Ripe for the picking: A guide to alternative sources of finance supported by 2 Ripe for the picking: A guide to alternative sources of finance Ripe for the picking: A guide to alternative sources of finance 3 Summary Small and medium-sized businesses need access to finance to enable them to fulfil their growth aspirations Constraints on lending, resulting from the financial crisis, are beginning to ease but a ‘new normal’ has emerged that means traditional forms of finance, such as overdrafts and loans, will not be the solution for all businesses all of the time Businesses are increasingly exploring alternative sources of finance to fund growth and this is being matched by new and exciting developments in alternative finance provision This CBI guide is designed to raise awareness amongst growing businesses of the increasing range of financing options available to them. The content contained within this document is provided for general information only. It does not purport to contain all of the information which you may require nor is it intended to amount to advice on which you should rely. While the CBI has taken all reasonable steps to ensure, as at the date of this document, that the facts which are contained in it are true and accurate in all material respects, the CBI does not make any representations, warranties or guarantees, whether express or implied, that the content in this document is accurate, complete or up-to-date. The CBI accepts no liability to readers or any third party whatsoever and however arising, whether in contract, tort (including negligence), breach of statutory duty, or otherwise and whether resulting from the use of this document, or any omissions from or deficiencies in this document. You must obtain professional or specialist independent financial and legal advice before taking, or refraining from, any action on the basis of this document and its content. 4 Ripe for the picking: A guide to alternative sources of finance Ripe for the picking: A guide to alternative sources of finance 5 Introduction A thriving SME sector is critical for maximising the UK’s growth remain a critical and significant source of business lending in the To speed up the diversification of the finance market, policy makers potential and access to finance is fundamental to enabling businesses future, businesses are increasingly looking to alternative finance have taken a number of steps in recent months. The table on page to realise their growth ambitions. This is particularly critical for the options to fund their growth aspirations. 6 sets out Government’s response and current progress in taking UK’s high-growth medium-sized businesses. As set out in the CBI’s forward the recommendations of the Breedon Taskforce Review, a The UK market is changing to meet this need. There is an increasing report ‘Future Champions’1, these firms could be worth an additional business-led taskforce set up to identify opportunities to boost choice of lenders, with new challenger banks entering the market. £20bn to the economy by 2020, but only if they can access the finance finance options in the UK. The Bank of England reports that in Q4 2012 Shawbrook Bank’s net they need to grow. lending to households and firms was £87m, while Aldermore and The Government has also resolved to take long-term action to ensure The good news is that the strain on lending, resulting from the financial Metro Bank reached £251m and £53m respectively.3 the availability of finance to growing businesses when they need it, crisis, is easing. CBI members report an increase in the availability of with the announcement of a state-backed Business Bank. In addition to the emergence of challenger banks, the availability finance, while the Bank of England’s Credit Conditions Survey shows of alternative finance options is increasing. This growth is not only So the direction of travel is towards a much more diverse financing that the cost of finance for small and medium-sized businesses fell in from the emergence of new, innovative finance options – such as landscape in the future. This CBI guide is designed to boost the first quarter of 2013.2 crowd funding, explored on page 14 – but also from the increased awareness amongst growing businesses of the increasing range of However, the CBI believes the financial crisis has put the UK on an prevalence of finance options that are well-known but under-utilised. financing options available to them. irreversible path to a ‘new normal’ in financing, with regulatory Notably, the UK is seeing a significant increase in the availability of reform, bank balance sheet restructuring and a more realistic asset based financing, with the Asset Based Financing Association pricing of risk changing the nature of lending for the long-term. The predicting that the sector will grow by 9% in 2013.4 financial crisis has forced UK businesses to address their historical The changing landscape is also encouraging a debate on the overreliance on traditional bank debt; in the UK banks are the source importance of equity investment to growing businesses. Just 3% of of nearly 80% of all credit. While traditional forms of finance will small and medium-sized businesses use equity finance in the UK, below the EU average of 7% and much less significant than in countries like Denmark and Sweden, where equity investment accounts for 46% and 31% of SME financing respectively.5 The barriers to equity investment in the UK are a feature of the finance market that must be addressed. 