Greater awareness and greater use of equity finance could help more firms to invest, grow and boost the long-term health of the UK economy, according to a new report by UK employers’ organisation CBI, published today.
The CBI report, Slice of the Pie, highlights the UK’s overreliance on traditional debt finance and the serious under-utilisation of equity finance.
Better financial planning – CBI launches new online tool
Most small and medium-sized firms are time-pressed and 57% spend less than an hour researching finance providers. Whereas the most successful growing businesses develop a plan to review their finance needs on a yearly cycle, including maintaining regular contact with finance providers.
The CBI is launching a new online – FindmyFinance – tool to help get firms started by analysing what type of finance is best for them.
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 regarding equity finance is a fear of losing ownership (46%). A quarter of respondents said 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.
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.