. Whilstthereissomeoverlapbetweenthesurveytimeperiods,furtheranalysisofthereasonforseekingfinanceovertimeconfirmsfinancesoughtinthelastyearwasmorelikelytobefundingworkingcapitalthanpreviously.
25. ONS(2015)‘BusinessInvestment,Quarter3(JulytoSept)2015ProvisionalResults’http://www.ons.gov.uk/ons/dcp171778_425505.pdf
26. BDRCContinental(2015)‘SMEFinanceMonitorQ32015’http://bdrc-continental.com/wp-content/uploads/2015/11/SME-charts-Q3-2015-FINAL.pdf
27. BankofEngland(2015)‘CreditConditionsReview2015Q3’http://www.bankofengland.co.uk/publications/Documents/creditconditionsreview/2015/ccrq315.pdf
28. BankofEngland(2015)‘CreditConditionsReview2015Q4’http://www.bankofengland.co.uk/publications/Documents/creditconditionsreview/2016/ccrq415.pdf
29. NotethatthereportingpopulationdiffersbetweenBankofEnglandandBBAreportingdata,hencenetlendingnumbersarenotdirectlycomparable.
30. BDRCContinental(2015)‘SMEFinanceMonitorQ22014’andBDRCContinental(2015)‘SMEFinanceMonitorQ32012’http://bdrc-continental.com/products/sme-finance-monitor/
31. BDRCContinental(2015)‘SMEFinanceMonitorQ32015’http://bdrc-continental.com/wp-content/uploads/2015/11/SME-charts-Q3-2015-FINAL.pdf
32. Thissectionfocusesonequityfinanceforprivatecompaniesratherthanpublicequityonmarkets.
33. BritishBusinessBank(2016)‘2015BusinessFinanceSurvey’
34. Beauhurstisaproviderofmarketdataonequityinvestment.Seehttp://about.beauhurst.com/formoreinformation.
35. Thesenumbersareconsistentwiththosepublishedininthe2014SmallerBusinessfinancemarketreportandequitytrackerreport.ThesenumbersdiffertothosepublishedbyBeauhurstthemselvesastheyarebasedonSMEsonly(atthetimeofinvestment),andalsoexcludeMBO/MBIandotherPrivateEquityinvestmentsthatarenotdirectlylinkedtobusinessgrowth.
36. Page71inBritishBusinessBank(2015)‘SmallBusinessInvestmentEquityTracker’containsadescriptiononhowthedifferentinvestmentstageclassificationswerematchedacrossthedifferentdataequitysources.http://british-business-bank.co.uk/wp-content/uploads/2015/03/050315-Equity-tracker-FINAL.pdf
37. Beauhurstdoesidentifyunpublisheddeals,butthereisnoconsistenttimeseriescurrentlyavailable.
38. Wright,HartandFu(2015)‘ANationofAngels:AssessingtheimpactofangelinvestingacrosstheUK’http://www.ukbusinessangelsassociation.org.uk/sites/default/files/media/files/erc_nation_of_angels_full_report.pdf
39. TheincreaseislikelytobeevenlargerasnewinvestmentsbecomeidentifiedbyBeauhurst.
40. http://www.immunocore.com/news/2015/07/immunocore-secures-320-million-205-million-in-europes-largest-private-life-sciences-financing
41. Unicornbusinessesaredefinedasventure-backedprivatetechnologycompaniesvaluedatover$1billion.
42. CBInsights(2015)‘TheUnicornList’(accessed08/12/2015/)https://www.cbinsights.com/research-unicorn-companies
43. EnterpriseResearchCentre(2015)‘GrowthDashboardJune2015’http://www.enterpriseresearch.ac.uk/wp-content/uploads/2015/06/2015-UK-Growth-Dashboard-Report.pdf
44. ICAEW/GrantThornton(2015)‘UKBusinessConfidenceMonitorQ42015’http://www.icaew.com/~/media/corporate/files/about%20icaew/what%20we%20do/business%20confidence%20monitor/2015/bcm%20q4%202015.ashx
45. Thenumberofbirthsasaproportionofactiveenterprises.
46. EnterpriseResearchCentre(2014)‘Movingonfromthe‘Vital6%’’http://www.enterpriseresearch.ac.uk/wp-content/uploads/2014/02/ERC-Insight-No_3.pdf
47. EnterpriseResearchCentre,GoldmanSachsandBritishBusinessBank(2015)‘UnlockingUKProductivity–InternationalisationandInnovationinSMEs’http://www.enterpriseresearch.ac.uk/wp-content/uploads/2015/11/Internationalisation-and-Innovation-Report-web-pages-.pdf
48. EnterpriseResearchCentre,GoldmanSachsandBritishBusinessBank(2015)‘UnlockingUKProductivity–InternationalisationandInnovationinSMEs’http://www.enterpriseresearch.ac.uk/wp-content/uploads/2015/11/Internationalisation-and-Innovation-Report-web-pages-.pdf.Note:excludesJapan.
