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access to finance in the North East and Yorkshire: helping or hindering growth?
Welcome The narrow escape from the Triple Dip Recession seems to have paved the way for more bullish talk around â€˜economic green shootsâ€™ in the UK. But is this sentiment filtering down to grass roots level amongst businesses in the North? Watson Burton, in association with Insider Media and Garbutt & Elliott recently completed a survey of over 290 businesses in the North East and Yorkshire to establish whether the accessibility of finance, or indeed an understanding of the options available to companies, was helping or hindering growth. With over 50% of our respondents looking to raise finance this year, this report sets out our five recommendations for businesses looking to secure finance. We would like to thank everyone who took part in the survey, and would very much welcome your views on our findings. If you would like to discuss any issues around access to finance, we would be only too happy to hear from you.
Duncan Reid Head of Corporate, Watson Burton
For the main, businesses are optimistic... but there are still challenges Three quarters of our respondents predict that their business will experience growth this year, with 31% of companies hoping that they will grow by 10% or more. Yet the majority still feel that a lack of access to finance is hindering their business’s growth.
The use of business angels and friends and family as a source of funds also seems to be on the increase, with over 45% of respondents in the North East raising funds from those sources in the last 12 months. This may also explain the increased interest in crowdfunding recently.
However, six in ten admit that they have had difficulties accessing finance, with nearly a third (31%) saying it was very difficult or impossible. The main barriers are 1) they believe finance is simply not available 2) the level of control exerted by funders is too onerous and 3) the costs associated with gaining finance are high. Worryingly, 53% of respondents say a lack of finance is restricting their ability to grow.
However, there also appear to be some gaps in awareness of the funding options available. One example of this is Government backed loans or grants, such as the Regional Growth Fund. This supports projects that are using private sector investment to create economic growth and sustainable employment. Also, despite the Enterprise Guarantee Scheme being plagued by bad press, this source of funds can provide viable businesses with loans of up to £1,000,000, particularly those that do not have the normal requirements of security.
On the flip side, those businesses that have been able to source finance have mostly done so through bank loans showing that perhaps the rein on bank lending is loosening. Interestingly there seems to be a great shift towards more people using asset based lending – the second highest source for Yorkshire business. The tide has definitely changed here because in the past many business owners were wary of using these types of facilities, based on an historic stigma that could portray them as having financial problems as well as the belief that it will be a costly or administrative nightmare.
A sunny outlook 3/4 predict that their business will experience growth (almost a third hoping for growth of 10% or more in the next 12 months)
It is our view that many businesses in the North (as well as elsewhere in the UK) need to be open minded about where they can raise finance, as the traditional routes such as banks, are not necessarily easy to access. In addition, companies need to seek better advice as to the best way to access different sources of funds. Many are too easily put off by the doom and gloom headlines that money simply isn’t available. Now is the time for businesses in the regions to change their mindset, seize the opportunities of alternative finance options and grow their business in 2013 and beyond.
2013: a year of growth?
Despite the doom and gloom constantly streaming from the UK business press, respondents within the North East and Yorkshire were optimistic about growth over the next 12 months. Over three quarters of those surveyed were forecasting some growth over the next year, this being split out as around 30% of respondents indicating that they would see moderate to high growth (10% or more), with around 45% forecasting low to moderate growth (up to 10%). Interestingly there is little difference between responses from those in the North East and those in Yorkshire perhaps showing a consistent sentiment across the north that, one way or another, it is time to move forward and break free of that negative press.
Our Yorkshire based respondents indicated that they would use finance to invest primarily in plant and machinery (35%), acquisitions (31.5%) and organic growth (29.5%), whilst in the North East funds would be used for development of new products and services (39%), plant and machinery (33.3%) and organic growth (33.3%). It is interesting that acquisitions are back on the agenda for companies in Yorkshire. Other high ranking uses for funds included investing in a marketing drive, new product launches and accessing international markets.
One of the key factors in delivering that growth is of course access to finance. The majority of respondents from across the north indicated that they would be looking to raise finance in a range of up to £500,000. A modest number of respondents were looking to raise between £0.5m and £5m, and just 5% of North East companies and 10% of Yorkshire companies were looking to rise in excess of £5m.
So, with our growth ambitions and potential uses for funding firmly in place, how easy will it be to raise the finance needed?
Investing in what? North East • new products and services (39%) • plant and machinery (33.3%) • organic growth (33.3%) Yorkshire • plant and machinery (35%) • acquisitions (31.5%) • organic growth (29.5%)
Ease of access
53% of those in Yorkshire and 44% of those in the North East said access to finance was restricting business growth.
