Large numbers of SMEs are being denied access to the finance they need to grow because they fall between the funding levels that venture capital firms and the banks are prepared to offer.
That was the finding of the government-sponsored Rowlands review.
The review, carried out by ex-3i chief Christopher Rowlands and published this week, revealed that a permanent gap exists for businesses looking for between £2 million and £10 million in growth capital and that neither banks nor equity investors are likely to fill this gap in the near future.
Venture capital firms are chasing larger deals, while the banks, in the aftermath of the credit crunch, have stopped lending at equity levels.
The review recommended that the potential for increased demand for this type of financing should provide a good reason for the government to step in.
Christopher said: “The review shows that there is a gap in the provision of growth capital to small and medium sized firms.
“This gap is permanent, and we need to act in order to ensure that UK firms have the finance they need as we emerge from the recession. I believe government should act to initiate activity to attract private capital into the field.”
Lord Mandelson, the Business Secretary, welcomed the review: “It is now for the government and the market to work together to address these issues effectively. It is vital that UK SMEs can secure the investment they need to grow.”
The Prime Minister, Gordon Brown also welcomed the report. He said that the government’s innovation fund, which supports high-tech businesses, will grow to £1 billion over the coming years.
Mr Brown added that, where there is a gap in finance for companies looking to expand, the government is proposing “a Growth Capital Fund, a credible channel for private capital to invest in established and growing SMEs”.
The CBI applauded both the review and the government’s plans but urged that the cost of raising equity finance should be tax deductible in the same way that raising debt finance is.
John Cridland, the CBI’s deputy director general, commented: “[The plan] would help tackle a recognised gap in the market: finance for high-growth SMEs. These firms will help pull the UK out of recession, and generate jobs and investment if they can access the vital capital they need to grow.
“Wider issues of SME finance still need to be addressed, such as making the cost of raising equity finance tax-deductible in the same way as raising debt finance. This review is an important step in the right direction and will benefit many innovative high-growth SMEs in all sectors and regions.”
