Watch the funding gap

Regional funding schemes can boost small businesses and deliver value when they are run on commercial principles

By Sally Goodsell

Smaller businesses are still finding finance hard to come by. Some banks are lending again, but a great many businesses with high growth potential are not catered for. It’s not just the economic climate; in 30 years of financing small and medium enterprises (SMEs), I experienced this problem long before the current recession.

This gap in funding is stopping small businesses becoming tomorrow’s medium-sized employers, making it a significant missing link in building a more sustainable economy.

The untapped potential of SMEs – which already provide more jobs than any other sector in the UK – could mean work for millions. But jobs are not the only thing at stake; the Treasury would also welcome the extra taxes.

We need to allow small and medium sized businesses to fulfill their potential and play a bigger part in a healthy economic recovery. We’ve relied so heavily on blue chips that others have been left by the wayside.

I'm not convinced that this dilemma should be the responsibility of the banks. Stimulating widespread economic growth and jobs is surely government territory. In these cash-strapped times, talk of public initiatives for small business growth sounds expensive, but it can be done without cost to taxpayers.

At Finance South East (FSE), a regional funding organisation, we invested public money into private enterprises in the form of loans and equity, stimulating jobs and tax revenue.
We made small investments in companies with good growth prospects – and those we have invested in over the past three years have grown almost five times faster than the national average. Yet the entire operation does not burden the public purse.

The key to this success has been taking a commercial approach to public investment.
Our loans are paid back at competitive interest rates and equity decisions are made on the same profit-driven principles as any venture capitalist. These funds are self-sufficient but the crucial difference is that we are willing to invest in early-stage businesses that the private sector doesn’t cater for.

We've found that relatively small investments of about £100,000 can transform a company’s fortunes, helping it to develop technologies, break into new markets and go on to attract more substantial funding from private investors. It is a model that could be replicated across the UK to fit regional economies. But without political support the opportunity will be lost.

National funds at the larger end of the funding scale are important, but it’s always worth remembering that the UK is a conglomeration of regional economies that behave very differently. In my opinion, schemes must be regionally delivered to meet genuine demands.

Regional funding schemes can also help to forge closer links between businesses, business angels and universities, as well as offer non-financial support such as hands-on mentoring from experienced fund managers. This is extremely valuable to investee companies, encourages an open and communicative relationship and tangibly de-risks the investment opportunity.

Some MPs have expressed the fear that venture capital support funds could become little more than a “slush fund”. Clear objectives, rigorous evaluation mechanisms and transparency safeguard against this.

A recent economic impact study backs up what FSE has long known; regional funds can deliver excellent value when managed properly.

This research found turnover of our investee companies increased by an average of 34 per cent per year, compared with 7 per cent for the UK. It also revealed that almost 80 per cent could not get similar funds from banks or other sources and that 90 per cent would have mothballed development without our investment.

We're keen to work with all stakeholders to develop this work into a blueprint for small business growth across the UK. We have proof that regional funding can deliver value when run on commercial principles. The next step is to act on this evidence decisively.

Sally Goodsell is CEO of Finance South East

20 February 2010

Sally Goodsell. CEO of Finance South East,