Written evidence submitted by finnCap Ltd (SME0008)

1         Executive Summary

• The SME sector is the engine of economic growth and employment in the domestic UK economy.
• The UK is home to the most successful SME growth market in the world, the London Stock Exchange’s AIM market, where over £90 billion has been raised to support SMEs’ growth and development.
• However, just as more SMEs are considering the public markets as a source of growth or scale-up capital, multiple regulatory initiatives are significantly increasing the cost, complexity and timescale of this important source of funding.
• Furthermore, although retail investment is the lifeblood of ‘listed’ SMEs, recent investment rules actively militate against retail customer involvement in SME funding via public markets.
• Alternative sources of finance, such as crowdfunding and P2P lending, remain insignificant compared to bank lending for SMEs.  Regulatory restrictions on investor participation may be partly to blame for this very low level of SME funding market penetration.
• SMEs suffer from a lack of information about where to find the right growth capital alternatives to debt and misconceptions about both.
• The combined effect of the above has been to materially reduce the level of competition in the market for financing SME growth companies.
• At the same time, only 19% of SMEs say bank advice always meets their needs, many feel that lenders do not understand the SME sector and a quarter of SMEs are turned down for finance at the very stage when they look to grow.  In all, almost half of UK SMEs have experienced barriers in accessing finance.
• As a result, a ‘scale-up gap’ has opened, resulting in a lack of supply of appropriate capital, holding back further investment and contributing to fewer firms scaling up.
• The gap is worse than some international competitors and, importantly, worse than previous business growth performance seen in the UK.
• The UK now ranks 13th in world for scale up capital.
• This gap comes at a significant cost to the UK economy – if we were to boost our scale-up population by just 1 per cent, that would add £96bn to GDP.
• Policy and regulatory focus to encourage competition is key to closing this gap.
• The UK has seen a recent acceleration in the rate of SMEs founded and run by women.
• Growing women-led companies make a significant contribution to the UK economy.
• 44% of women-led companies grew at over 20% last year and 21% grew by more than 50%.
• But still women-led businesses achieve far lower levels of funding than those helmed by men.
• Unless this anomaly is addressed, we risk squandering the talent and potential of more than half of the population.
  

2         The Author

2.1       Sam Smith

As Chief Executive of finnCap, Sam Smith remains the only female CEO of a City broking firm. She established finnCap in 2007, having orchestrated the buy-out of a small corporate broking subsidiary of a private client stockbroking firm. Today, finnCap is ranked as the No.1 Nominated Adviser and Broker to AIM companies.

Sam qualified as a Chartered Accountant at KPMG and is an alumnus of the University of Bristol. She is passionate about ensuring that girls and women see only opportunities, rather than barriers to success, in whatever industry they want to be in.

Aside from her duties as CEO, Sam is actively involved in various mentoring projects and organisations such as Pinky Lilani’s Women of the Future awards, of which Sam is a former winner.

Sam is also a patron for the Modern Muse project, aimed at encouraging and inspiring millions of young girls throughout the UK to consider a business career and entrepreneurship as ways to realise their dreams.

2.2       finnCap Ltd

finnCap advises ambitious growth companies, accesses capital on their behalf and promotes their stories. Using our wide range of expertise across multiple sectors, we shape SME companies and products into effective investment stories.  As a modern entrepreneurial business we fuel faster growth, build value and are trusted to deliver success for businesses at every stage of their journey. Through delivering certainty we inspire confidence, energy and the determination to grow.  We believe this is the reason we are the largest adviser to ambitious growth companies and No. 1 broker on the London Stock Exchange’s AIM market, the most successful SME growth market in the world.

3         Reason for submitting evidence

3.1       SME economic contribution

• SMEs employ 81.6 per cent of the UK workforce.
• SMEs disproportionately drive job creation.
• Ninety-nine per cent of the 4.9 million UK businesses are SMEs.
• UK SMEs currently contribute £202bn to the economy and are forecast to contribute £241bn to the UK economy by 2025.

3.2       Funding gap

• just 19% of SMEs say bank advice always meets their needs
• almost half of UK SMEs have experienced barriers in accessing finance
• lenders frequently do not understand the SME sector
• A quarter of SMEs were turned down at the very stage when they looked to grow

• the UK’s historically thin market for patient capital holds back further investment.
• a lack of supply of appropriate capital contributes to fewer firms scaling up
• Alternative finance, such as crowdfunding and peer-to-peer lending, remains insignificant compared to bank loans for SMEs
• Although AIM is the most successful SME growth market in the world, raising over £90 billion for SMEs, recent regulatory initiatives are significantly increasing the cost, complexity and timescale of accessing this important source of funding

• evidence points to a UK ‘scale-up gap’ both with international comparators and with previous UK business growth performance.
• boosting our scale-up population by just 1 per cent would add £96bn to the UK economy.
• In the long run, if we close the scale-up gap, we stand to gain 150,000 net jobs and £225bn additional GVA by 2034.

