Help to Grow can help you nurture your business
The British Business Bank launched the initial phase of the government’s Help to Grow programme in May 2016. The first £30 million of Help to Grow-supported lending was delivered to businesses through Lloyds Banking Group. These growth loans are bespoke debt-based finance that goes beyond senior debt in terms of its risk appetite. It is used to support business growth and development.
In January 2017 a second lender, the challenger bank OakNorth, joined the Help to Grow programme with a £30 million facility. On 14 March, OakNorth completed its first loan under the scheme in the form of a £600,000 loan to Notes, the London-based speciality coffee, food and wine company.
Help to Grow aims to provide debt finance of up to £2 million to fast-growth businesses and is targeted at filling a £1 billion gap in scale-up lending.
The government’s concern over the supply of growth loans to support growing smaller businesses is not a recent phenomenon. The 2009 Rowlands Review identified a funding gap in the supply of growth capital for funding amounts of between £2 million and £10 million and suggested mezzanine finance may fill the gap.
Mezzanine financing is a hybrid of debt and equity financing. It gives the lender the rights to convert to an ownership or equity interest in the company in case of default, after venture capital companies and other senior lenders are paid.
Many of the issues raised by the Rowlands Review appear to be relevant for smaller growth loans of below £2 million as well.
The British Business Bank recently conducted some research which examined the finance market for growth loans to UK smaller businesses to answer the following questions:
- What are growth loans and what type of businesses are most suitable for this type of finance?
- How many businesses have characteristics that make them suitable for growth loans and is there actual demand from smaller businesses?
- What is the current supply of growth loans and how is the market structured?
- Is there a funding gap and does the British Business Bank need to intervene in this market?
The research found evidence to suggest that the small business growth loan market is currently not working as effectively as it could.
Despite several new government-funded growth funds established since 2009 the British Business Bank identified a possible growth loan funding gap in the range of £170 million to £870 million per year depending on average deal size. The gap that could be considerably larger when deals in the range £2 million to £5 million are considered.
There has been limited entry into the market by new private debt funds focused on smaller businesses. There are still only a small number of providers currently making growth loans to smaller businesses.
As private sector debt funds start to invest at deal sizes of £5 million and above, any future British Business Bank programme should prioritise smaller deal sizes of less than £5 million, especially for deal sizes of less than £2 million where the gap is most acute.
However, due diligence and other arrangement costs for smaller deals are more difficult for providers to undertake commercially. Incentive mechanisms may therefore be required to offset the higher due diligence costs.
It is important to recognise that the demand side is as important as the supply side. The evidence points towards low current demand for growth loans as smaller businesses are largely not aware of mezzanine finance and of specific providers.
Awareness campaigns involving stakeholder organisations and advisors to raise the profile of growth loans and funders may help to stimulate demand. There are no quick fixes and it is likely that the UK small business growth loan market will take time to become established.
If you need advice on business growth funding for small and medium sized enterprises contact Pegasus Funding Resources for more information on firstname.lastname@example.org