6 Ripe for the picking: A guide to alternative sources of finance Ripe for the picking: A guide to alternative sources of finance 8 seLF-issued retaiL bonds p16 Government action to boost finance options for UK businesses following the Breedon Taskforce ALTERNATIVE FINANCE priVate PLacements p17 Breedon recommendation Government action DECISION TREE retaiL bonds p15 priVate equity p22 Increase awareness of alternative financing by creating a single Government has announced plans to deliver a British Business Bank which brand and a single business support agency to deliver the will bring together Government finance and support schemes for small and corporate Venturing p20 peer-to-peer Lending p14 business growth fund p21 Government’s range of SME finance programmes, drawing on medium-sized businesses in one place. This will simplify the landscape for international examples such as Germany’s state-backed bank, KfW. Government support. Asset based Lending p10 peer-to-peer Lending p14 pubLic equity markets p23 corporate Venturing p20 Industry to establish a Business Finance Advice network, comprising The Business Finance Advice network central website is currently under the main accountancy bodies. development to create a single portal for businesses to find registered advisors. Open up access to capital markets financing for smaller companies Government commissioned the Association for Financial Markets in Europe through the creation of a body to bundle and securitise SME loans. (AFME) to conduct a feasibility study of an aggregation platform. The study DO YOU NEED DO you haVE Are you wiLLing to WouLD you benefit business angeL p18 deemed such an agency as feasible and Government is now considering the IS your business report. WORKING I need security? use equity IN your from INVestment GROWTH I.E. equipment, business to secure coupLED with adVice at the start-up stage? Venture capitaL p19 Consider the potential for the Government’s Business Finance A £100m tranche of the Government’s co-investment scheme, the Business OR GROWTH CAPITAL buiLding INVestment? and support? Partnership to invest in innovative products such as mezzanine loan Finance Partnership, has invested in innovative forms of non-bank lending CAPITAL? funds and peer to peer lending. including peer-to-peer lenders, online receivables exchanges, supply chain finance and mezzanine finance. GROWTH CAPITAL To buy new equipment, to I need DO you deaL DO you haVE Encourage large businesses to support smaller companies by The Cabinet Office embarked on a supply chain finance initiative in 2012, purchase new premises WORKING IN business to security? reinforcing prompt payment practices, supporting greater use of working closely with a number of large corporates to encourage the CAPITAL business saLes? I.E. equipment, peer-to-peer Lending p14 invoice financing and utilising supply chain financing to invest in introduction of supply chain finance schemes. WORKING CAPITAL buiLding smaller suppliers. To fund a contract or to pay a VAT bill UK authorities and business representative bodies should provide Government is in on-going discussion with business representatives and an evidence-based perspective of the impact of international finance bodies to contribute to an evidence-based perspective on the impact regulatory measures on the provision of bank and non-bank finance of regulatory reforms to SME financing. to UK SMEs and to update their evidence on an annual basis. SuppLY chain finance p12 Asset based Lending p10 Increase the UK retail investor appetite for corporate bonds. Government has explored, but has not committed to developing retail investor appetite for corporate bonds as ‘proposed changes would complicate [the existing set up] and undermine its core purpose of providing a relatively simple, safe vehicle trade finance p13 which encourages people to save.’6 Code Policy developed, but requires delivery Recommendation implemented No action taken 10 Ripe for the picking: A guide to alternative sources of finance Ripe for the picking: A guide to alternative sources of finance 11 “...the UK’s market, at £220 billion a year, is Asset based lending equal to that of Germany and the US combined.” Online invoice trading platforms Asset based lending is finance which is secured by assets, such as ALTERNATIVE FINANCE the debtor book, plants and machinery, stock and property.