SMALL BUSINESS FINANCE MARKETS - British Business Bank · Business Bank’s previous Small Business Finance Markets report last year. However, our analysis finds that structural problems

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


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.


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.


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.


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.


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.


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.


4. Unintended consequences of regulation

Theintroductionofregulationsorothergovernmentinterventionsmayhaveunintendedconsequencesleadingtoinefficientoutcomesinmarkets.Forexample,whilstregulationsdesignedtoimprovefinancialstabilityarerequiredtheymayraisethecostoffinanceresultinginlessuseoffinancebysmallerbusinesses.

Itisimportanttorecognisethatinmanycasesbusinessesinabilitytoobtainfinancedoesnotrepresentaprobleminthe market.

1.1

AGGREGATE FLOWS OF FINANCE TO SMALLER BUSINESSES ARE ENCOURAGING


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}


FIG 1.1


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.


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

NO

R

BRA

% of start-ups with 1-9 employees that grow to 10+ within 3 years

%

10

5

20

15

30

25

40

35

45

FIN

ITA

NO

R

BEL

CAN

SWE

USA

AUT

NZL

NLD

LUX

UK

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



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.


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.


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


20

10

40

30

60

70

80

90

100

%

50

Population Applications Successful Unsuccessful

Scale-up

Stay ahead

Start-up

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


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


Volume: Value:

Stay ahead 18%

Scale-up 30%

Start-up 52%

Stay ahead 41%

Scale-up 38%

Start-up 21%


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


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.


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


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.


MAIN REASON FOR SEEKING FINANCE (LAST OCCASION IN LAST THREE YEARS)

FIG 1.9

Source: British Business Bank Finance Survey

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30

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10

60

%

50

Working capital/

cashflow

Purchasefixed assets

Startbusiness

Beingproactive

Expansion

Refinancing

Other

2012

2014

2015

TYPE OF FINANCE SOUGHT (LAST OCCASION IN LAST THREE YEARS)Source: British Business Bank Finance Survey

10

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5

30

35

%

25

Bankoverdraft

Credit cardfinance

Family/

colleague loan

Bank loan/m

ortgage

Tradefinance

Assetfinance

Equityfinance

P2plending

Leasing/HP

Grants

2012

2014

2015

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


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


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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FIG 1.12

Source: BBA SME Statistics: https://www.bba.org.uk/news/statistics/sme-statistics/

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Notes: Loansexcludeoverdrafts.CommercialrealestatesectorreferstoSICcode10ainBBAstatistics:Buying,selling&rentingownorleasedrealestate


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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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

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• Thevolumeofequityinvestmentis increasing in 2015 with increases seeninallstagesoffunding,butisparticulardrivenbyincreasedventurestagefinancing

• TheUKperformsrelativelywellintermsofVCactivitycomparedtorestofEurope,significantlylagsbehindthe US


• 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

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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.

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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

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2014 VENTURE CAPITAL INVESTMENTS AS A PROPORTION OF GDP

FIG 1.19

Source: Invest Europe, NVCA, World Bank

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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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1.7

REGIONAL PERSPECTIVE

• New business births are concentratedinLondon,withvariationbetweenotherregionsrelativelylessmarked

• TheregionalshareofhighgrowthbusinessesshowslittlevariationoutsideofLondonbuttherearewidevariationsinbusinessperformanceinsub-regionalareas

• Theflowofbanklendingtosmallerbusinesseslargelyfollowsthebackgroundshareofbusinesses

• PrivateEquityfinanceisconcentratedinLondonandSouthEastbutisunder-representedinsome regions


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


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

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PROPORTION OF BANK LENDING APPROVED BY REGION

FIG 1.22

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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.


2.1

TRENDS IN START-UPS


• 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


BIRTHS OF NEW ENTERPRISES PER 10,000 POPULATIONFIG 2.1

Source: BBB analysis, ONS Business Demography Data

40

20

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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

%

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2009 2010 2011 2012 2013 2014

Services

Construction

Production


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


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.


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


20

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30

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%

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


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



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


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10

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%

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


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New loan New overdraft

Application in value £000

Scale-up

Stay ahead

Start-up


earlystagebusinessesisalsorecognised,particularlywhereachievinggrowthambitionscanbeparticularlybeneficialforUKproductivity.Atthisstage,supportingtheprogressionofyoungbusinessesisofkeyimportance.ManyoftheproductsofferedbytheBritishBusinessBankareavailabletothesebusinessesfromtheEnterpriseFinanceGuaranteetoequityschemesandotherinitiativessuchasHelpToGrowaimedatboostingthesupplyoffinancetosmallerbusinesses.


