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Financing small business Britain

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Goldman sachs

For many small businesses in the UK, financing their operation is a private, internal affair. Nervous of established finance options, small business entrepreneurs often self-finance their business, or only grow within the constraints of reinvested profits

What this trend has meant over the long term is a missed opportunity for boosted growth. Our 10,000 Small Businesses UK programme encourages small business leaders to consider the best financing options for them, and following graduation, over four times as many of these businesses take on finance than UK small businesses more generally (70% versus 17%).

The impact of this difference is clear. On average, graduates from the 10,000 Small Businesses UK programme are growing revenues at 81% a year – 13 times the national average.

In the post-recession economy, finance has been seen as too risky or a last-minute stop-gap, rather than a long-term strategy for enabling growth. There is a range of options available to business owners that is only increasing, with alternatives such as crowdfunding responding to new requirements. With increased readiness on the supply side, more work and attention needs to be paid to the demand side. There are three problems at its core.

Equity gap

Whilst almost half of UK small businesses use banks or building societies for external finance, the British Business Bank finds that only 10% use equity to raise funds. Small business owners are often happier to accept poor terms for debt than give away control of even a portion of their business in the form of equity. However, there are a variety of options, which allow investors to share in the success of a business whilst the owner receives funding and maintains overall control.

Information gap

BEIS reports that access to information and advice on finance options is a more significant barrier to SMEs than availability of funding. Many small business owners go straight to the bank they already use for finance: the opportunity cost of getting the right deal in the time taken from running the business is too high. Only when this information is more available to business owners, or can be provided by a peer network, can they find the right option without sacrificing their time.

Ambition gap

The majority of SMEs are ‘happy non-seekers’ — according to SME Finance Monitor, 81% have not sought any external finance and nothing is putting them off from applying. This is compounded by the fear of debt that sees 75% of small business owners want to pay down debt and remain debt-free. Businesses that innovate, train new staff or internationalise require funding, and this lack of financing ambition will be reflected in fewer new products, a less skilled workforce and fewer international trade links, and ultimately, reduced growth.

These point to a need for improved networks, clearer signposting, and quality education for small business owners. Business leaders can develop and share best practices through better networks. By improving signposting, businesses can filter out options that are not right for them. With clearer information, business owners can have confidence in their financial decisions.

There is a large market for those businesses willing to become finance-ready, and no shortage of outside capital willing to support them. By fostering confidence, providing higher-quality, earlier advice, and celebrating ambition and success, external finance can be seen as a true catalyst for growth.

Charlotte Keenan, Head of the Office of Corporate Engagement EMEA, Goldman Sachs