49. Earlystageentrepreneurswhohavecreatedmorethantenjobsandexpectmorethan50%growthinjobsinthenextfiveyears.
50. EnterpriseResearchCentre(2015)‘GrowthDashboardJune2015’http://www.enterpriseresearch.ac.uk/wp-content/uploads/2014/06/ERC-Conference-LEP-Growth-Dashboard-final.pdf
51. BIS(2015)‘SmallBusinessSurvey2014:SMEEmployers’https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414963/bis-15-151-small-business-survey-2014-sme-employers_v1.pdf
52. BDRC(2015)‘SMEFinanceMonitorQ32015’http://bdrc-continental.com/wp-content/uploads/2015/11/SME-charts-Q3-2015-FINAL.pdf
53. EnterpriseResearchCentre(2015)‘ContributiontoJobCreationbyHighGrowthSMEs’http://www.enterpriseresearch.ac.uk/wp-content/uploads/2015/07/ERC-HGF-Pre-Budget-Insight-Final.pdf
54. Deloitte(2015)‘DeloitteAlternativeLenderDealTrackerQ32015’http://www2.deloitte.com/uk/en/pages/financial-advisory/articles/deloitte-alternative-lender-deal-tracker.html
55. BritishBusinessBank(2015)‘AnalysisoftheUKSmallerBusinessGrowthLoansMarket’http://british-business-bank.co.uk/wp-content/uploads/2015/03/Growth-loan-research-report-FINAL-VERSION.pdf
56. Preqin(2015)‘PreqinQuarterlyUpdatePrivateDebt’https://www.preqin.com/docs/quarterly/pd/Preqin-Quarterly-Private-Debt-Update-Q3-2015.pdf
84 BRITISH BUSINESS BANK
ENDNOTES
57. Nodatapointsavailablefor2009.
58. BNYMellonAssetManagement(2011)‘InvestinginDebt:OpportunitiesinLeveragedLoans’http://www.alcentra.com/news/research/investing-in-debt-opportunities-in-secured-bank-loans.pdf
59. Nodatapointsavailablefor2009
60. TheUKGovernmentdefinesSMEsaccordingtothenumberofemployees(249employeesorless),andsothereissomepossibleoverlapbetweenthetwodefinitionsforsomebusinesses.
61. BIS(2014)‘MSBDemographics’https://www.gov.uk/government/statistics/msb-demographics
62. ForexampleCBI.
63. 49%ofmid-capbusinessesexpecttradingconditionswillimproveinthenext12monthscomparedto14%expectingittobeworse(givinganetbalanceof35%).Incomparison,44%ofSMEsexpectconditionstoimprovebut11%expectconditionstoworsengivingasimilarnetbalanceof33%.
64. BIS(2010)‘Resultsfromthe2010FinanceSurveyofmid-capBusinesses’https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/32248/10-p108-results-2010-finance-survey-mid-cap-businesses.pdf
65. BIS(2010)‘Resultsfromthe2010FinanceSurveyofmid-capBusinesses’https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/32248/10-p108-results-2010-finance-survey-mid-cap-businesses.pdf
66. SeeEnterpriseResearchCentre,GoldmanSachsandBritishBusinessBank(2015)‘UnlockingUKProductivity–InternationalisationandInnovationinSMEs’andUKTI(2013)‘BringingHometheBenefits:HowtoGrowThroughExporting’
67. Youngfirms:thosetradinglessthan3years.Growingfirms:thosethathadincreasedemployeenumbersorturnoverbyatleast5percentinthelastyear.Dataavailableat:https://www.gov.uk/government/collections/small-business-survey-reports
68. BDRCContinental(2015)‘SMEFinanceMonitorQ32015’http://bdrc-continental.com/wp-content/uploads/2015/11/SME-charts-Q3-2015-FINAL.pdf
69. Eurostat(2015)‘InternationalTradebyEnterpriseCharacteristics’http://ec.europa.eu/eurostat/statistics-explained/index.php?oldid=72936
70. EnterpriseResearchCentre,GoldmanSachsandBritishBusinessBank(2015)‘UnlockingUKProductivity–InternationalisationandInnovationinSMEs’http://www.enterpriseresearch.ac.uk/wp-content/uploads/2015/11/Internationalisation-and-Innovation-Report-web-pages-.pdf
