In this comment piece, Bev Hurley, Chief Executive of YTKO Group, asks why policymakers insist on seeing “access to finance” as a purely financial issue. Read on to find out why it is just as important, if not more so, for us be supporting and educating ambitious-but-stuck businesses in becoming investment ready through clear market validation.
Why do policymakers insist on seeing “access to finance” as a purely financial issue? Bashing the banks is all very well and good, but simply throwing money at the supply side in an attempt to alleviate the problems that growth oriented SMEs face when investing in their businesses is not the answer.
I don’t want my hard-earned taxes to pay for the banks to lend to un-investable businesses, or high-risk propositions: we’ve got Start Up Loans for that, and even using them to support the supposed “gazelles” via the Growth Accelerator is a real policy gamble. After all, if finding and supporting ‘high growth’ winners was such a straightforward business, then the private equity industry would be getting far better returns on their portfolios than they’ve been doing for the last few years.
Difficult though it may be for the government to say so, businesses need to buck their ideas up when it comes to accessing finance, whether that’s debt or equity. Most applications for equity finance – at least in the angel space – go straight in the bin and speak to any bank relationship manager worth their salt and they will tell you that they have a similar experience with those that come asking for loans and overdrafts.
The answer to raising money, whether you’re a start-up or an established business, is to be investment ready. Investment readiness starts with a proper understanding of the real opportunities for growth, and validating them in the market. Only through knowing what prospective customers will buy, and why, and how much, and when, and at what price, can that be demonstrated in a robust business plan with targets and milestones.
It is this market validation process that mitigates the risk from any funders’ perspective, because it gives them confidence that the business will be able to repay a loan, sustain an overdraft, or scale towards a further investment round or exit. Accessing finance starts with the market.
And only after that has been done can realistic financials be prepared, rather than the wishful thinking, finger in the air approach adopted by many companies, especially naïve tech starts. According to the last two comprehensive surveys of SMEs by the EU and the European Central Bank, the two biggest barriers to growth – across Europe – are firstly access to customers (sales, marketing, business development), and secondly, access to finance.
In the UK, where we have a cultural aversion to selling and a widespread lack of management skills when it comes to understanding marketing and business development, it is no surprise that SMEs continue to report they can’t get finance either. Educating and supporting ambitious-but-stuck businesses, at whatever stage of the growth journey they are at, and especially if they aspire to sustainable growth, has to take this twin track approach.