Firms urged to tap into equity finance for growth

GREATER awareness and more use of equity finance could help more firms to invest, grow and boost the long-term health of the UK economy, according to a report.

The CBI report, Slice of the Pie, highlights the UK’s overreliance on traditional debt finance and the serious under-utilisation of equity finance. Half of all small and medium-sized firms (SMEs) rely on bank loans, while 36% use overdrafts. By comparison just 3% use equity finance – this lags behind the European average of 7%.

That’s despite the majority of growing businesses which have used equity finance reporting that it had a positive impact on their company (66%), and four out of five saying that they would use it again to fund business growth. 81% would recommend equity finance to other companies.

Katja Hall, CBI chief policy director, said: “We need to shatter the equity finance glass ceiling and encourage growing firms across the UK to use this largely untapped resource. It’s a myth that using it results in loss of control and decision making.

“Equity finance is one of the most effective ways for small and medium-sized firms to access investment capital and there are plenty of investors who take a minority stake.

“The Government should pilot a tax incentive for retail investors who hold their equity stakes for a certain period of time, to stimulate and nurture more long-term investment culture which growing firms are looking for.”

The main concern that businesses have over using equity finance is a fear of losing ownership (46%). A quarter of respondents said that they were concerned about a loss of decision making power. These worries are tied to a lack of awareness of the various different types of equity finance – while small and medium-sized firms are aware of venture capital and private equity, just half said that they were aware of public equity.

Many growing businesses also lack the capabilities to engage with equity providers because the negotiation of terms can be considerably more complicated than with debt finance, requiring financial expertise.

That’s particularly problematic, the report says, considering that only a quarter of them have a qualified financial manager and the vast majority (84%) do not consult external advisers before making finance decisions.

Growing businesses need ‘patient capital’ – finance that can be invested for five years or more – but CBI research shows that most equity finance deals are done on a medium-term basis. Half of business angel, venture capital and private equity investments were made for less than five years.

The CBI is calling on the Government to:

•Pilot a simple tax incentive to encourage retail investors to hold shares on a longer-term basis
•Support the British Business Bank to develop a mezzanine finance option – a hybrid convertible debt to equity finance product – to help ease businesses concerns about losing control.
Other CBI recommendations to boost the take-up of equity finance include:
•The Government should make the Seed Enterprise Investment Scheme (SEIS) permanent to provide investors and businesses with stability and surety on the tax landscape
•The Government should consider introducing an incentive for businesses investing in their supply chain to boost the supply of corporate venturing
•Better promotion of schemes like Business Finance Partnership – bringing all Government initiatives under the Business Bank.