CBI Magazine

Access to finance

Small and medium-sized businesses need access to finance to enable them to fulfil their growth aspirations. Here are some of the key options open to them

As well as the guide below you can also use our Find your Finance tool and read the full report

Asset-based lending

  • Asset based lending is finance which is secured by assets, such as the debtor book, plants and machinery, stock and property.
  • Invoice financing is the most common form of asset based lending and in most cases acts to support business to manage their cash flow, bridging the gap between the delivery of goods or services by a business and the payment from its customer.
  • Businesses typically use this type of finance to fund their working capital. Businesses that are experiencing high growth find invoice finance flexible as the borrowing grows alongside the sales ledger.
  • Businesses that have to pay their suppliers before receiving payment from their customer also benefit.
  • Asset based lending is suitable for businesses which have business to business sales, where the business is not contractual.
  • The total number of businesses in the UK using asset based lending in Q4 2012 was just under 43,000, an increase of 3% on Q4 2011.
  • Total advances to businesses reached £17bn at the end of Q4 2012, an increase of 6% on the same quarter in 2011.
  • European trade is considered to be more dependent on invoice financing than the United States. The UK has the highest penetration of invoice financing in the world, at c. 10% of GDP, vs. the United States with 1% of GDP. In fact the UK’s market at £220 billion a year, is equal to that of Germany and the US combined.
  • Barriers to asset based lending have been caused by the perception that it is a finance of last resort. However, this perception is changing and the market is growing.


Online invoice trading platforms

Online invoice trading platforms are an expansion of the asset based financing market and allows businesses, for a fee, to sell outstanding invoices to investors on an online exchange, in real time.
Online invoice trading platforms have developed significantly in the UK in recent times, following the creation an online receivables exchange in the US , which has funded $1bn of small and mediumsized businesses since its inception in 2008.

How it works:

  • A business applies online as a ‘seller’ and, after approval by the platform, selects invoices that it wishes to raise finance against
  • A pool of investors bid to advance funds against the invoice, with the best bids ensuring a competitive rate
  • Funds are advanced into the businesses account, usually within 48 hours of uploading the invoice
  • When the business’ customer pays the invoice, the business refunds the investor with the advance plus fees.


Supply chain finance

  • Supply Chain Finance (SCF) is a way that large companies can use the strength of their balance sheet to support their suppliers, who are generally smaller and often SMEs. SCF works by allowing a supplier to sell its invoices to a bank, or another finance provider, at a discount once they have been approved by the buyer.
  • Instead of relying on the creditworthiness of the supplier, the bank deals with the buyer, who is usually a less risky prospect. This means the supplier gets access to finance at a lower rate than they may have done. That allows the supplier to secure its money earlier and hence improve its working capital position.
  • The Breedon Taskforce Review called on Government to accelerate adoption of supply chain finance and, in response, the Cabinet Office has worked with some of the UK’s largest companies to help accelerate the take-up of supply chain finance programmes.
  • The first Government Supply Chain Finance scheme was announced in October, for community pharmacies in England, unlocking up to £800m of new credit for around 4,500 pharmacy businesses.
  • Supply chain finance will not be suitable for all supply chains and it is important that businesses adequately assess their network for suitability.


Trade finance

  • For centuries, financial institutions have provided import/export financing and trade risk mitigation products to secure the risks exporters’ face when doing sales deals abroad.
  • While providers of trade finance have seen regulatory change impacting on their ability to lend, the impact has been less acute for trade finance than for other traditional forms of finance. This is because trade credits are typically short-term and recognised as lower risk because they are underpinned by a contract; this makes trade finance an increasingly viable alternative for firms that previously relied on other working capital arrangements to fund export growth.
  • The overall value of global trade finance increased by 86% between 2009 and 2010 which, coupled with 83% of providers of trade finance reporting an increase in demand during 2010, lays the foundations for a healthy and growing market.
  • Trade finance is suitable for exporting businesses that require working capital on a flexible basis and broadly fall into two categories: Financing some or all receivables or Financing individual larger contracts.


Peer-to-peer and crowd funding

  • Peer-to-peer and crowd-funding platforms enable individuals and businesses to lend to small and medium-sized businesses for a specific project.
  • On peer-to-peer platforms, investors make a financial return based on the level of interest the borrower pays. Investors in a crowdfunding bid most commonly receive a non-monetary return i.e. a finished product.
  • Peer-to-peer lending is suitable for businesses which have been trading for at least two years. However, this may vary depending on which platform you use.
  • The peer-to-peer and crowd-funding market is experiencing significant growth in both the UK and US and in 2012 $2.7bn was raised globally from crowdfunding and peer-to-peer lending.
  • From April 2014 the Financial Conduct Authority will regulate the peer-to-peer lending market after calls from providers themselves to be regulated. Regulation will help bring credibility and stability to the market, enabling further growth.