71. BritishBusinessBank(2016)‘BusinessFinanceSurvey’
72. Thissectionfocusesonequityfinanceforprivatecompaniesratherthanpublicequityonmarkets.
73. Immunocore.Seehttp://www.immunocore.com/news/2015/07/immunocore-secures-320-million-205-million-in-europes-largest-private-life-sciences-financing
74. ItisimportanttonotethatthisanalysisexcludesMBO/MBItransactionsandonlycoverinvestmentsforcompaniesthataredefinedasanSMEbasedontheECdefinitionoflessthan250employeesandeitherturnoveroflessthan€50morbalancesheettotaloflessthan€43m
75. ThenumberofEuropeanVCbackedIPOshasincreasedby289%between2013Q1-Q3and2015Q1-3,whilsttradesaleshaveincreasedby17%.DowJonesVentureSource(2015)‘VentureCapitalReportEurope3Q2015’http://images.dowjones.com/wp-content/uploads/sites/43/2015/10/26092335/Dow-Jones-3Q15-Europe-VentureSource-Report-final.pdf
76. BVCA(2015)‘PerformanceMeasurementSurvey2014’http://www.bvca.co.uk/Portals/0/library/documents/Performance%20Measurement%20Survey/2014%20Performance%20Measurement%20Survey.pdf
77. BVCAdatashowstheamountoffundingraisedforVCin2014(£288m)isslightlyhigherthanthatraisedin2013(£259m),althoughlessthan2012levels(£428).
78. SeeBusinessBank(2015)‘EquityResearchReport:ReviewofEquityInvestmentinSmallBusiness’http://british-business-bank.co.uk/wp-content/uploads/2015/03/050315-Equity-report-FINAL.pdf
79. QualitativeresearchfortheBIS(2013)‘SMEJourneyTowardsRaisingExternalFinance’surveyrevealed‘mostrespondentshaveconcernsregardingequityfinance,astheydidnotwanttogiveupcontroloftheirbusinesstothirdparties’.
80. BusinessBank(2015)‘SmallBusinessInvestment:EquityTracker’http://british-business-bank.co.uk/wp-content/uploads/2015/03/050315-Equity-tracker-FINAL.pdf
81. HMRC(2015)‘EnterpriseInvestmentSchemeandSeedEnterpriseInvestmentSchemeStatistics:October2015’https://www.gov.uk/government/statistics/enterprise-investment-scheme-and-seed-enterprise-investment-scheme-statistics-october-2015
82. Reliefisavailableat50%ofthecostoftheshares,onamaximumannualinvestmentof£100,000.Companiesmusthaveraisednomorethan£150,000intotalfromSEIS.
83. HMRC(2015)‘EnterpriseInvestmentSchemeandSeedEnterpriseInvestmentSchemeStatistics:October2015’https://www.gov.uk/government/statistics/enterprise-investment-scheme-and-seed-enterprise-investment-scheme-statistics-october-2015
84. Currentlyincometaxreliefof30%isavailabletoinvestorssubscribingtonewVCTsharesandthereistax-freedividends
85. HMRC(2015)‘VentureCapitalTrusts:numberoftrustsandamountoffundsraised(September2015)’https://www.gov.uk/government/statistics/venture-capital-trusts-number-of-trusts-and-amount-of-funds-raised
86. Parliament(2015)‘FinanceAct2015:ChapterII’http://www.legislation.gov.uk/ukpga/2015/11/pdfs/ukpga_20150011_en.pdf
87. BritishBusinessBank(2016)‘BusinessFinanceSurvey’
88. EuropeanCommission(2015)‘Howrevisedbankcapitalrequirementshaveaffectedlending:Commissionconsults’http://europa.eu/rapid/press-release_IP-15-5347_en.htm?locale=EN
89. Thismarketanalysishasincludedinterviewswith35stakeholdersincludingfundmanagers,patientcapitalproviders,lifesciencecompaniesandbusinessrepresentativeorganisations.
90. Forthepurposesoftheanalysis,asuccessfulexitisdefinedasbeingeitheratradesale,IPOorsecondarysaletoanotherfund.
91. Thereissomedoublecountingbetweenangels,corporatesandVCdealsduetosyndicateddealsinvolvingcombinationofdifferentinvestors.