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

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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


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

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2011 2012 2013 2014

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Angel Network

Private investor

Other

Private equity

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£50

£100

£150

£200

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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).



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

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45

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%

25

All SME employers Micro Small Medium

SBS 2012

SBS 2014

SBS 2010

SBS 2007/08

• Manybusinessesexperiencegrowthandthisisincreasingovertimeastheeconomicrecoveryissustained

• Increasednumbersofbusinessesarenowaimingtogrowcomparedto2014,withsomeexternalfinancebeingusedtofundit

• Althoughonlyasmallproportionofbusinessesarehighgrowthbusinesses,theyareveryimportantforjobcreation


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


• 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.


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


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


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


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


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



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


5

15

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%

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


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.


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


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


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.


APPROACH TO FINANCING EXPORTS

FIG 3.14


20

30

40

10

60

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80

%

50

Generalbusinesscashflow

Extendedoverdraft/credit line

Businesscreditcard

Personalcreditcard

Externalloan

Internalfinance

Otherfinance

Nofinanceneeded


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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Deals

NUMBERS OF VENTURE STAGE DEALS BY DEAL SIZE

FIG 3.15

Source: Beauhurst

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Number

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Up to £1m £1m to £5m £5m to £10m Above £10m

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2011



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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20142012

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Total ammount raised from all companies raising funding (£m)

Companies raising funds for first time

• 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


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InvestmentsDeals

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


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.


• Averageloantenorforbankloansis3-4yearsbutthemajorityofbusinessesobtainloansattheloantenortheyrequire

• PatientCapitalisatypeoflong-termfinancethatfundscapitalintensivebusinessesdevelopingproductsorprocesseswithlongleadtimes

• PatientCapitalcomesfromavarietyofdifferentfundingsourcesincludingangels,VentureCapitalfunds,listedinvestmentvehicles,corporateinvestorsandpublicequitymarkets.

• VentureCapitalisanimportantsourceofpatientcapital,buttheUKmarketislessdevelopedthanthe US

• Therearenumberofestablishedlistedinvestmentvehiclesprovidingpatientcapital,togetherwithrecentnewfundraisingsuggestinganincreaseinthesupplyofpatientcapitaloverthenextfewyears

• PublicequitymarketshaveopenedupwithincreasednumbersofInitialPublicOfferingsin2014,althoughvolumesareslowingdownin2015


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


No – shorter period 8%

Don’t know – 10%

No – longer period 8%

Yes – for period requested 75%

No – shorter period 0%

Don’t know – 3%

No – longer period 3%

Yes – for period requested 94%

SME Mid-cap

SME AND MID-CAP LOAN TENOR SOUGHT

FIG 3.22


Longer

5-7 yrs

20%0% 40% 60% 80% 100%

3-4 yrs

1-2 yrs

One yror less

Don’t know

Mid-cap bank loans/mortgages

SME bank loans/mortgages

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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All tech Non tech Cleantech

Health Pharma IT



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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Uk companies

CHAPTER FOUR FINANCE PRODUCTS AND DIVERSITY OF SUPPLY

Awell-functioningfinancemarketforsmallerbusinessesrequiresacompetitivemarketintheprovisionoffinance.Thisrequiresnotonlyarangeofavailableproductsthatsuitthedifferingfinanceneedsofsmallbusinessesbutalsoadiversityofsourcesofsupplytoensurethatthereisacompetitivemarket.IncreasingthediversityofsupplyoffinanceforsmallbusinessesisakeystrategicobjectiveoftheBusinessBank.

Chapter4considersuseoffinancethatisusedwidelyacrossalltheBusinessBankmarketsegmentssuchasassetfinance(section4.1)andalternativefinance,inparticularpeertopeerlenders(section4.2).

Thischapterthereforesummarisesthelatestevidenceofthediversityofdebtfinancesupply,drawinginparticularontheevidencegatheredandsummarisedbytheCompetition&MarketsAuthority.Section4.4thenlooksinmoredetailatthedevelopmentofchallengerbanks.



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


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

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5

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2008

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2012

Hire Purchase

Leasing

Total

Other Finance

SME Asset Finance

£ Bi

llion

Notes: SMEassetfinancebefore2012isassumedtobe60%ofthetotalsizeoftheassetfinancemarket;*estimatesbasedonpublishedfiguresfor12monthstoNovember2015.


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.