Retail bond market

  • Bonds are essentially an IOU debt instrument. The purchaser of the bond – usually an institutional investor – is the lender. It receives a set return each year (coupon) for a set number of years, at the end of which the bond can be redeemed.
  • Retail bonds are brought by individual investors, including individual savers, rather than major institutional investors. The minimum amount invested can start at relatively small levels – usually under £1,000.
  • Investors in retail bonds can buy or sell a bond at any time through the Order book for Retail Bonds (ORB) and check its price on the london Stock Exchange – just like a share.
  • Companies that have raised funds on ORB increasingly tend to come back to the market, demonstrating how businesses can tap into a new pool of capital.
  • Issues on ORB have ranged from £25m - £300m, with most bonds issued between £50-75m. Since its launch in February 2010, businesses have raised around £3.2bn by issuing bonds on ORB.
  • In the UK the retail bond market is smaller than other developed countries. The MOT in Italy, created in 1994, is the most successful, liquid and heavily traded retail bond market in Europe, with over 800 bonds listed18, raising €700bn since its establishment.


Self-issued retail bonds

  • It is possible for businesses to self-issue a retail bond which is a finance option used predominately by medium-sized businesses looking for long-term growth capital.
  • In Germany, there have been around 200 self-issued bonds, with investors usually from the companies, the customer base or people local to the business.
  • In the last year (March 2012-March 2013) the total issuance volume by German and Austrian companies was €1.9bn, with the average issue size around €35m.
  • In the UK, the market for self-issued bonds is less developed, although there have been several high profile bonds raised in recent years, such as by restaurant chain leon, Hotel Chocolat and Ecotricity.


Private placements

  • A private placement is a long-term, typically 5-12 year, fixedinterest debt instrument, issued by a corporate directly to institutional investors, including pension funds and insurance companies.
  • Private placements are suitable for businesses who require longterm, senior debt capital, but who are not ready for the public debt markets.
  • Because the UK market is underdeveloped UK businesses looking for a private placement most often look to the US market. In the US, the market generally generates loans of $100m upwards. However, this has evolved over the last few years and it is now possible to arrange placements with values from £20m/$25m upwards.
  • The US private placement market accounts for 90% of the global market. In 2012 businesses raised over $50bn with around 40% of borrowers being UK businesses. From the large amount of UK companies accessing the US private placement market we can see that there is demand for private placements from UK firms.
  • The German private placement market, Schuldschein, raised 8.6bn in 2011. The Breedon Taskforce estimated that a UK private placement market could be worth £15bn.
  • There are barriers to developing a private placements market in the UK, the most pertinent being an underdeveloped investor base and regulatory differences between Europe and the US for unlisted debt. The Association of Corporate Treasurers (ACT) has taken forward a recommendation from the Breedon Taskforce Report to examine how to develop the private placement market in the UK.


Business Angels

  • Business Angels are most commonly high-net worth individuals who invest in early stage or high growth businesses, either directly or through organised networks and syndicates.
  • Business Angels usually have substantive knowledge and experience of growing businesses and can act as a mentor for the business, providing advice and guidance.
  • Angel investment is suitable for seed or early stage companies looking for their first or second stage of external funding to grow rapidly.
  • There are approximately 18,000 business angels in the UK, investing an estimated £850m per annum. If a business qualifies for investment under the Enterprise Investment Scheme or Seed Enterprise Investment Scheme, then investing in the business may be more attractive for Business Angels. 57% of Business Angel investments make use of the scheme.


Venture capital

  • Venture Capital funds invest in early stage, high-risk, but high potential businesses.
  • Typically after a 3-7 year investment, the venture capitalist will exit the company by selling their shares, either back to the business or to another investor.
  • Venture Capital investment is most typically suited for early stage companies that are experiencing high-growth or have potential for high-growth.
  • The UK boasts the largest venture capital market in Europe, accounting for 21% of all globally invested amounts.
  • In 2009, the BvCA’s venture capital members collectively raised £1.5bn to invest into companies in the UK and abroad. The average investment into a British company was £763,000.


