The CBI report, Slice of the Pie, highlights the UK’s overreliance on traditional debt finance and the serious under-utilisation of equity finance. Half of all small and medium-sized firms (SMEs) rely on bank loans, while 36% use overdrafts. By comparison just 3% use equity finance – this lags behind the European average of 7%. That’s despite the majority of growing businesses which have used equity finance reporting that it had a positive impact on their company (66%), and 4 out of 5 saying that they would use it again to fund business growth. 81% would recommend equity finance to other companies.
The main concern that businesses have over using equity finance is a fear of losing ownership (46%). A quarter of respondents said that they were concerned about a loss of decision making power. These worries are tied to a lack of awareness of the various different types of equity finance – while small and medium-sized firms are aware of venture capital and private equity, just half said that they were aware of public equity.
Many growing businesses also lack the capabilities to engage with equity providers because the negotiation of terms can be considerably more complicated than with debt finance, requiring financial expertise. That’s particularly problematic considering that only a quarter of them have a qualified financial manager and the vast majority (84%) do not consult external advisers before making finance decisions.
Encouraging more long-term investment
Growing businesses need ‘patient capital’ – finance that can be invested for five years or more – but CBI research shows that most equity finance deals are done on a medium-term basis. Half of business angel, venture capital and private equity investments were made for less than five years.
The CBI is calling on the Government to:
- Pilot a simple tax incentive to encourage retail investors to hold shares on a longer-term basis.
- Support the British Business Bank to develop a mezzanine finance option – a hybrid convertible debt to equity finance product – to help ease businesses concerns about losing control.
Other CBI recommendations to boost the take-up of equity finance include:
- The Government should make the Seed Enterprise Investment Scheme (SEIS) permanent to provide
- Investors and businesses with stability and surety on the tax landscape.
- The Government should consider introducing an incentive for businesses investing in their supply chain to boost the supply of corporate venturing.
- Better promotion of schemes like Business Finance Partnership – bringing all Government initiatives under the Business Bank.
Better financial planning – CBI launches new online tool
Most small and medium-sized firms are time-pressed and 57% spend less than an hour researching finance providers. Whereas the most successful growing businesses develop a plan to review their finance needs on a yearly cycle, including maintaining regular contact with finance providers. The CBI is launching a new online – FindmyFinance – tool to help get firms started by analysing what type of finance is best for them.
A link to the CBI equity report, Slice of Pie, is here – it includes case studies of companies which have used equity finance.