Availability of long-term growth capital threatens MSB expansion plans

GAPS in the funding ladder could be preventing medium-sized businesses in the West Midlands from realising their growth ambitions, according to a new report.

The report, compiled by the CBI and accountancy and BDO, says that while bank lending has improved, together with the flow of invoice finance facilities and peer-to-peer lending, for many businesses these are predominantly short-term funding options and the availability of long-term growth capital remains a barrier.

The report – Stepping up: fixing the funding ladder for MSBs – concludes more than half of MSBs are finding it hard to access a loan for longer than five years.

The CBI and BDO have therefore recommended ways the Government can offer tax incentives and encourage long-term debt and equity investments to help growing firms realise their full potential.

Mid-market firms in the West Midlands represent just 2% of all companies in the region, yet they are responsible for 20% of revenues and 21% of the regional workforce, according to CBI research.

It is suggested as many as 70% of these businesses are planning to grow in the next year.

Richard Butler, CBI Regional Director in the West Midlands, said: “Building up a British ‘Mittelstand’ of successful medium-sized businesses is mission critical to our economic future.

“A key part of unlocking their enormous potential is for the Government to fix the funding ladder, filling in the gaps in the supply of long-term finance that the Midlands’ brightest growing firms need to succeed.”

John Stephan, mergers and acquisitions partner at BDO in Birmingham (left), said: “Medium-sized firms lack diversity in long-term funding sources; yet it is the mid-market that is fundamental to creating a balanced and sustainable economy.

“Those scaling up are often investing in innovation, new markets and in boosting their production capacity, all of which needed to be funded with long-term capital. We are not trying to reinvent the wheel. Instead we’re suggesting an innovative adaptation of existing channels.”

The CBI and BDO have called on the Government to create new Long Term Lending Trusts (LTLT), which would extend tax incentives to investors that are willing to commit to providing long-term debt for at least five years – a similar way to the Venture Capital Trust scheme.

They are also recommending changes to the way the Enterprise Finance Guarantee works by rewarding lenders for providing longer-term loans, allowing AIM-listed companies to raise more capital from existing investors without the need to produce a prospectus, and an investigation into the Government’s ‘Business Tax Road Map’ to discover where it can boost the use of equity finance by growing businesses.