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HCR Law Events

16 January 2024

Raising capital for SMEs and the Mansion House reform

As the current climate creates a tougher, more uncertain time for small to medium-sized enterprises (“SMEs”), we consider how they will grow and develop in a time where the belts of financing and capital-raising are tightening.

This is a market where the extended low-interest environment has ended, traditional banks have stricter lending criteria and equity investment is scarce. It is, therefore, no surprise to see a growing private credit market and the rise of challenger banks offering flexible funding options tailored to each SME.

Statistics published by the British Business Bank back in March 2023 showed a drop in the proportion of smaller businesses using external finance – 33% in 2022 versus 44% in 2021. However, as they noted in a press release that month, in the same period it was a record year for challenger and specialist banks which lent £35.5bn – exceeding traditional major UK banks.

This climate creates a need for emerging equity funding models, angel investment, bespoke credit solutions and more notably government backed initiatives.

Emerging funding models and support

Even with the above backdrop, SMEs are being supported by new funding models and ideas. Digital platforms are being created to allow retail investors access to private markets, and platforms to link angel investors with startups are on the rise. New private credit funds are also looking to provide very flexible and broad funding options, offering investment right across the spectrum of the capital structure. Similarly, specialist asset-based lending and annual recurring revenue products are gaining more traction

Other private schemes have also been started with a similar aim; Tech Nation, a prominent UK startup network has pledged to deploy £10bn of private investment over the course of the next five years to startups outside of London. The scheme will be supported by HSBC Innovative banking. To date, more than 1,300 SMEs have benefited from the scheme from the date of its initial launch.

Government-backed initiatives – the Mansion House reform

Amongst the alternative methods mentioned above, significant interest arises when the government steps in. Tech Nation was originally a government-backed scheme before it was closed when funding was redirected to EagleLabs, another startup support hub. Governments worldwide are acknowledging the role that SMEs play in their contribution to the economy.

In July this year, the UK chancellor delivered a set of initiatives with the aim of boosting pension savings and simultaneously increasing investment into British business. A key takeaway target that the chancellor set out is to unlock £50bn by 2030 from pension funds for investment in private equity and startup businesses.

As part of the reform, the chancellor announced the ‘Mansion House Compact’. This is essentially a voluntary agreement between nine of the country’s largest defined contribution pension providers. With a combined c.£400bn in assets, including household name insurers, the agreement commits them to the objective of allocating 5% of assets under management (“AUM”) in their default funds to unlisted equities by 2030. The providers include Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer.

It is hoped that this could potentially unlock the target of £50bn to be deployed into UK-based SMEs.

Whilst the initiative is in its early stage and there are no key indicators that the scheme is working, it is hoped that this incentive will provide confidence to SMEs that capital is out there to be deployed and demonstrates the willingness of the government to intervene and support when needed.

The future for SME lending

While SMEs struggle with tough market conditions, new platforms, funding models and government support is out there. If you are a startup or SME, hope is not lost on capital raising. If you are in your early stages, equity investment is possible.

Consider emerging models, digital fundraising platforms and crowdfunding. Reach out to flexible debt providers and explore peer-to-peer lending options. Investors will back SMEs with good growth prospects and recurring revenue, but it may be that the funding options will have to come from outside the norm.

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About the Author
Jaks Smallwood, Solicitor

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