UK SME Confidence has dropped since the EU Referendum, with 53 per cent of small and medium-sized enterprises (SMEs) feeling less optimistic about the future of their businesses, according to the CBI’s recent manufacturing report.
The Bibby Financial Services SME Confidence Tracker notes that access to funding had also been a rising challenge amongst SMEs, with around 30 per cent of businesses suffering bad debt in the last year, with an average debt loss per business of £11.8k.
But have these changed the way businesses access funding, particularly in terms of changes to debt versus equity funding?
UK equity funding continues to slump – but where is it going?
Early figures from Beauhurst’s latest equity investment data shows that it’s not looking likely that 2016 will top the previous year in terms of deal numbers, and Brexit is possibly to blame.
However, post-Brexit data on venture capital investment is sparse, and it doesn’t necessarily mean investors are pulling out in the UK.
Martin Mignot, seed-stage investor at Index Ventures says, ‘We’ll obviously keep investing in the UK and EU. Like it or not, tech has no borders. London’s always been the most open and pro-business city in the world; no reason for it to change now!’
In fact, many of the UK’s most prominent investors have released statements saying that it’s business as usual for investing, and they will continue as normal.
Debt funding is a different story altogether
On the 4th August 2016, the Bank of England cut interest rates from 0.5 per cent to 0.25 per cent, to encourage business and personal lending and consumer spending in an effort to bolster the British economy.
Commercial debt finance (ie lending which is normally secured and owed back, with interest, to a financial institution) appears to continue growing, even post-Brexit. The Asset Based Finance Association (ABFA), which encompasses invoice finance and asset finance lending data, reported a £1 billion year on year increase in factoring, reaching £20.3 billion for the first half of 2016.
It is certain that debt funding is on the rise, particularly in niche segments (ie alternative funding). But it doesn’t seem like it’s just demand for debt finance that’s on the rise. Financiers and lenders are growing and alternative financiers are on the rise. Recently, DueCourse announced that it raised a £5 million debt facility for a cloud-based invoice financing service for SMEs. On the same week, export finance provider Stenn International recently launched a $300 million financing platform for global trade finance.
So why is debt finance growing so rapidly?
Adam Tyler, Chief Executive for the National Association of Commercial Finance Brokers (NACFB) says, ‘With the UK’s SME community showing a real appetite for growth, despite the uncertainty of Brexit, we have seen small business lending at levels above even those registered before the financial crash.’
Debt finance usurping VC funding could be linked with historically low interest rates and a weak pound, although there’s limited data available on small business lending post-Brexit. Business borrowing for growth has never been cheaper though, given the pound’s 31-year low against the dollar and it slumping against the euro, making it cheap to export.
An example of a UK exporter who appeared to be thriving from exports is Scotch Whisky. Up 3.1 per cent, the first return to growth in the last three years, the Scottish Whisky Association reported an increase in volume of whisky sold abroad. In particular, the boost in exports was driven by India, which imported 3.1 per cent more whisky in the first six months of 2016.
What are the challenges of debt funding?
Commercial finance in the debt space remains challenging, not just for alternative finance but also for traditional banks. As a result of Basel II and III regulation, lending to businesses remains difficult.
James Sinclair at Trade Finance Global says, ‘Businesses are constantly getting rejected from the banks when they apply for debt finance. It’s a vicious cycle of waiting for months on an application, and then getting rejected as their turnover is less than £6 million, although they are perfectly eligible for funding off other lenders.
‘Due to regulation, banks are shying away from offering commercial finance such as trade and export finance, and SMEs struggle to find lenders that can be flexible, fast and secure funding.’
Funding altogether, be that VC or debt funding stands on a completely different landscape to where it was 8-10 years ago. The reality is, is that banks are lending less to SMEs and VCs appear to remain optimistically cautious about investing in the UK. That said, the funding landscape continues to evolve as new challenger banks enter the market and make it easier for businesses to access funding.
Further reading on funding