92. BritishBusinessBankanalysisofBeauhurst
93. BritishBusinessBankanalysisofPreqin
94. WhilstVCTshavealargeimpactonthemarket97VCTfundsinexistence,ofwhich66haveraised£440millionfundingin2013/14asubstantialproportionoftheinvestmenthasgonetolowerrisksectors,andsofallsoutofthebroaddefinitionofpatientcapitalused.
95. Woodford(2015)‘WoodfordPatientCapitalTrustPLCFactsheet’https://woodfordfunds.com/our-funds/wpct/trust-facts/
96. ISISInnovation(2015)‘AnnualReport2015’http://www.isis-innovation.com/wp-content/uploads/2014/08/Isis-Annual-Report-2015-30Sep15-.pdf
97. MerciaTechnologies(2015)‘AnnualReport’http://asp-gb.secure-zone.net/v2/indexPop.jsp?id=666/3627/10334&lng=en
98. Someofthisfundingisgoingintootherpatientcapitalproviders,socareisneededtoavoiddoublecounting.
99. TheSmallBusinessFinanceMarketsReport2014providesmoredetailedcoverageofassetfinance,providingdefinitionsforthedifferenttypesofassetfinanceandmoredetaileddiscussionoftherationaleformarketfailuresinthatsector.
100. Leaseurope(2015)‘TheUseofLeasingAmongstEuropeanSMEs,areportpreparedforLeaseuropebyOxfordEconomics2015’http://www.leaseurope.org/Leaseurope%20SME%20Report%20Key%20Findings.pdf
101. SeealsoSlotty(2009)‘Financialconstraintsandthedecisiontolease:EvidencefromGermanSME’https://ideas.repec.org/p/fra/franaf/205.html
102. BritishBusinessBank(2016)‘2015BusinessFinanceSurvey’
103. BDRCContinental(2015)‘SMEFinanceMonitorQ22015’http://bdrc-continental.com/wp-content/uploads/2015/09/BDRCContinental_SME_FM_Q2_2015-FINAL.pdf
104. AltFiDatadefinitionscanbeaccessedontheirwebsite:http://www.altfi.com/data/definitions.
105. EstimatefromAltFiData.
106. Q2andQ32015
107. Thereviewwaslaunchedon6thNovember2014andisscheduledtoconcludebyMay2016.ItalsoincludespersonalcurrentaccountcustomersaswellasSMEs.
108. CMA(2015)‘RetailBankingMarketInvestigation:Provisional
109. ThisisaBusinessBankinterpretation,notafindingoftheCMAprovisionalfindings
110. BritishBusinessBank(2016)‘2015BusinessFinanceSurvey’
111. CMA(2015)‘Retailbankingmarketinvestigation:provisionalfindingsreport–Appendix6’https://assets.digital.cabinet-office.gov.uk/media/5630c4eee5274a59dc000004/Appendix_6.pdf
112. KPMG(2015)‘TheGameChangers:ChallengerBankingResults’https://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/Market%20Sector/Financial%20Services/challenger-banking-report.pdf
113. ClydesdaleBank(2015)‘FullyearResults’http://www.cbonline.co.uk/media/results-financial-information/
114. Aldemore(2015)‘AldermoreGroupPLCAnnualreportandaccounts2014’http://www.investors.aldermore.co.uk/news-and-results/results-reports-presentations/annual-report-2014
115. Shawbrook(2015)‘AnnualReportandAccounts’https://www.shawbrook.co.uk/media/180628/Shawbrook-RA2014-Web.pdf
116. Deloitte(2015)‘TheimpactofinnovationintheUKretailbankingmarket:AfinalreportfortheCompetitionandMarketsAuthority,30thJuly2015’https://assets.digital.cabinet-office.gov.uk/media/55ba0461ed915d155c000013/The_impact_of_innovation_in_the_UK_retail_banking_market__2_.pdf
117. SeeforexampletheFinancialConductAuthoritiesProjectInnovate:https://innovate.fca.org.uk/
118. SeeBankofEnglandwebsiteformoreinformationontheFundingforLendingScheme:http://www.bankofengland.co.uk/markets/Pages/FLS/default.aspx
SMALL BUSINESS FINANCE MARKETS 2015/16 85
ThispaperwasdevelopedbytheBritishBusinessBankEconomicsTeamincludingMattAdey,SarahBingham,DanvanderSchans,AsadGhaniandJakeHorwood.Wewouldliketothankallwhoprovidedprovidedinputandcommentsonthereport.
ACKNOWLEDGEMENTS
86 BRITISH BUSINESS BANK
SMALL BUSINESS FINANCE MARKETS 2015/16 87
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