SMEs are vital to the health of the UK economy and fast-growth businesses, in particular, play an important role in driving growth and creating new jobs.
However, it’s these businesses, the ones with the potential to grow rapidly, that often find it the most difficult to obtain the funding they require.
Business owners need finance in order to invest but they want to retain control of their business and not give up valuable equity. It’s a difficult situation for any ambitious entrepreneur.
For companies with annual turnover of between £500,000 and £10 million, the finance options are particularly limited. Private equity investors – who are very much in the business of providing growth finance – are usually only interested in larger companies, while business angel investors are more active in start-ups. Furthermore, conventional bank lending is often not available for projects that could be classified as speculative.
That’s where mezzanine finance comes in. Mezzanine finance is a fairly well-known type of funding, which sits between traditional bank debt and equity. However, it is a type of finance not widely utilised by British banks due to its relatively high risk factor.
Yet it is exactly what many SMEs need. They crave high-speed growth and an ability to adapt, whilst also requiring a similarly flexible lending option . This catch-22 scenario is experienced by entrepreneurs and small businesses country-wide, and is the conundrum that mezzanine financing aims to solve as it is based on cash flows and future potential, rather than existing assets.
There are 165,000 businesses in the UK with a turnover of between £500,000 and £10 million, those most in need of growth funding. Mezzanine financing is not necessarily for every one of them and a common question is how it impacts the internal structure of a business? This is always the major issue between SMEs and equity investors but what about Mezzanine providers?
Small businesses typically maintain a start-up attitude, with protective founders still firmly in the driving seat, whilst equity investment involves part ownership by those investors. This makes the decision between gaining funding and giving up a slice of the business very tough. Whilst mezzanine financing does require a lender to have a keen understanding of business plans, strategies and finances, the lender takes no control. This will come as a relief to those who have little or no interest in ceding ownership of something that has required years of time, money, sweat and passion and is just beginning to blossom.
The UK is full of great entrepreneurs building great businesses and the UK economy is dependent on their growth and productivity. Mezzanine finance is an innovative finance solution which more SME’s should be looking at to unlock their potential.
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