My Finance for Growth article last week produced one of the biggest ‘postbags’ we have ever had. As ever, most of the emails were ‘not for publication’.
Although most of the responses were ‘in agreement’ with the stance I took in the article, many made the point that the figures for rejections from the banks were misleading as, in their experience, it just wasn’t worth applying in the first instance. Banks required personal guarantees (rather than against the company) ‘we cannot risk the shirts on our backs as well as our livelihood’, high interest rates, huge arrangement fees and ‘the right to pull facilities and demand repayment without notice’. So, companies were run in a way that avoided the need for bank finance “which leads to less economic activity than would take place if bank finance was readily available’.
I got many replies from Private Equity firms. One made the point that US tech companies relied 100% on equity finance which meant that ‘everyone was sitting on the same side of the table. With bank finance you always have someone sitting on the opposite side – someone whose main interest is getting his loan repaid’. Another PE firm said ‘You are quite right in your views: there is plenty of equity [finance] available for decent businesses in the UK. Much of it, interestingly, coming from US funds who see strong technology and slightly less insane prices here [in the UK].’
Another said“What high growth businesses need are good early customers and that is why the Cabinet Office’s work to encourage HM Govt to buy innovative products from smaller companies is, in the long run, much more important than all the various schemes to pump yet more money into funding companies’. I totally agree with that. All the businesses I have founded have been mainly funded early on by customers either paying in advance or ordering a product ‘off the drawing board’.
Several made the point that companies need a mix of money. A ‘bedrock of equity funding’ can be augmented by various asset-backed finance (like hire purchase, leasing, factoring etc) to fund working capital.
The point was also made by quite a few respondents that HMGovt had created some very attractive schemes enabling private investment in SMEs. Despite this ‘few of my friends have taken advantage – but still complain at the poor returns on their cash!”. Conversely,the tax system, whereby interest on debt was tax deductable, came in for much stick.
On the other hand, many of the owners who wrote in were reluctant to go down the PE route as they felt such investors would force them into a sale in a few years time ‘probably to the Americans’; which was against the need to grow big UK-owned tech forms. Many felt that UK PE undervalued their businesses compared to their quoted counterparts. (“They look at P/E multiples whereas our peers command 6-7x revenue multiples’)
Really interesting set of responses. Clearly ‘we hit a nerve’. Always open to hear further views on this or any other subject dear to your heart.
Footnote - Maybe the UK isn't so bad afterall?
EY reported this week that the UK was one of the top five countries in the G20 for entrepreneurs, beating the likes of Germany and France, and second only to the US for access to funding. “A competitive tax system, business friendly regulations, skilled workforce and dynamic financial markets have given the UK its edge.” See The EY G20 Entrepreneurship Barometer 2013