Are barriers to investment harming your productivity?
A survey by the Bank of England (BoE) and the Department of Business and Trade has identified a potentially significant challenge facing SMEs on their journey towards growth.
The survey’s findings indicate that investment is crucial to sustaining growth for SMEs, but that many businesses faced barriers to accessing finance to make sufficient investment in areas, such as research and development, operational improvements and recruitment.
Most significantly:
- Half of businesses reported using only internal funds for investment
- 20 per cent said that they had underinvested
- 70 per cent preferred slower growth to incurring debt
- Use of equity finance is very low in SMEs
- Financial constraints are a key factor in discouraging borrowing
All of this begs the question – are you struggling to boost growth in your business due to these barriers to investment?
The key in the lock
Often, financial investment is the most effective – or only – way to achieve real growth within a business.
It opens the door to improvements in your product or service, innovations, enhanced marketing efforts and the ability to recruit the right talent for your team.
However, early-stage businesses or SMEs typically lack the large cash reserves of larger businesses and, therefore, struggle to invest sufficiently using only internal funds – leaving the options of slow growth or external investment.
The former is the preferred choice of most UK businesses, according to the research, but this does not need to be the case.
We can advise you on the right forms of external financing for you and help you seek a loan or investment that aligns with your growth strategy and financial plans.
What options are available?
External financing for businesses typically comes in two forms – investment or loans.
Equity finance – funds which do not come from bank loans but rather investment in exchange for a stake in the company – is demonstrably low among SMEs.
However, innovative new businesses with high growth potential are prime targets for investors, so important that you know what types of investments are open to you and how you might prepare to access them.
Investment can come in several forms and generally involves an individual or organisation providing funds for your business in exchange for a proportion of profits or a stake in the company.
Types of investment your business might attract include:
- Angel investing: Investors provide capital for a business start-up, usually in exchange for a portion of the business profits or partial ownership. Angel investors often contribute not just capital but also advice and business connections.
- Venture capital: Venture capital firms offer significant amounts of capital to start-ups and high-growth companies with the potential for high returns. In exchange, they usually require equity and significant influence on company decisions.
- Private equity: Private equity investors provide capital for businesses looking to expand, restructure, or transition ownership. Investments are often in larger, established companies compared to venture capital. This investment is in exchange for shares in the company.
- Crowdfunding: Through online platforms, businesses can raise small amounts of capital from many individuals. This method offers the advantage of not having to give up equity or repay the investment directly, though some platforms enable equity crowdfunding.
Preparing to attract investment can be a long process as it requires detailed insights into the value and future potential of your business, but you may also gain long-term partnerships and insights from investors.
The other major benefit of investment is that you will not be taking on debt – although another person or company may own a stake in your business.
On the other hand, if you would prefer to retain full control over your business, business loans may be an option.
Although over two-thirds of business owners would prefer slower growth to debt, responsibly managed loans do not have to be a hamper to growth.
Taking on some debt with correct management, such as timely repayment and reasonable loan amounts, can help boost your business’s overall creditworthiness and open doors to future financing.
The key to successfully managing debt for higher growth is to be ambitious but realistic in your strategy and to ensure that you can cover repayments, even in case of slower growth than anticipated.
Managing funds for investment
However you choose to bring funds into your business, you must plan to make strategic investments to ensure growth and a return on investment.
This is the overall goal of investment and carries benefits for:
- You, allowing you to repay debt or grow your business
- Investors, who will see a return on their investment
- Clients or customers, who may benefit from new products or services
Demonstrating that you can manage and allocate external funding is also beneficial for plans and may make your business more appealing to further investment or additional credit further down the line.
For advice on accessing external funding for your business and managing your investments, contact a member of our team today.
