Small firms may miss out on £2.5bn fund

Most small businesses seeking affordable finance will miss out on a new £2.5bn equity fund launched by the UK’s largest banks, a business lobby group has warned.

The Forum of Private Business said the criteria to access the Business Growth Fund, launched by banks and the British Bankers’ Association (BBA), will put many businesses off from using the scheme.

The Business Growth Fund allows banks to take stakes of between 10 per cent and 50 per cent in high growth businesses, with turnovers of between £10m and £100m, in return for investments of £2m to £10m.

But according to the latest figures from the Department of Business, Innovation and Skills (BIS), just five per cent of small and medium-sized enterprises (SMEs) have funding requirements of £1m or more, with just under a quarter (23 per cent) needing between £10,000 and £24,000.

The FPB said a paltry one per cent of SMEs are seeking equity finance (down from two per cent in 2006/2007), with most choosing not to sacrifice a stake in their businesses and preferring debt lending in the form of bank loans (40 per cent), and overdrafts (35 per cent).

The forum said it is concerned that the fund will not help the vast majority of firms struggling to find the cost-effective finance necessary to compete for new contracts, create jobs and drive economic growth.

FPB senior policy adviser Alex Jackman said: “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.”

Jackman added: “There is a real danger that these firms will be left behind and that would be disastrous for the economy.”

Under the Business Growth Fund the banks are committing to provide £1bn of equity capital over three years and £1.5bn over 10 years.

Conceived as part of the BBA's taskforce last autumn, the fund was central to the Project Merlin deal struck between the government and major banks. The deal included an increase in lending to SMEs and restraint on bank bonuses.