The scale of Britain’s contribution to the European Union continues to be a subject for sometimes heated debate – even two years after the Brexit vote. During the referendum campaign, those on the leave side put the figure at £19bn per year, while remain voters pointed out that a large percentage of that money came back in the form of rebates and funding for various programmes. The House of Commons Library has put the net contribution for 2017 at £8.1m. The arguments continue.
Certainly there is something of a merry-go-round, with cash leaving UK coffers and some of it returning but what has been less widely reported is that UK SMEs are among those to benefit from programmes coordinated in Brussels.
The sums are not trivial. Last year, the Federation of Small Business pointed out that the European Investment Fund (EIF) currently directs around £500 million a year to British SMEs. And with Britain’s departure from the EU now less than a year away (although there will be an additional transition period) businesses are set to lose access to that particular source of finance.
The European Investment Fund is something of a ‘hands off’ institution. Rather than investing directly in SMEs (and also small mid cap companies) it works with both banks and investors. In essence it contributes money, which can be distributed under EIF rules in the form of loans, micro-loans and equity investment. The Fund does not itself make decisions on individual cases. Instead, it delegates that job to its partners.
In addition, EU money is also distributed in the form of grants. Under the jurisdiction of the European Regional Development Fund (EDRF). The focus here is on four broad areas – namely: SMES, the digital economy, the low-carbon economy and innovation.
A Period of Transition
Of course, the UK has an industrial strategy aimed at rebalancing the manufacturing/services mix in the economy and boosting support for the UK regions – the Northern Powerhouse and Midlands Engine initiatives being flagship programmes. Thus it possible – and perhaps likely – that more funding will be directed to SMEs from UK government coffers, rather than the money having to make the journey to Brussels and back.
But there are no guarantees. Last year, the Federation of Small Businesses called on the government to take action to ensure businesses would not see any reduction in their funding as a result of the Brexit vote.
With the UK’s official departure from the EU in March 2019 now very firmly on the radar screen, it is important for businesses and their advisers to look again at the funding options available.
In terms of policy, the Enterprise Investment Scheme and Seed Enterprise Investment Scheme have proved successful in ensuring a flow of funds to qualifying companies by using tax-breaks to de-risk investment. If there is a criticism, it is that the generosity of the tax reliefs have skewed investment towards companies that meet the EIS/SEIS criteria.
The British Investment Bank is also expected to play a hugely important part on keeping capital flowing to SMEs.. Working with partners, it’s goal is to create a diverse funding market, while encouraging small businesses to seek out the most appropriate forms of funding to meet their requirements.
But it shouldn’t be forgotten that Alternative Finance is already filling in many of the gaps in the UK business funding ecosystem. Rewards Crowdfunding – as exemplified by IndieGoGo and Kickstarter – has long provided cash lifeline for new business seeking to get their first products off the drawing board and into the hands of customers In particular, it is often used to, essentially, sell products in advance to ‘donors’ and in doing so fund the first production run.
Equity Crowdfunding, for its part has grown rapidly over the last five years by offering SMEs with growth potential a means to sell shares, without necessarily having to cede ownership to a small group of powerful investors.
But it is arguably platform lending that has had the biggest impact on the SME funding market. Depending on the requirement, term loans and invoice finance facilities are available from a wide range of platforms. Some are generalist and some, like The Route – Finance Private Debt platform – which focuses on special situations lending – position themselves in a specialist corner of the marketplace.
As one source of funding dries up, the key for businesses is to look at the alternatives and plan any fundraising campaigns well in advance.
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