Government must increase small business awareness of alternative finance methods, report says

In the report (51-page / 2.1MB PDF), a Government-commissioned taskforce chaired by Legal and General chairman Tim Breedon said that there was "significant potential" to develop non-bank sources of lending for small businesses.

Creating a single "brand" under which to deliver the Government's range of SME finance programmes, along the lines of German development bank KfW, would help "increase awareness" of alternative funding methods available as well as deliver those products, Breedon said. The service should be able to lend directly to SMEs, or aggregate loans which could then be sold on to larger investors - allowing smaller businesses indirect access to the global capital markets.

The report also suggests setting up a new Business Finance Advice network made up of the main accountancy bodies, as well as allowing the Government's Business Finance Partnership (BFP) to invest in more innovative financial products such as mezzanine finance and peer-to-peer lending. The BFP is currently accepting proposals from private sector investment partners which will enable it to make up to £1 billion available for lending to SMEs.

Investment funds expert Daniel Greenaway of Pinsent Masons, the law firm behind Out-Law.com, was particularly interested by the report's comments on mezzanine finance. The term refers to a type of debt that represents a claim on a company's assets ranked only above common shares. It can be a more expensive financing source for a company than more traditional forms of debt due to its unsecured ranking, however provides a higher investment return than secured or more senior lending.

"The report raises the issue that businesses are often not aware of the existence of mezzanine finance," he said. "That may be so but from the perspective of the mezzanine providers there is no shortage of opportunities - as the report also notes the issue is more about the ability of the mezzanine providers to raise finance from institutional investors."

"One of the big challenges for them is that institutional investors tend to place mezzanine in the same bucket as their private equity investments, but it does not always get a fair shot due to the lower – albeit more predictable – targeted returns on the latter," he added.

Breedon said that the current trend among banks to try to reduce the amount of debt on their books as a result of new regulations at both national and international levels - a process known as 'deleveraging' - was likely to leave a "significant funding shortfall" as businesses began to show signs of growth and regain their appetite for investment. The report anticipates that the 'gap' in funding banks will have to make available to businesses could reach as much as £191bn over the next five years, with almost £60bn of this impacting on SMEs.

"Whilst there is no silver bullet to addressing this issue, we have made a number of recommendations which I believe will collectively help open up alternative financing channels for UK SMEs," Breedon said.

The report also calls for more support from larger businesses, from paying their bills to small suppliers more quickly to the possible introduction of tax breaks to encourage larger businesses to invest in SMEs through corporate bonds and small business investment funds.

Business Secretary Vince Cable welcomed the report, saying that he hoped it would represent a "turning point" in business finance.

"We need to reshape the UK's finance landscape to better serve the needs of ordinary businesses, helping more companies find the support they need to start and grow," he said.