The Future of Funding
This week, with their annual conference looming, Richard Lambert, Director General of the CBI – which represents over 240,000 small to medium sized businesses, spoke out about his views on the future of business funding.
He said that the recession has profoundly changed the way we look at funding business growth, and this change will undoubtedly influence us for a long time into the future. He suggested that the way forward was collaboration, with more partnerships, relationships and shareholders all helping one another to survive and succeed through the recession and beyond.
According to the BBC, he said that it: “Might it be a good idea to encourage new forms of institutions to finance the growth of small and medium sized enterprises, through equity and debt.” He continued: “That’s what the old Industrial and Commercial Finance Corporation did successfully for 50 years after the war: why not reinvent it?”
Back before the business angel investor existed as we now know them, there was the Industrial and Commercial Finance Corporation (ICFC). Set up in 1945 by the Bank of England and several other banks to help rebuild British business after the war, it specialised in providing growth capital to small and medium sized enterprises. In the 50s, 60s and 70s this institution became the largest provider of investment funding in the UK for SMEs, and today we know them as 3i.
So Mr Lambert thinks we need another institution like a bank, but not actually a bank, to invest in Britain’s small businesses today? Well, we’re all for anything that will focus the Government’s attention on the development of this country’s SMEs, but much of what the ICFC was doing back then is actually being done today by wealthy individuals with a maverick attitude and a passion for corporate adventure – the business angel investor.
There are times when individuals have an advantage institutions:
- A business angel investor is not constrained by politics, bureaucracy or red tape. They are therefore free to make investment decisions far more rapidly.
- As we saw at the beginning of the recession, the collapse of a lending institution can have wide reaching catastrophic effects on the market. However, similar difficulties experienced by a business angel investor would have a minimal effect on the market as a whole. In reality in a market where there are now thousands of cash rich successful individuals keen to partner with the right businesses, the vacuum left by one business angel investor deciding to cease investing will not cause a countrywide ripple of despair. There will always be another business angel investor waiting to invest their capital in the next big thing.
- A business angel investor who makes poor decisions, invests their money unwisely or is adversely affected by the economic climate is just one amongst so many out there that the lending market will continue regardless. The poor decisions of an institution that have sent them into a spiral of financial crisis may well cause them to re-evaluate their lending policy, thus making it more difficult for SMEs to borrow from them.
- Institutions are far more likely to lend based on a list of criteria, a point system or a business’s history of financial stability, whereas a business angel investor is far more likely to lend based on experience, personality and belief. Because with a business angel investor you are dealing with an individual who has complete autonomy over their spending decisions, they will be far more likely to be swayed by factors like commitment, determination and confidence than an institution would be.
So while we agree that the Government needs to do something to help small businesses in the long term by providing a structure for lending that does not rely on the greed of the former financial regime, we think that maybe they should pay more heed to those who have been doing the job whilst the banks have been slumbering. Maybe it’s time for there to be some governmental encouragement given to the business angel investor to keep doing the excellent job they have been doing to ensure our businesses are funded when no-one else would.
Original Image: Katarina 2353
