Business Growth Fund – step in the right direction or papering over the cracks?

Last week saw the unveiling of the government’s new Business Growth Fund (BGF), a £2.5bn resource aimed at helping the UK’s businesses recover following the recession.

Backed by five of the UK’s largest banks – Barclays, HSBC, Lloyds, RBS and Standard Chartered – it is anticipated over the next few years that the BGF will invest into hundreds of UK businesses that need funding to create new products and services, new jobs and break into new markets.

So surely this is a positive move which will alleviate the crippling issue of lack of access to finance for our business base? The answer to that is both yes and no.

Firstly, let’s begin with the positives. It is a fairly significantly sized private backed fund which will certainly make a difference for many medium sized companies across the country that are looking to expand their product portfolio and break into new markets, improve productivity and help rebalance the economy to one that is more export orientated. It will invest between £2m and £10m in companies in return for an equity stake in the business and a seat on the board, therefore filling a ‘gap’ in finance which was previously small change for venture capitalists and generally not perceived as being worth their time or resource. Through the equity stake, these businesses will also have access to knowledge and expertise of those involved in the BGF, helping them operate strategically and operationally, and opening up avenues for future succession funding.

‘Are the banks and policymakers prioritising high growth opportunities above all else? If
they are, then it is unlikely that the rebalancing of the economy and
the private sector job creation will take place at sufficient levels to realise the government’s
economic ambitions.’ However, the BGF is certainly not ‘all inclusive’ and there are fundamental issues that it will not address. Firstly, it is restricted to companies which have sales of approximately £10m to £100m per annum – so essentially it is a fund being targeted at higher growth medium sized companies. The exclusion of less productive medium sized companies and the all important small business base is clear. Many of those firms and start ups will require significantly less than the £2m minimum that is on offer, so are not eligible for this fund.

The question therefore is, are the banks and policymakers prioritising high growth opportunities above all else? If they are, then it is unlikely that the rebalancing of the economy and the private sector job creation will take place at sufficient levels to realise the government’s economic ambitions. The reality is that most SMEs are not ‘high growth’, and urgently need capital injections to help them maintain capacity – if this capital does not arrive in sufficient quantity then unemployment will further increase and the ability of the private sector to take on ex-public sector employees will diminish.

To the government’s credit, the monies being promised for small businesses by banks as part of the Project Merlin initiative should help to some extent in oiling the cogs to get lending levels moving again. However, today’s news that the banks have not met their lending targets in the first three months of the year, whilst not surprising, illustrates the uphill battle that SMEs face.

In sum total then, it can’t be argued that the BGF is not at least a step in the right direction, but it is certainly not going to create a major transformation in bank lending overnight – more targeted measures are urgently required to ensure that the SME base, lifeblood of the economy, is not set adrift. One of the coalition government’s objectives, outlined in the Backing Small Business strategy, is to reorientate itself around the needs of small businesses. It needs stay focused on this as a central priority for all SMEs, not just a select number of middle sized organisations, or the wider economic recovery could be undermined.