In fact, over 50% (59% in Yorkshire) said that raising finance over the last 18 months had been difficult to impossible. However, the growth aspirations revealed by our survey mean it is clear that a change of approach to raising finance is needed to ensure those growth ambitions aren’t stifled. Interestingly enough, for those that have successfully raised finance in the last 12 months the majority of funding is in fact still coming from the banks. Almost 50% in Yorkshire and 30% in the North East cited this as their main source of finance.
However, it remains clear that to ensure the planned growth is realised businesses won’t be able to rely entirely on the banks and that other options will need to be fully explored and exploited to suit each business’ particular identify and needs. For example, asset based lending (ABL) scored very highly in our survey with 31% in Yorkshire and 23% in the North East confirming that form of lending as being their preferred source of finance. One of the most interesting differences between the regions is in relation to angel investment and loans.
That trend could indeed continue particularly in light of the Bank of England’s recent extension of its £80bn Funding for Lending Scheme to January 2015 specifically in an attempt to boost support to credit starved SMEs by incentivising banks to lend more.
53% of companies in Yorkshire say access to finance is restricting growth.
44% of companies in the North East say access to finance is restricting growth.
Just 4% of Yorkshire businesses participating in our survey had utilised angel based investements, whilst almost 26% of those in the North East had benefited from this approach.
Over 20% of businesses confirmed they are still relying on funding from family or friends to secure the growth of their business which presumably shows both a continuing lack of confidence that the banks are lending and a lack of awareness of some of the alternatives.
One factor which could account for the difference is the smaller pool of business angels operating within the North East, which mean businesses are more aware of the business angels who are actively backing the growth ambitions of businesses. In addition, the links between the Finance for Business North East funds (the â€œJEREMIEâ€? funds) and the angel networks are more mature in the North East, meaning companies are perhaps matched with the most appropriate angel investors more often. Whatever the reason, it is positive that North East businesses to have demonstrated their willingness to engage with business angels, who can offer much more than funds to an investee business.
Sources of funding Angel investments and loans Asset based lending Bank loans/mortgages Crowdfunding Equity investments Family/friends Government grants/loans
Stock markets (inc AIM and Plus) Other
What are the barriers?
The top three barriers to raising finance across the two regions were quoted as: the finance simply not being available, the cost of finance and continuing economic uncertainty. In addition, many of our respondents indicated that the level of control exerted by funders was a barrier to raising finance, with 40% of those in Yorkshire citing this point and just 27% in the North East. Perhaps one of the reasons for this disparity is the greater use of business angels by North East business. Given business angels are usually entrepreneurs who have “walked in the shoes” of the managers of a growing business, there is a less rigid compliance structure to contend with, compared to funding from high street lenders or more traditional venture capital investors.
Out of reach Six in ten had difficulties accessing finance with nearly a third (31%) saying it was very difficult or impossible
The banks, perhaps unsurprisingly, come in for some criticism with comments from our respondents included below.
“The banks are not being realistic with their decisions. They seem to think that every business should be making high percentage profit in very difficult trading circumstances. If we were making loads of profit we wouldn’t need to borrow. The banks need to wake up and help.”
“Business only 18 months old and banks unwilling to lend, despite full order book for 2012/13 and 40% secured for 2013/14”
Do we understand the options?
We asked our respondents whether they would know how to access a range of different funding models.
Whilst most people knew how to access the more traditional financing options such as bank loans and asset based lending, people were not so sure when it came to the likes of angel investment, equity investments, Government grants or crowd funding. The overwhelming first choice for fund raising is still from the banks with 73% of respondents from Yorkshire and 66% from the North East selecting this as their preference. The least likely option for raising finance in both regions was using the Stock Markets, with only 5% of respondents stating this would be the most appropriate source of finance for them. This is unfortunate, as we consider that the Stock Markets will become increasingly important in future for growing businesses looking to significantly scale up their capital resources. When thinking about who to approach for advice, banks and accountants were the most cited sources, with an additional 30% seeking internal advice from within their own business in the first instance. A relatively low number of respondents would seek advice from a government led agency / programme perhaps indicating a low level of awareness around grants and other public sector funding options.
