The UK Small Business Enterprise Financing Market Article
In July 2010, Financial Secretary to the Treasury, Mark Hoban MP, at the Lord Mayor’s Private Equity and Venture Capital Dinner expressed adamantly the importance of Private Equity as we look to drive recovery with business at the help and capital expertise needed to help businesses to grow.
UK Enterprise Statistics:
- There is an estimated 4.8 million1 private sector enterprises in the UK at the start of 2009, an increase of 51,0002 (1.1 per cent) since the start of 2008
- Turnover in SMEs is estimated at £1,589 billion, £88 billion (5.8 per cent) higher than 2008.
Investing in Innovating UK Enterprises:
The UK is known for innovating firms, especially in dire times where innovation is required, both finding new opportunities and making the within existing firms. It is conclusive that innovating firms are less likely to fail than non-innovating firms. That firms that innovate in product and process are more likely to be acquired as a transfer mechanism for innovation into larger firms, and this may be an important exit route for innovative entrepreneurs and their investors by capitalizing on their past success and innovations different to the industry by selling out their equity positions. (Cosh and Hughes 1994).
Planned future innovation is easily derived by size, past innovation, competitors from overseas, where a firms survival is based on product and process innovations. The ability for SME’s to access and pursue such innovations requires the access to capital in already cash flow restrictive environments.
A Switch From Banking and Asset Finance to Equity Investments
The FLA reported in 2010 all funding supplied by their members fell by 2% from £20.1bn to £19.6bn, a half a billion shortfall for the market which is increasing in demand but without the funds to maintain growth of the estimated 750,000 SME’s using equipment leasing or hire purchase, asset finance of debt-financed business investments. Of which exactly 250,000 new agreements each year occur, one in every three small businesses with any external borrowing uses asset finance. With less funds spent in the downturn, there are less assets to grow a firm or cash flow with.
There is a need to switch the requirement to just Asset financing and Bank Credit to Equity Capital, and SME’s within the UK looking for raising capital or alternative debt mechanisms. One such mechanism as a listed company is to put up shares in the company as collateral based on their liquid market value as a floatation on the Frankfurt Stock Exchange. This gives more assets and more leverage for raising the amount of capital needed.
Direct Equity placements in the firm by way of a floatation or private placement is the other method. Shareholders in a floatation may not require as much control. Because of the lack of knowledge in structuring private placement transactions and floatations by the management of SME’s, rarely do they manage to utilize private equity, estimated 1-2%. However the recent changes allowing higher investment, more investors, and deregulation of the requirement of a prospectus up to 5 million euro opens the doors and increases the value to SME’s of learning how to take on equity and raise money within the UK and EU.
Large firms such as Lombard’s, one of the largest asset financers in the UK with a 20% share in the market is one of the few who remains committed to funding SMEs and are open for business in this sector.
However, SME’s should ensure their ability to pay down commitments made to such financers by listing their company or selling equity in their firm to have cash flow in replacement for lack of cashflow to cover capital investments.
Thus there is a growing requirement for SME’s to reveal their opportunities to investors within the UK, and for investors to look home for growth and innovation. Invest in the UK, invest in Innovation, look for the new opportunities being incorporated in the UK.
As Mark Hoban MP recognized in his speech, “In the years preceding the financial crisis the economy had become too dependent on bank lending. We need greater diversity in the sources of business funding in the future to avoid repeating the mistakes of the past. A key part of this will be broadening the use of equity finance, particularly among smaller businesses with growth potential. Currently, only 1 to 2 per cent of small businesses use equity finance at any one time.”
The UK is ideal for incorporating a firm, and finding capital, where the UK hosts 60% of Europe’s Private Equity and Venture Capital industry. £5bn in 2011 has been earmarked by over 100 private equity executives to invest.
Private Equity has a broad reach from institutions to individuals that can drive the growth of your businesses, your investments, your economy.
The private equity sector utilizing private placements and listings on the Frankfurt Stock Exchange can make up for the missing market in equity finance called the “Equity Gap” in the range of £250,000 for start-ups, to £10 million for growth businesses.
But there are now a number of public/private funds that have been created to fill this gap as well and to incentivize investment here. A requirement to be publicly listed is sometimes put in place, however, it also gives a competitive edge of private less liquid firms in the competitive environment of capital raising. The alternative of listing on the Frankfurt Stock Exchange to access capital through foreign and EU public markets is in popular demand to drive growth and innovation within the UK.
Many small businesses still have an aversion to using equity, whether through a misunderstanding of what is involved or a lack of knowledge about how to seek it.
The changes in regulations have created an opportunity for firms who are willing to seek investment as small businesses to meet that 150 investor or 5 million euro threshold allowed without a prospectus.
Change In Regulations Make It Easier To Raise Capital
Recent regulation changes spearheaded by Mark Hoban, Financial Secretary to the Treasury, have eased the ability for small businesses to raise equity finance from this month onward.
Small and Medium Enterprises (SMEs) will be able to access up to £4.37m before a prospectus – a costly compliance procedure – is triggered.
Hoban said: “I’m delighted to announce that the UK is taking the lead in Europe by introducing these deregulatory measures early, saving UK SMEs £12m per year.
“Reducing the regulatory burdens faced by business is vital in making the UK the best place in Europe to start, finance and grow a company.
The deregulatory amendments to the EU Prospectus Directive became law at the beginning of this month, allowing businesses to take advantage of the measures from immediately.
As written in articles before by FSE Listings Inc, (http://www.fselistings.com/fse-listings) small firms need to look at equity finances as an alternative to going to the Bank who is overburdened, these simple changes makes the UK the leading place to headquarter your small business and list on the Frankfurt Stock Exchange.
The most important choice is making right choices! In order to do this, small businesses need to know the alternatives to credit and Banks, and the UK equity markets and the European Exchange Frankfurt Listings can reach the capital requirements privately and then publicly with ease.
The leading firm for assisting companies to gain much needed equity capital partners and Frankfurt Listings of UK firms is FSE Listings.
“Extending the number of investors and increasing the prospectus value will help more small businesses access equity finance and show there are more options than just going to the bank for credit. What’s important is that small businesses are aware of the alternative routes to finance.”
The Important Of the UK Investor
Now more than ever before within the UK, educating the investor on opportunities within the UK is key! The UK investor is bombarded with investment opportunities In order to maintain communications with the UK investor market, this publication has been developed as a report on the market, requirement, changes, and need for the UK investor.