3.3       Gender gap

• the number of women setting up their own business is rising much faster than men, but far fewer women run their own businesses than men.
• 44% of women-led companies grew at over 20% last year and 21% grew by more than 50%.
• But women-led businesses achieve far lower levels of funding.

3.4       Regulatory burden

• regulatory initiatives have imposed disproportionately heavy administrative burdens on SMEs
• although retail investment is the lifeblood of ‘listed’ SMEs, investment rules actively militate against such retail customer involvement in SME funding.
• Proposals to increase access to redress for smaller SMEs will increase costs for all regulated providers of SME growth funding.

3.5       Competition

• Rules designed to protect investors have choked off direct retail investment into SMEs.
• Proposals designed to protect smaller SMEs will increase costs for all regulated providers of finance, impacting their profitability and deterring some altogether.
• As a result competition in the market for financing SME growth is reduced.
  

4         Submission

4.1       Economic contribution

The State of Small Business report by Nesta (oct. 17) found that:

• “SMEs have disproportionately driven job creation since 2010 – accounting for 73 per cent of new private sector jobs created, while making up only 60 per cent of private sector employment.”

Research, conducted by Hampshire Trust Bank in partnership with the Centre for Economics and Business Research (CEBR), predicts that:

• SME contributions to the economy will grow by 19% from 2016 to 2025.
• UK SMEs currently contribute £202bn to the economy and are forecast to contribute £241bn to the UK economy by 2025.

4.9 million UK businesses employ 24.3 million people and have a combined turnover of £3.3 trillion. Ninety-nine per cent of the 4.9 million businesses are SMEs. SMEs employ 81.6 per cent of the UK workforce.

4.2       Funding gap

A report by Close Brothers concluded that:

• “SMEs are not using the right types of finance: micro SMEs are reliant on personal savings; overdrafts are overused by SMEs of all sizes to fund growth; personal credit cards are regularly used to meet cash flow needs
• “Despite the myriad of options available, 540,000 businesses in the UK are now unsure about being able to access the finance they may need to grow or even survive
• “Weak support from banks is failing to resolve these issues; just 19% of SMEs say bank advice always meets their needs
• “Despite lending bouncing back since the recession, almost half of UK SMEs have experienced barriers in accessing finance, with lenders frequently not understanding sector
• “A quarter of SMEs were turned down at the very stage when they looked to grow
• “Alternative finance like crowdfunding like crowdfunding and peer-to-peer still pales in comparison to bank loans for SMEs.”

The HM Treasury August 2017 consultation, Financing growth in innovative firms, identified a “patient capital gap”, whereby:

• “…a lack of supply of appropriate capital appears to be one important factor that contributes to fewer firms scaling up.”; and
• “….the UK’s historically thin market for patient capital has created a negative feedback loop that holds back further investment. This has created a gap between optimum levels of investment in a fully functioning market and those today.”

The Scale-Up Report on UK Economic Growth by Sherry Coutu CBE (Nov. 2014), found that:

• “evidence points to a UK ‘scale-up gap’ both with some international comparators and with previous business growth performance seen in the UK.” and
• boosting our scale-up population by just 1 per cent would add £96bn to the UK economy. In the long run, if we close the scale-up gap, we stand to gain 150,000 net jobs and £225bn additional GVA by 2034.

4.3       Gender gap

According to Aston University's annual Global Economic Monitor Report:

• comparing 2003-6 and 2013-16, the number of women setting up their own business rose by 45 per cent, compared to just 27 per cent among men;
• but still 5.5 per cent of women run their own business versus 10.4 per cent of men.

A survey of the Fastest-Growing Women-Led Businesses Driving the UK Economy by Founders4Schools (2018) revealed that:

• 1,283 growing women-led companies contributed a total of £26.1bn in revenue to the UK economy; and
• 44% of women-led companies grew at over 20% last year and 21% grew by more than 50%.

The Female Founders Forum report, Untapped Unicorns: Scaling Up Female Entrepreneurship (Nov. 17) found that:

• “…women-led businesses achieve far lower levels of funding, with male entrepreneurs 86 per cent more likely to be VC funded and 56 per cent more likely to secure angel investment.[1]”

4.4       Regulatory burden

• a raft of recent regulatory initiatives – Making Tax Digital, corporate governance, the Market Abuse Regulation, revised AIM Rules, etc. – have imposed disproportionately heavy administrative burdens on UK SMEs;
• Investment rules, such as Product Governance, Appropriateness, Suitability and model portfolios, discourage managed, advised and even execution-only retail investment in SMEs.

4.5       Competition

• Regulatory initiatives, such as those described above, although designed to protect investors, have the unintended consequence of choking off retail investment into SMEs;
• Proposals designed to protect SMEs, such as enhanced access to the Financial Ombudsman Service, increase costs for all regulated providers of finance, impacting their profitability and deterring some altogether.  These initiatives have the unintended consequence of reducing competition in the provision of finance to SMEs.

March 2018