Fast-growing small and medium-sized enterprises in the UK face a cash shortage of up to £15bn this year after investor funding fell away during the coronavirus pandemic, with businesses outside of London notably struggling for financial support, according to new research.
A report about growth capital and focused on SMEs whose sales or number of employees are increasing at more than 5 per cent a year found that the funding shortfall for these companies is projected to double this year, from about £7.5bn in 2019, because of the Covid-19 crisis.
The research by the ScaleUp Institute, a think-tank, Innovate Finance, which represents the interests of the non-bank lending sector, and Deloitte, the accounting firm, comes as the government starts work on how to address the vast equity needs of companies that have accumulated large debts during the pandemic.
The Treasury has underwritten £50bn of bank loans to businesses, some of which are unlikely to be repaid.
The funding shortfall facing fast-growing SMEs stems from how investors are seeking to focus their cash on shoring up companies they have already committed equity to, according to the report.
Researchers said equity funding for the fast-growing SMEs had dropped 40 per cent in the second quarter compared with the same period a year earlier.
And while overall fundraising on London’s Aim, which focuses on smaller companies, more than doubled in the second quarter, the amount secured for growth appeared to be down 45 per cent.
The report predicted that the amount of funding secured by fast-growing SMEs from these two sources would drop by at least £5bn in 2020 compared with 2019. The amount of early-stage venture capital committed would fall by £2.5bn. Adding that to a recurring annual shortfall in funding of about £7.5bn for these SMEs would result in a £15bn deficit this year.
Researchers identified 33,860 so-called scale-ups — SMEs that are increasing turnover or employment by at least 20 per cent a year — across the country and warned that their potential would be stymied by a lack of long-term investment capital.
However, if the funding shortfall was filled permanently, the report estimated there would be a doubling in the number of scale-ups within 10 years.
It said the companies would in turn make an additional £20bn of business investment each year, creating about 3m new jobs. Scale-ups employed 3.5m people in the UK in 2018.
Researchers said scale-ups represented less than 1 per cent of all SMEs, but half of their combined turnover. These businesses are more productive and twice as likely to innovate compared with other SMEs.
Funding the scale-ups could “level up” prosperity and productivity across the UK, a key government aim, said Irene Graham, chief executive of the ScaleUp Institute.
“It is a huge opportunity to really level up and deal with the long-term lack of growth capital,” she added. Coupled with more government investment in skills and the nurturing of successful regional clusters of businesses, state support for new investor funding could close the productivity gap between the south-east England and the rest of the UK, said Ms Graham.
London scale-ups secure about 25 per cent of their investor funding needs, according to the report. But in several UK nations and regions the companies obtain less than 5 per cent.
Charlotte Crosswell, chief executive of Innovate Finance, said that the £15bn shortfall in investor funding for small, fast-growing companies was partly because of an uncoordinated approach from both the public and private sectors.
She added that larger, more mature businesses often found it easier to raise finance but this meant there was a gap in support for the next wave of innovative companies as they looked to grow in size.
A government review in 2016 acknowledged the problem and led to the creation of British Patient Capital, a state body that invests public money in UK scale-ups.
The new report built on this by calling for a “national blueprint for growth”, under which the government could provide seed capital and investment products, as well as bring industry together to devise solutions to the investor funding shortfall. This could include legal changes to allow pension funds and insurers to invest some of their money in scale-ups.
The report suggested that British Patient Capital, part of the British Business Bank, the state-owned lender, create a joint venture with private equity firms to deploy money into scale-ups.
It also proposed that the BBB open eight regional offices to funnel money to promising companies across England.
This article has been re-edited to make clear that the funding shortfall of up to £15bn affects SMEs whose sales or number of employees are increasing at more than 5 per cent a year, and not just start-ups as originally stated. The story has also been changed to correct the growth rate of scale-up companies, and to clarify SME fundraising on Aim.
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