• Approximately£2.8bngrosslendingfacilitatedbyonlineplatformsin2015

• P2Pbusinesslendinghasthegreatestshareofgrossflowsoffinanceataround£1.3bn

• P2PFAestimate£90mofnetlendingflowsfacilitatedbymemberstoSMEsinQ32015,excludingpropertylending

• OnlineplatformscanplayanincreasinglyimportantroleindiversificationofSMEfinancemarkets

• FinancefacilitatedthroughUKonlineplatformsoutstripsamountsrecordedforotherEuropeancountries


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,

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1.50

3.50

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2010 Q2

2010 Q3

2010 Q4

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2011 Q2

2011 Q3

2011 Q4

2012 Q1

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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

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250

Q42014

Q12015

Q22015

Q32015

Net lending flows secured on real estate

Net lending flows to SMEs

Net lending flows to individuals



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.


• Latestresearchfindsthatthemarketfordebtfinanceprovisiontosmallerbusinessesremainsconcentrated

• Theprovisionofgeneralpurposebusinessloans to smaller businesses remains concentratedinthefourlargestproviders

• Assetfinanceshowsgreaterdiversificationthangeneralbusinesslendingbutconcentrationremainssignificant


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.


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


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


• Challengerbankshaveadoptedawidevarietyofbusinessmodels

• Financialtechnologyplaysanimportantroleinthedevelopmentofchallengerbanks

• Financialregulationandothergovernmentinterventionsmayimpactonthegrowthofchallenger banks


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.


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



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.


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.


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


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


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/


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


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


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


69. Eurostat(2015)‘InternationalTradebyEnterpriseCharacteristics’http://ec.europa.eu/eurostat/statistics-explained/index.php?oldid=72936


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



104. AltFiDatadefinitionscanbeaccessedontheirwebsite:http://www.altfi.com/data/definitions.

105. EstimatefromAltFiData.

106. Q2andQ32015

107. Thereviewwaslaunchedon6thNovember2014andisscheduledtoconcludebyMay2016.ItalsoincludespersonalcurrentaccountcustomersaswellasSMEs.

108. CMA(2015)‘RetailBankingMarketInvestigation:Provisional

109. ThisisaBusinessBankinterpretation,notafindingoftheCMAprovisionalfindings


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


ThispaperwasdevelopedbytheBritishBusinessBankEconomicsTeamincludingMattAdey,SarahBingham,DanvanderSchans,AsadGhaniandJakeHorwood.Wewouldliketothankallwhoprovidedprovidedinputandcommentsonthereport.

ACKNOWLEDGEMENTS



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BritishBusinessBankplcisapubliclimitedcompanyregisteredinEnglandandWalesregistrationnumber08616013,registeredofficeatFoundryHouse,3Millsands,Sheffield,S38NH.AstheholdingcompanyofthegroupoperatingunderthetradingnameofBritishBusinessBank,itisadevelopmentbankwhollyownedbyHMGovernmentandisnotauthorisedorregulatedbythePrudentialRegulationAuthority(PRA)ortheFinancialConductAuthority(FCA).BritishBusinessBankoperatesunderitsowntradingnamethroughanumberofsubsidiaries,oneofwhichisauthorisedandregulatedbytheFCA.BritishBusinessFinanceLtd(registrationnumber09091928),BritishBusinessBankInvestmentsLtd(registrationnumber09091930)andBritishBusinessFinancialServicesLtd(registrationnumber09174621)arewhollyownedsubsidiariesofBritishBusinessBankplc.ThesecompaniesareallregisteredinEnglandandWales,withtheirregisteredofficeatFoundryHouse,3Millsands,Sheffield,S38NH.TheyarenotauthorisedorregulatedbythePRAorFCA.CapitalforEnterpriseFundManagersLimitedisawhollyownedsubsidiaryofBritishBusinessBankplc,registeredinEnglandandWales,registrationnumber06826072,registeredofficeatFoundryHouse,3Millsands,Sheffield,S38NH.ItisauthorisedandregulatedbytheFCA(FRN:496977).BritishBusinessBankplcanditssubsidiaryentitiesarenotbankinginstitutionsanddonotoperateassuch.AcompletelegalstructurechartforBritishBusinessBankplcanditssubsidiariescanbefoundatwww.british-business-bank.co.uk.

©BRITISHBUSINESSBANKPLC(FEBRUARY2016)THISPUBLICATIONISAVAILABLEFROMBRITISH-BUSINESS-BANK.CO.UK.

ANYENQUIRIESREGARDINGTHISPUBLICATIONSHOULDBESENTTO:BRITISH BUSINESS BANK PLCFOUNDRY HOUSE3 MILLSANDS SHEFFIELD S3 8NH

www.british-business-bank.co.uk British Business Bank

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