1. Background
The Business Bank has been a long time coming. Britain has been the only one of the G8 countries to not have an institution that facilitates business finance solutions for the SME sector. America’s Small Business Administration was created by President Eisenhower as far back as 1953.
The KfW in Germany has been supporting the sector for some 60 years with the other members all having their own versions.
2. Purpose
The idea of a British Business Bank was first proposed in 2012 by George Osborne and Vince Cable. There was (of course) a difference in opinion as to what function the Bank should fulfil. Mr Osborne wanted the Bank to oversee the various Government schemes on offer whereas Mr Cable wanted the Bank to lend in its own right.
It seems that they have agreed to differ and reached a compromise where we see the new organisation taking responsibility for the implementation of the various government lending schemes and at the same time providing capital to a number of alternative finance providers.
The total amount being made available is £400m with £300m already allocated. The main recipients being:
Funding Circle £60m
Zopa £10m
Ratesetter £10m
European Capital £50m
Beechbrook Mezzanine £30m
Praesidian £30m
BMS £15m
Boost & Co £20m
Shire £40m
Urica £10m
Market Invoice £5m
Credit Asset Management £5m
With SMEs having a combined turnover of some £1,600bn, employing 14.4 m workers and accounting for 99.9 per cent of all private sector businesses in the UK (www.fsb.org.uk/stats), it is no wonder the government has been desperate to get the banks to fund these businesses.
Following the financial crisis of 2008 the main Banks in the UK have chosen to shy away from funding the SME sector in an effort to shore up their risk profiles and, ‘as I understand it’, to focus on the larger Corporates where they can make more money in a more controlled environment.
This of course is not unreasonable after the serious difficulties experienced post 2008 when risk and reward ratios became very confused.
3. Delivery
The Bank has segmented the market into three core target groups:
- Start-ups and early stage firms
- Firms planning to grow, and
- Other stable firms with viable business propositions not able to obtain finance.
They have developed a range of programmes to increase the flow of finance into these core groups as follows:
Venture Capital Solutions
This area of the Bank is responsible for the design and delivery of a portfolio of products that encourages and supports the flow of venture capital into smaller businesses.
Lending Solutions
This team manages products that support the flow of debt-based finance into the SME sector, including the Start-Up Loans initiative and the Enterprise Finance Guarantee scheme. They are currently working on an initiative to increase the flow of Mezzanine finance to Small and Medium businesses.
Investment Programme
This programme was launched in April 2013 to make commercial investments on the basis of matched funding coming from the private sector. It is seeking to encourage new and smaller lenders into the investment market.
Wholesale Solutions
This part of the Bank is responsible for delivering funding and capital products and programmes that increase the flow of finance to the SME sector, including:
A range of ‘Wholesale Guarantees’ that are designed to make lending to smaller businesses more attractive to banks by increasing their capital efficiency.
and
An Asset Finance Funding Vehicle that will be designed to increase the availability of asset finance to the SME sector.
Comment
The Business Bank can only be a force for good in my opinion. Anything that increases the supply of finance to the SME has to be a step in the right direction and will be a continuing catalyst for growth in this sector.
The support given to the Alternative Finance market is in itself worthy of significant praise as not only has the programme provided a number of these businesses with additional capital it has also served to validate this form of business funding at a time when the market is ever sceptical of previously unknown Brands offering finance solutions.
At this increasingly fragile period in the recovery it is crucial that the Business Bank succeeds – it is too SME to fail!
As always, if you have any comments on this article or would like to discuss any aspect of it please contact me at info@transcapital.co.uk or on 0845 689 8750.
John Thompson is Managing Director and founder of Trans Capital Associates
Image by: Department for Business, innovation and Skills