Corporate venturing

  • Corporate venturing is a formal, direct investment relationship, usually between a larger and a smaller company.
  • The larger firm provides direct support to smaller businesses usually in three ways, although some partnerships combine these types of investment. By making a financial investment in return for an equity stake in the business. By offering debt finance to fund growth activities for an agreed return. By offering non-financial support for an agreed return, such as providing access to established marketing or distribution channels.
  • Large businesses engage in corporate venturing for a number of reasons. It may be undertaken as a simple financial investment or as an opportunity to become an alternative provider of finance in the market. A firm might engage in corporate venturing for the strategic value it can provide e.g. supporting its supply chain, gaining market insight or ensuring knowledge transfer.
  • Corporate venturing is most attractive to growing businesses that would value a partnership approach to their next investment. Whether in providing knowledge or routes to market, the partnership in a corporate venturing arrangement will be diverse, as it is tailored to the needs of both parties.
  • The corporate venturing market in the UK is difficult to measure as research tends to focus on large corporates with formal corporate venturing units undertaking equity deals. However, research shows that these deals are increasing and the UK is undertaking more deals than European counterparts.

Business Growth Fund (BGF)

  • The Business Growth Fund (BGF) was set up in July 2010 by members of the Business Finance Taskforce as an independent company. BGF – with the financial backing of five of the UK’s main banking groups, Barclays, HSBC, lloyds, RBS and Standard Chartered – has capital of up to £2.5bn to invest in eligible businesses.
  • BGF provides growth capital and typically invests between £2-10m for a minority equity stake (10%-40%) and a seat on the board, in established UK companies that can demonstrate a strong growth trajectory, and typically with a turnover of between £5m-£100m.
  • BGF invests from its own balance sheet and so can offer long-term funding of up to 10 years, and can also provide further funding as companies continue to grow.
  • BGF invests in all business sectors with the exception of regulated financial services and property development. As of early 2013, BGF has made 25 investments and has committed over £120m of new money to fund the expansion of growing British firms from a range of sectors.
  • In 2013, BGF is targeting investment of around £200m


Public equity markets

  • In public equity, unlike private equity, the business becomes publically listed with shares able to be brought and traded by the public.
  • The main public equity market in the UK and Europe for growing businesses is the Alternative Investment Market (AIM) which is operated by the london Stock Exchange. AIM offers smaller growing companies a public market with access to both retail and leading institutional investors within a regulatory environment designed specifically to meet their needs.
  • There are no rules requiring companies to be a certain size or have an established trading record. However, a Nominated Advisor (Nomad) would expect that a strong AIM candidate would have strong growth prospects and a record and management team that compares favourably with its peer group.
  • Since its launch in 1995, over 3,000 companies from across the globe have chosen to join AIM – collectively raising over £80.6bn (including £44.6bn in further issues).
  • Companies will often go through secondary rounds of funding on the market and many progress from AIM to the Main Market.
  • The recent announcement in the 2013 Budget, abolishing stamp duty on shares for companies listed on growth markets including AIM, will result in greater availability of finance for these companies. In addition, the Government is currently consulting on extending ISA eligibility to invest in shares traded on the public equity markets for growing companies across the EEA. This will assist in boosting investment to these businesses.
  • Both these measures demonstrate that broadening the investor base for small and medium-sized business through appropriate fiscal and regulation incentives is an effective way of increasing access to finance.


Pension-led funding

  • Pension-led funding utilises directors' personal, existing pension facilities to raise capital for their business.
  • It provides funding without having to give a personal guarantee to a lender
  • It can provide protection for business assets held within the pension scheme
  • Funds are released from existing pensions with MHRC and FCA regulations and repaid to the scheme with interest
  • Pension-led funding can utilise intellectual property (if available) as a new asset to secure these funds
  • All funding is repaid via loan payments over a fixed term or lease payments as agreed by the trustees and at an agreed commercial rate, providing a chance for real growth for the pension scheme.
  • ES Global directors use pension-led funding to help finance a management buyout
  • From Live-Aid to the 2012 Olympics, ES Global has provided temporary structures for events and exhibitions across the world since 1974, using its patented construction system.
  • Directors Olly Watts and Jeff Burke wanted to implement a management buyout and having gained some finance from their bank, required further funds from a complementary funding source. 
  • Clifton Asset Management, leaders in pension-led funding, set up a new Small Self-Administered Scheme (SSAS) for Olly and Jeff and money from their pension funds was used to buy the ES Global trademark, valued at £405,000 which the company is leasing back, benefitting the business and pension.
  • Olly said: “Jeff and I are now the very proud owners of ES Global. We really could have not got there without pension-led funding and the energetic input and continuous delivery on commitments made.”