A scale-up is typically defined as a business that grows by an average of 20pc every year for three years and has a minimum of 10 employees at the start of that three-year period.
But while the UK may be an optimum place to start a small business (600 start-ups launched every day in London during the first six months of 2016, according to figures from Startup Britain) it lags behind the US and other leading economies in terms of the number of companies that successfully scale.
Welcome to the scale-up gap. An oft-cited barrier to growth is a lack of access to finance, so what are the current funding options for UK SMEs looking to scale up?
Grants and regional funding
A plethora of grants and regional funding options exist, but many are for very early-stage development rather than growth. The ScaleUp Institute is one exception, while the British Business Bank is backed by the Government and exists to complement big bank lending. Additionally, the Business Growth Fund invests equity funding to help all kinds of businesses scale.
Should the Government do more to help close the scale-up gap? "There’s lots of support,” says Conrad Ford, chief executive of the online business finance supermarket, Funding Options. “The Enterprise Finance Guarantee (EFG) scheme helps lenders lend to SMEs unable to offer adequate security. Traditionally associated with major banks, EFG is now available through dozens of specialist lenders.
“The new bank referral scheme means that firms rejected by their bank for finance are offered alternatives through designated finance platforms, of which Funding Options is one,” he adds.
More needs to be done to make funding both transparent and accessible, says Ian Watkinson, chief commercial officer of Clear Funding. “SMEs should be able to trust that there are suitable options available to them that can help support their growth ambitions without being punitive,” he says.
“The Government’s bank referral scheme is a positive step forward, helping businesses find an alternative provider that meets their business needs through platforms such as Funding Options, and SMEs can also take advantage of advisory services, such as the Federation of Small Businesses, which can give further support to help them run and grow.”
Equity funding entails giving up a slice of your business in return for investment. Venture capital and angel investment networks are the two main equity funding routes open to small businesses, but require a clear plan for delivering a return to investors within an agreed time frame.
“For micro-businesses looking to scale, an angel investment network – typically high net-worth individuals who are investing their own money – is a good starting point,” says Neeta Patel, founding chief executive of The New Entrepreneurs Foundation, which has helped 200 aspiring entrepreneurs launch more than 70 ventures and raise more than £12m in early-stage funding over the past six years.
“For slightly more advanced businesses looking for £3-5m in scale-up funding, venture capital is the place to go for equity funding.”
A bank loan is an option for companies with solid cash flow that can support the interest payments, but new global capital regulations designed to make banking more stable have made it harder for banks to offer large overdrafts, explains Mr Ford.
“Invoice finance is a popular way for scale-up business-to-business (B2B) firms to unlock vital working capital as it grows with your business,” he says. “Working capital finance options for high-growth business-to-consumer (B2C) firms are less obvious, but a new type of lender is emerging where firms repay a fixed percentage of revenues.”
Many crowdfunding platforms exist, including equity and non-equity options – Seedrs and Crowdcube are two of the most well known.
“Crowdfunding has issues and complications – not least that that you need to appeal to a large number of people online and do a lot of marketing before you even list the business in order to be successful,” says Ms Patel. “It’s not an easy route. We read about the success stories, but they are few and far between.”
For scale-up firms seeking long-term loans, traditional high street banks prefer a consistent track record that many high-growth firms simply don't have. “Another challenge is that many high-growth sectors, such as technology and media, lack physical assets such as machinery to offer as security,” says Mr Ford.
“Peer-to-peer lending has played a vital role in filling this gap, but the major banks have also launched specialist divisions to lend to their scale-up clients.”
Keep it in the family
For Ms Patel, the most favourable finance option remains the one closest to home. “If you can raise the money you need via friends and family, that’s the best option at the early scaling stage,” she says. “There’s no pressure from investors asking for their money back or forcing you to exit before you’re ready. But, of course, the downside is that they may never speak to you again if you lose their money.”
Ultimately, there’s no silver bullet for financing a scale-up. “It all depends on your approach to risk, your attitude to giving away part of business, and your company’s ability to finance a debt,” she adds.
“Whatever funding route you take, remember that investors want to see sound business fundamentals first. Is your idea sound and the market good? Is there credibility in your team? Can you prove a path to serious profitability? Unless the answer is yes, none of the funding options will work.”
Source: The Telegraph