UK SMEs’ appetite for equity finance growing, bank debt falling
A new report suggests small businesses’ appetite for long term equity-based finance has increased significantly in the last 12 months during which time demand for traditional bank debt has continued to fall.
The number of SME owners that are considering external equity investment has ramped up to 44 per cent in the past 12 months from 34 per cent last year, according to a new report commissioned by Albion Ventures, a venture capital firm.
The report which is based on interviews with 1,000 SMEs, highlights that this growth is part of a longer-term trend with just 12 per cent of SMEs willing to sell equity to raise cash in 2103.
Over the past year, in addition, demand for traditional bank finance fell to 45 per cent, down from 49 per cent in 2015, suggesting that the UK SME sector is pivoting away from its reliance on debt, the report concluded.
On a sector basis, appetite for equity finance was the strongest by far among IT and telecom firms (52 per cent), manufacturers (40 per cent) and transportation and distribution companies (32 per cent). Construction firms trail at just 13 per cent.
On a regional basis, SME owners in London are the most likely to consider equity investment (37 per cent) followed by those in the East of England (35 per cent) and Scotland (29 per cent).
Millennial entrepreneurs are by far the most enthusiastic towards equity finance with 40per cent considering this approach compared to 29 per cent of CEOs in their forties. Male business owners are far more likely to consider equity from venture capital, private equity and business angels (28 per cent) compared to just 16 per cent of females.
The growing popularity of equity finance is supported by recent data suggesting £4.9bn was invested in fast growing UK businesses across 2,989 transactions in 2015-16, the highest on record.
Patrick Reeve, managing partner at Albion Ventures says the growth is a vote of confidence in the post-Brexit economy with demand for equity finance continuing to grow among entrepreneurs.
He says this underlines “a psychological shift from the traditional reliance on bank debt as the source of growth finance“.
“What is particularly welcome is the emergence of the ‘Dragon’s Den generation’ – those under 35 who embrace an equity culture. The greater willingness of younger CEOs to use equity rather than banks to secure the funds they need suggests we’re shifting towards a more entrepreneurial model as seen in the US,” he added.