Long-term approach essential for growing firms’ funding
Offering tax incentives to savers who commit to providing long-term finance for medium-sized businesses (MSBs) would help growing firms realise their full potential, according to a new CBI/BDO report.
Stepping up: fixing the funding ladder for MSBs recommends ways the Government can encourage long-term debt and equity investment in these firms. The ‘forgotten army’ of Britain’s businesses, MSBs represent just 1.8% of companies, but generate nearly a quarter of private sector revenue and make up 16% of total employment.
With over half of MSBs finding it hard to access a loan for longer than five years, the UK’s largest business group, together with the accountancy firm, BDO, are calling on the Government to better incentivise this type of funding by:
Creating new funding vehicles – Long Term Lending Trusts – which offer income tax relief to savers investing in long-term MSB debt funding
Changing the way the Enterprise Finance Guarantee works, by rewarding lenders for providing longer-term loans.
Sean Taylor, Co-Founder and Managing Director of Redwood Technologies, said:
“Long-term finance is critical to the future of any growing firm, but the lack of it can make climbing up the growth ladder a tough task for many mid-sized businesses.
“These proposals are aimed at giving companies like ours a much needed leg up in reaching our full potential, at the same time as helping savers.”
John Cridland, CBI Director-General, said:
“Building up a British ‘mittelstand’ of successful medium-sized businesses is mission critical to our economic future. With little recognition, these firms quietly toil away, creating jobs in communities and boosting growth in every corner of the nation.
“A key part of unlocking their enormous potential is for the Government to fix the funding ladder, filling in the gaps in supply of long-term finance that the UK’s brightest growing firms need to succeed.
“Incentivising savers to invest in our businesses for the long-run is a win win. It offers them attractive, alternative investment packages, while helping propel medium-sized businesses along their growth path, boosting the economy as a whole, and enhancing productivity.”
John Gilligan, Partner at BDO UK, said:
“Making the most of the UK mid-market is fundamental to creating a balanced and sustainable UK economy. But the UK lacks diversity in long term funding sources – particularly for mid-sized companies.
“We’re not trying to reinvent the wheel. Instead we’re suggesting an innovative adaptation of existing distribution channels. This is designed to allow new entrants to start up and flourish alongside current funding sources. The proposal also gives the people of Britain the opportunity to directly invest in long-term loan portfolios to the middle market in a regulated environment. Savers will have a new asset class to invest in and companies will be able to access the more patient capital that they tell us they need to grow.”
With 70% of MSBs planning to grow in the next year, they will be central to improving the UK’s investment performance and driving productivity growth. To boost the ready supply of available growth capital, the report calls for:
A new financing vehicle – the Long Term Lending Trust (LTLT)
The LTLT would extend tax incentives to investors who are willing to commit to providing long-term debt, in a similar way to the successful Venture Capital Trust scheme, for at least five years. Targeting individual savers, it should offer:
A return based on yield, not capital gain
Income tax relief, with a deduction from income tax in the year of investment.
The LTLT – which would cost the Government only £310 million a year and could unlock billions of new long-term loans – would likely provide relatively high returns, whilst offering a strong degree of protection, being run by an investment professional.
Make the Enterprise Finance Guarantee incentivise long-term lending
The Enterprise Finance Guarantee supports bank loans of up to £1.2 million to MSBs, by guaranteeing up to 80% of the outstanding amount of the loan.
As the scheme evolves, it should be adapted to promote longer term loans. For example, the guarantee could be amended – progressively increasing as the term of the loan increases, with higher guarantees of capital repayments at a later date.
The Government should continue to actively promote the benefits that private placements have for British companies, boosting awareness and demand
Make the UK the best place to list on a growth equity market by allowing companies already listed on the London Stock Exchange’s AIM to raise more capital from existing investors without the need to produce a prospectus.
A Cross-departmental investigation of the UK’s enterprise tax framework to be at the heart of the Government’s ‘Business Tax Roadmap’, to see whether it can help boost the use of equity finance by growing businesses.
26 August 2015
The CBI defines a medium-sized business as a firm having an annual turnover of between £10 million and £100 million.
About the CBI:
Across the UK, the CBI speaks on behalf of 190,000 businesses of all sizes and sectors which together employ nearly 7 million people, about one third of the private sector-employed workforce. With offices in the UK as well as representation in Brussels, Washington, Beijing and Delhi, the CBI communicates the British business voice around the world.
Visit the Great Business Debate website – a CBI led campaign to help build public confidence in business.
Accountancy and business advisory firm BDO LLP has a clear ambition to be known in the market for exceptional service delivered by empowered people. The 2014 Mid-Market Monitor shows that BDO is the market leader for client satisfaction for the third year running – outperforming all its major competitors.
BDO’s heartland is the mid-market. The UK mid-market accounts for less than 1% of all firms but delivers more than 33% of the UK’s revenue – over £1 trillion – and one in four jobs. BDO’s Mid-Market Manifesto (www.midmarketmanifesto.com) calls for greater government focus on mid-sized businesses.
BDO LLP operates in 18 offices across the UK, employing 3,500 people offering tax, audit and assurance, and a range of advisory services. BDO LLP is the UK member firm of the BDO International network with revenues approaching £400m.
The BDO International network provides business advisory services in 152 countries, with more than 60,000 people working out of 1,350 offices worldwide. It has revenues of $7.02bn.