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Why closing the funding gap is a job best left to mixologists
Category: Money | 07 March, 2013 11:42
Whilst nobody knows exactly how big the funding gap is for smaller businesses in the UK, last year's Breedon report suggested it sits somewhere between the £26 billion and £59 billion mark.
The truth is, even if we did know, it is hardly a sum we can relate to. Say you take the best case scenario of £26 billion – if you laid 26 billion pound coins in a straight line, it would extend around the world sixteen times. It would take you thirty years to do this, walking 12 hours per day, having worked nearly a million years to earn the money in the first place.
How can we address the funding gap if we don’t even really understand it?
The government, banks, large corporations and private individuals should all work together to make the problem more manageable.
Let’s start with the government. The onus is on the government to encourage the right level of bank lending. However, it's a delicate equilibrium to manage; if they are too generous and banks lend overzealously, we will return to a world of asset bubbles, where banks take undue risk. It might also not fare well with our friends in the EU, who set strict guidelines around EU state aid. If not enough is done, well, let’s just say it will do little for the economy or the 2015 elections.
How about the banks? It may not be obvious, but banks are keen to support the small business community as this is where they see their growth, not their fortune 500 clients. After all, SMEs account for the majority of private sector GDP and employment. But it’s a segment that is difficult to serve economically, especially whilst the banks are dealing with legacy technology issues, a forever changing regulatory landscape and remain focused on rebuilding their own balance sheets.
Initiatives like the £80bn Funding for Lending Scheme (FLS) are intended to stimulate the banks to lend to smaller businesses. But since its introduction in August, gross banking lending to businesses has fallen by £8bn, and the FLS cash poured largely into the mortgage market.
One hurdle is that business banking facilities are more complex than mortgages, overdrafts or personal loans - which are fairly standard products - as they usually require relationships through a local branch network, an understanding of the business, and in some cases analysis of a supply chain. Businesses will start to see the benefit of the scheme but it will take time. In the interim, we have to look at other channels for help.
SMEs’ larger siblings can play a role in addressing the funding gap. Last year, analysts estimated that the “total cash of stash under the corporate mattress [is around] £750bn”. If large corporates made even 2% of this cash available to SMEs in the form of loans, it could reduce the funding gap by a whopping £15bn! Recent research reveals that a further £36bn in cash flow could be made available to SMEs through prompt payment of invoices, some of it by larger corporations.
Private individuals can also play a role in addressing the funding gap, and alternative funding platforms are making this process easier, and more appealing. In fact, if the entire working population invested just one week’s salary into SMEs every year for the next three years, we’d have probably solved the problem.
Of course that would never happen, nor should it. Investing in or lending to SMEs is high risk and not comparable to parking your cash in an ISA, so it’s certainly not for everyone. However, it is clear to see that the problem becomes more manageable. There are also generous government incentives in place for backers of small businesses. The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) mean that an individual can claim back up to 78% of their investment in tax relief!
The alternative funding scene is a young but growing industry that will start to play a significant role in small business funding. In fact, Deloitte expects some £1.9bn will be invested through online platforms this year, more than double the £0.9bn raised in 2011. All eyes are on the government and regulators to ensure that this growing market is supported and guided correctly, for it will live or die by its reputation, the quality of the operators, and the screening they undertake on businesses they put forward for funding.
Closing the funding gap will be no easy feat. It requires close collaboration between the government, banks, large corporations and private individuals all at once. Think of it as if you're mixing the perfect cocktail - it takes time, practise, requires a delicate equilibrium of ingredients working together harmoniously, and you will most probably get it wrong the first few times.
Derek Uittenbroek is the Founder and CEO of FundTheGap, a new online equity fundraising platform for start-ups and small businesses