We saw some interesting differences between the regions when looking at which options businesses were more likely to use within the next 18 months:
Double the percentage of respondents in the North East were likely to select angel led investments
Double the percentage of respondents in the North East were likely to select crowd funding
Double the percentage of respondents in Yorkshire were likely to go to family and friends
Main barriers to raising finance:
of businesses expect growth this year
1. Finance is not available 2. Level of control exerted 3. Costs of finance
Businesses know how to access: Bank loans / mortgages 96% Asset Based Lending 85% Family/Friends 77% Government Grants/Loans 52% Equity Investments 50% Angel Investments/Loans 44% Stock Markets 35% Crowdfunding 22%
Where do people go for advice? 1. Their bank 2. Their accountant 3. Their FD
say lack of finance is restricting their ability to grow
It is clear from the findings from our survey that whilst it is still a difficult market (and will remain so for the foreseeable future), finance is still available for companies looking to grow. The challenge for all companies is to ensure that they make the right decisions and take the right approach to access the finance they need to fund that growth. Based on the feedback from the survey and our in-depth knowledge of the funding landscape in the North of England, we set out below 5 key recommendations for companies looking to access finance: 1: Ask the Experts Whilst there is a whole range of information available to those companies seeking to raise finance including brochures, handbooks and websites, companies should utilise their network of professional advisors, including their lawyers and accountants. Professional advisors with expertise in finance are up-to-date on the current, more accessible, finance options and can effect introductions to the funders. A warm introduction from a professional advisor will give you an advantage over those business’s making a cold approach. A professional advisor will also understand the issues a particular funder will want to cover and will help tailor the approach, business plan and presentations much more closely to the needs of the funder. Do not underestimate the value professional advisors can bring to the funding process and get them involved early. 2: Be open minded It is clear from the survey that those businesses that have kept an open mind on the type of finance they would consider accessing to grow their business have been more successful in obtaining the funding they need.
Traditional bank finance, such as overdraft facilities and term loans, whilst hard to access, are still available. However, companies should also consider asset based lending, venture capital, business angel finance and, often cheapest of all, Government backed finance options, including grants and R&D tax credits. Banks are also offering innovative solutions to finance problems, for example, funding the cost of the acquisitions of bespoke software solutions. Often a package of more than one source of finance may be the best (and only) way to raise the finance required so businesses need to keep an open mind about pulling together a finance package. In addition, don’t necessarily go for the obvious solution. For example, some venture capital investors and business angels will be more than happy to invest in order to fund the acquisition of property or new machinery, if they support a clear growth strategy for a business. It is often easy to look only to the “traditional” providers of finance in these circumstances. 3: Be clear on what level of finance you want and why It is important to establish early what level of finance is needed and to be clear on the purpose for raising finance. This will drive the decision on the type of funder to approach to raise the finance. If these questions are not answered coherently, then a funder will not support a funding proposition. A funder will also want to know how the fund raising will help the business grow, with clear projections to demonstrate that the business can fund the repayment of the finance and to show the return any funder can expect.
It is essential to be realistic about when you need the finance. Tranched funding may be easier to raise. For example, if only a little finance is needed now to invest in product development with further funding to follow to take the product to market, it will be easier to raise finance for the product development initially. Once milestones have been met, further finance can then be raised for the next stage of development. 4: Be prepared to invest yourself All funders want to see the management team taking a risk that sits alongside them. They want to know that management have some ‘skin in the game’. This may take the form of a further investment in the business, by way of an equity investment or, if management do not have any spare funds, management accepting a lower remuneration package for a period after the funding has been advanced; nothing irritates funders more than to see their finance being used to fund management’s benefits packages. Alternative investment could be to give personal guarantees or second charges over property or other assets. If a management team does not have the confidence in their own business to take on or increase their risk, why should a funder feel confident that it will get a return on its investment. Demonstrating this level of confidence will help with any fund-raising. 5: Be prepared, be confident and be persistent Companies should only go to market when they have fully prepared for the fund-raising. They should prepare a high quality, clear business plan that is realistic. This should set out the level of finance required, what it will be used for, how the business will grow and how and
when the funder will receive its return. The business plan should also contain at least 3 years of financial projections and should be tailored to the most likely sources of finance that can be obtained. Identify who to approach and understand what they will want and ensure it is delivered. It is also essential to prepare the business for financial and legal due diligence from a funder so that it gets no ‘surprises’. Management should be honest on the level (if any) of the equity in the company they are prepared to give up; be realistic on the valuation of the business. The businesses that have been successful in raising finance have put in the hard work to position their business ready for a fundraising. Our survey reaffirms the view that it is hard to raise money in this market so you need to be persistent. Persistence shows a level of belief and confidence in the business and the proposition being put to funders. It is important to maintain confidence in the business and in the ability to raise finance. Whilst the press would lead us to believe there is no available money for business, our survey shows that the right businesses who are prepared to take a tailored approach, access to finance is still an achievable goal.
“Now is the time for businesses in the regions to change their mindset, seize the opportunities of alternative finance options and grow their business in 2013 and beyond” Duncan Reid, Partner, Watson Burton