Birmingham Post Article - May 2011

How can business growth be financed while the banks are still showing themselves to be in a mood to avoid risk?

Lucas Markou, partner at Solihull-based accountants and business advisers Jerroms LLP, reports

For some businesses, the Government has provided a ray of hope in the shape of the new Business Growth Fund (BGF),
which will have £2.5 billion to invest in small and medium sized firms.

BGF is chaired by Sir Nigel Rudd, a corporate heavyweight, former deputy chairman of Barclays Bank and founder of a successful group of companies three decades ago. The formation of BGF, which is currently making its first investments, is supported by the government and backed by major banks including Barclays, Lloyds and RBS. BGF will specialise in equity investment and the banks will obtain their returns as shareholders in BGF itself.The idea is to build a kind of giant investment group providing fixed or equity capital, leaving the banks to focus on providing short term working capital or asset finance.

Private equity has been around for a long time but the firms that supply it have moved up the size league and in recent years, most have only invested large sums, meaning they had no relevance to smaller businesses. This made it even more difficult to raise long term capital of relatively modest amounts.

The combination of this factor and the reluctance of banks to provide unsecured lending has led to the formation of BGF, which aims to provide between £2m and £10m to established growing businesses across a broad spectrum apart from the financial services sector.

I welcome the BGF initiative because it addresses the need for fixed capital and because it is planning to take a long-term view. At my own firm, part of our role is to help developing businesses to raise finance and we will certainly be keeping a close eye on developments at BGF.

There are still some other options for the growth business. There is still the option of the Enterprise Investment Scheme (EIS), which provides tax incentives to individuals to provide equity capital to small businesses in many trades and with fewer than 50 employees.

The Chancellor has indicated that the upper limits of size for EIS are likely to be increased from April next year so the tax breaks will be available for investing
in larger companies than the present limits allow.

The recent Budget has improved the principal tax break available under this scheme by increasing income tax relief for investors from 20 per cent to 30 per cent with immediate effect. Despite the economic setbacks of the last few years, there are still many potential investors around with a willingness to back smaller businesses.

Private companies looking for investors should take professional advice before they move forward both to aid the search for backers and to make sure any investment deal is properly structured.