mall and medium enterprises (SMEs) are global enablers of innovation, growth and productivity. Their flexibility, drive and willingness to take risks have made them invaluable contributors to industry progression, whether it is in finance, construction or digital technology. Despite this, many British SMEs could be in trouble. This was addressed back in 2015, when Prime Minister David Cameron acknowledged a £1 billion funding gap that is preventing the growth of SMEs, fuelled in part by institutional lending reducing at a rate of £5.7 million a day. Regardless of the sector or country they operate in, small businesses require funding to upscale. Traditionally SMEs would have turned to bank loans as the answer to this problem; however, since the
global financial crisis took hold in 2008, banks have become far more hesitant with the money they lend to businesses. With bank loan approvals declining, an alternative needed to be found – the solution came in the form of private equity investments. The consequences have been significant, with alternative finance platforms revolutionising traditional lending practices. In an industry once dominated by large banks, private equity schemes such as equity crowdfunding, P2P lending and tax-incentive investment policies have diversified the range of avenues available to SMEs to secure finance. Britain acts as a microcosm for this wider trend. SMEs account for 99% of all private sector firms in the UK; they are propelling the British
economy forward with a combined annual turnover of £1.8 trillion in 2015 – this represented 47% of total private sector revenue. However, these businesses would not be able to flourish without access to capital and this is where the UK has excelled in recent years. A major factor driving business progression in the UK has been government-backed taxincentive programmes – only a few remain, but these are schemes that encourage private equity investment into qualifying businesses by offering tax breaks to investors. The most significant of these programmes is the Enterprise Investment Scheme (EIS). Launched in 1994, the EIS has raised £12.3 billion for over 22,900 individual companies, proving to be an invaluable source of finance for British SMEs.
The scheme is growing every year; 2,795 companies raised £1.56 billion in 2013/14, a notable rise on the year before when 2,470 companies raised £1.03 billion. The success of the EIS as a business funding model has encouraged other countries to adopt a similar tax-efficient investment scheme, the most recent being Australia. By bringing together investors and innovators, tax-efficient investment schemes like the EIS have played a critical role in supporting the growth of SMEs and, in turn, the nation’s private sector. Despite these positives, there are still a number of hurdles that are inhibiting SMEs from reaching their full potential. While a huge amount of focus in the UK has been placed on helping budding entrepreneurs, start-ups and micro-
Jul - Sep 2016 International Finance Magazine
Published on Jul 1, 2016
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