The Government has launched its new Business Growth Fund (BFG), but the scheme has come under criticism for not providing support to the majority of small firms looking for finance.
The fund has been set up to help SMEs with an annual turnover of between £10 million and £100 million.
It has monies of up to £2.5 billion, and is backed by a number of leading banks.
The BGF will invest approximately between £2 million and £10 million per business in return for a minimum 10 per cent equity stake and a seat on the board for a BGF director.
It is designed to offer long-term equity investment for growing enterprises which are struggling to secure access to sources of capital.
Announcing the launch, the Business Secretary, Vince Cable said: “The Business Growth Fund is ready to make substantial equity investments into ambitious mid-cap British companies who are set to create the business success stories of the coming years.
“Alongside new government support for exporters and commitments made by the banks to increase the credit available to businesses of all sizes, this private fund will provide crucial support to the firms generating the employment our economy needs.
“Good investing requires local connections to find and assess opportunities, so for the Fund to have a presence outside London – in both Birmingham and Edinburgh – is particularly heartening. British businesses must have access to the growth capital they need, wherever they are based.”
With the banks committed to putting up £1 billion of equity capital over three years and £1.5 billion over ten years, the BFG is central to the Project Merlin deal struck between the Government and the major lenders.
It followed the Rowlands Growth Capital Review which, in November 2009, identified a significant shortfall in growth funding for firms seeking between £2 million and £10 million.
However, business groups have questioned the efficacy of the scheme, pointing out that many enterprises have an in-built resistance to equity finance.
The manufacturers’ body, the EEF, argued that the launch of the fund highlights the limited progress being made in increasing the provision of mezzanine debt finance recommended by the Rowlands Review recommended.
This, the EEF continued, is important because often SMEs often have an aversion to giving up an equity stake in their business.
Lee Hopley, the EEF’s chief economist, said: “Closing the growth capital gap is only one part of the challenge to improve access to finance for businesses. Government and the banks must remain focused on ensuring that the package as a whole delivers improved lending conditions for small and growing businesses.”
The Forum of Private Business (FPB) was more open in its scepticism.
It held up figures from the Department of Business, Innovation and Skills (BIS) indicating that just 5 per cent of SMEs have funding requirements of £1 million or more.
Almost a quarter (23 per cent) are looking for much smaller sums: between £10,000 and £24,000.
What’s more, a mere 1 per cent of SMEs are seeking equity finance (down from 2 per cent in 2006/07), with the majority choosing not to sacrifice a stake in their businesses and preferring instead debt lending in the form of bank loans (40 per cent) and overdrafts (35 per cent).
The FPB expressed concerns that the BFG will not, in fact, help the vast majority of firms struggling to find the cost-effective finance necessary to compete for new contracts and create jobs.
Alex Jackman, the FPB’s senior policy advisor, commented: “The Business Growth Fund aims to bridge the clear gap in funding for ‘high growth’ firms identified in the Rowlands Review back in 2009 and so is certainly a welcome step and one that is long overdue.
“But we cannot allow this to overshadow the real problem – the lack of affordable lending being made available by banks to start-ups and other small businesses – those that are not eligible to benefit from the fund. There is a real danger that these firms will be left behind and that would be disastrous for the economy.”
Mr Jackman added: “We need much better debt finance in the form of cost-effective lending in parallel to this kind of equity investment. So far efforts to make this happen – such as a lending code that is not binding, targets that many banks are simply not meeting and mentoring and appeals schemes of unproven merit – are just not enough.”
More details on the BFG can be found at www.businessgrowthfund.co.uk