Andrew Ewing, corporate finance partner with Johnston Carmichael
It may shock you to hear this if you are running a small business: money is available to help you grow.
A few years back this point would have been a given but in this current climate the availability of support from banks and other sources to help SMEs has been perceived to be a huge issue.
While there is a common perception that there is little capital funding available to SMEs, I don’t believe it is a fair one.
I feel this has resulted in many companies not even bothering to make an approach to the banks or other sources for help.
However, the situation on the ground is fundamentally better than perceived and improving further with evidence that some banks are actively doing more to engage with the SME community.
Santander has increased its profile recently, rolling out a new mezzanine level of unsecured funding for growing businesses, while HSBC, perhaps identifying a commercial opportunity in Scotland, has bolstered its recruitment levels to focus on generating more business and retail loans.
This development could spark further momentum in the market and potentially influence some of the more traditionally Scottish based banks to engage more.
It’s fair to say that RBS and HBOS acquirer Lloyds have been a little more patchy in their lending, with a more cautious approach but they do continue to back solid performing SMEs.
I feel the key issue for the banks and SME lending revolves around communications.
They all need to do more to explain and demonstrate to business owners there that they are open for business and keen to support small firms with serious growth plans. To be able to reference deals done in this sector of the market would certainly strengthen sentiment.
For those firms which are still struggling to comply with the banks’ lending criteria or simply can’t get the required level of funds from them, there are a number of alternative sources of capital available.
SMEs should also look at alternative forms of finance which may be suitable, depending on their circumstances.
The Scottish Loan Fund (SLF) was set up to help out firms with demonstrable growth potential which can’t otherwise get access to funding.
The SLF can provide loans on a commercial basis, ranging from £250,000 to £5 million to qualifying Scottish SMEs that have growth potential or are engaged in exporting out with Scotland.
This lending tends to be more expensive than traditional bank debt but this is reflective of the higher risk attached to its unsecured nature.
The Business Growth Fund (BGF) is a £2.5bn, UK government initiative set up to help small and mid-sized fast growing firms. While the BGF is effectively competing with existing players in the finance market, it should be welcomed, especially after it bolstered its presence in Scotland last year.
The Fund recently announced an investment of £3.85 million of growth capital in Glasgow based technology business, M Squared Lasers. As well as offering financial support, the BFG also provides non-exec input on the boards of the companies in which they invest.
There are also investment opportunities available from a rising number of mid-tier private equity firms in Scotland.
These include Glasgow-based Maven Capital Partners; Soutar Investments, backed by Stage Coach chairman Brian Soutar; Nevis Capital, which is predominantly engineering sector focused; and Panoramic Growth Equity – based in London and Glasgow - which has a £34m pound fund to invest in SMEs across the UK.
SMEs should also not discount targeting investment from private equity firms based south of the Border. Last year London-based Lyceum Capital bought a majority stake in Fife energy procurement consultancy McKinnon & Clarke for £22m.
Meanwhile another London equity player, Sovereign Capital, led an MBO of Bellshill-based Euro Environmental Group, another example of the interest which UK-wide private equity firms are showing towards Scotland.
Another trend, especially noticeable within the technology sector, of larger companies investing cash in smaller firms as an alternative to putting their capital in the bank could provide another option for SMEs to consider.
A great example of this is Mitie, the global outsourcing giant, which has invested in over 80 small businesses.
Just as charity begins at home, businesses should also initially look at how they can best maximise the income they generate before they start hunting for external sources of capital.
I have seen SMEs in high innovation sectors such as technology and life sciences save hundreds of thousands of pounds through research and development tax relief claims.
While the criteria for getting lending, whether from banks or some of these other vehicles, may be tough there is no question in my mind that capital is available to aspirational companies.
As with many things in life, the most important aspect is often the human one: does a potential investor buy into the business owner and his or her management team?
This could prove to be the ultimate springboard or stumbling block.
Andrew Ewing, Corporate Finance Partner, Johnston Carmichael