ALTERNATIVE SOURCES OF FINANCE TO SMEs - THE VIEW FROM WALES


An important part of the access to finance review was an examination of how other types of lending to SMEs in Wales can help close the finance gap that currently exists for some businesses.  There were several recommendations from the stage 1 review on non-bank sources of finance and a number of these issues are currently being examined by the Welsh Government - most notably that of trade credit. However, as this blog posting will show, there have been some further developments in the field of alternative sources of lending which is a significant factor given that banks continue to struggle to lend to SMEs in Wales and the rest of the UK.

Trends in non-bank lending

The first part of the report examined, in detail, the different types of alternative finance that is available to businesses in Wales. Six months later, the evidence suggests that whilst traditional bank lending continues to decline, there has been an increase in the level of non-bank lending to businesses across the UK.

For example, evidence from the NACFB (National Association Commercial Finance Brokers) shows that the use of alternative finance options for small businesses has reached its highest ever point in 2012-13. According to the NACFB, use of alternative sources of lending to SMEs has been increasing with a recent survey of its commercial finance intermediaries showing that:
  • Alternative lending to the UK's SMEs has climbed to £10.5 billion in 2013, up from £9 billion a year earlier. This growth of 17 per cent means that overall funding for small businesses is at a five-year high. More relevantly, this represents a 64 per cent increase from 2008/9 and the largest contribution to SME funding from NACFB financial providers in the last five years.
  • Buy-to-let accounted for the largest amount of lending (23 per cent) with a contribution of £2.4 billion in 2013, followed by leasing and asset finance with £2.3 billion and commercial mortgages with £2.2 billion. Invoice finance deals contributed £674 million. 
  • Commercial mortgages showed an increase of 46 per cent more deals as more businesses explored this route 
  • SME funding through leasing and asset finance has grown by 12 per cent in the same period and made its largest contribution to small business funding since before the recession. It now makes up 22 per cent of alternative loans to small businesses compared with just 7 per cent in 2007-8. Growing awareness of this funding route among the small business community saw £2.3 billion of loans secured through NACFB members during 2012-13 and boosted the average number of deals by 59 per cent. Businesses also enjoyed greater access to leasing and asset finance with 11 per cent more NACFB brokers now active in this area.
  • The value of peer-to-peer lending and other new forms of small business finance also grew by 80 per cent in the last year, providing SMEs with £501 million worth of loans from NACFB members in 2012-13. This is the first time this figure has exceeded half a billion pounds.

Invoice discounting and factoring

Additional data from ABFA (Asset-Based Finance Association), which has 140 members across the UK, also seems to suggest that there has been a recent growth in asset-based finance (factoring and invoice discounting) during the last year. The latest industry figures (for April-June 2013) show that:
  • Whilst the number of clients has only grown by 1 per cent, the total funding advanced by the ABFA’s members to firms has increased by 10 per cent year on year, the balance rising from £15.8 billion to £17.4 billion (June 2012-June 2013). 
  • Sales from firms using asset-based finance have also risen markedly, reaching £131.2 billion in June 2013, a rise of some 12 per cent in the past year, with businesses utilising export factoring (29 per cent) and export invoice discounting (24 per cent) showing a considerable increase in their sales during the last quarter
  • Service-based firms account for 29.5 per cent of all clients and manufacturing firms account for 29.3 per cent. 
  • Both small and large companies using asset based finance, with advances to small firms (£500K – £1 million turnover) recording 6.2 per cent growth in the last quarter alone, whilst larger companies (£50 million - £100 million turnover) have similarly seen growth in advances of some 14.3 per cent. 
ABFA members only work with around 43,000 UK businesses, with an estimated 2,100 clients in Wales  which demonstrates that there is considerable scope for further development of this alternative source of finance although there continues to be misconceptions about the products in the current context of mistrust of the financial services industry and the fact that, like most forms of commercial finance, asset based finance products are not regulated products. To deal with the latter issue, ABFA launched their own Code, Professional Standards and Complaints framework in July 2013 overseen by a new Professional Standards Council for the industry. This may provide further confidence in the industry and encourage more SMEs to utilise asset-based finance in the future.

Asset finance

Asset finance, which comprises mainly of leasing and hire purchase products, is also an area that has seen growth in recent times. As the Federation of Small Businesses’s (FSB) submission points out, the attractiveness of asset finance is that it is more predictable and agreements will not be cancelled by lenders (due to the structure and contractual nature of deal), which helps all businesses, especially those with limited capital. Usually the credit line is secured with the asset being leased rather than any other business or personal asset, which is also a key benefit. The FLA (Finance and Leasing Association) has worked with the UK Government to ensure that asset finance is included in various programmes aimed at improving the availability of credit for SMEs, such as Funding for Lending. This is estimated to have supported up to £300 million of asset finance for investment in new equipment in 2,000 businesses.

As of 2013, the UK’s leasing market to both consumers and businesses is one of the largest in Europe worth around £76 billion. The latest data from the FLA show this trend is continuing, with asset finance for business growing for the fifth consecutive month in August 2013 (by 3 per cent to £1.5 billion). Growth occurred in most asset sectors over the previous 12 months including plant and machinery finance (13 per cent), commercial vehicle finance (15 per cent), and IT equipment finance (6 per cent) and business equipment finance (3 per cent).

Building Societies

During the initial interviews for the stage 1 report, it was suggested that building societies could become more involved in lending to the SME sector, especially in commercial mortgages where they have previously specialised. In May 2013, the Nationwide unveiled plans “to develop and offer a full range a financial services to SMEs, playing an increasing role in providing credit to an important part of the UK economy”. This seemed to give the clearest indication yet that building societies could be looking to provide alternatives to bank lending, especially given the extension of the Funding for Lending Scheme. However, in August 2013, the Nationwide announced that it was its plans were unlikely to take effect until 2014 at the earliest.

Following further discussions on the role of building societies in supporting access to capital within the Welsh economy, this was not unexpected. Interviews with stakeholders suggested that traditional commercial mortgages, which building societies could diversify into, were managed better through the banking sector. And whilst there are commercial investments into areas such as social housing and residential investment, there seems to be reluctance from building societies to expand into other forms of financial support for the business community. Instead, the message is that they want to focus on what they are doing already and doing it better for their customers.

A similar view was expressed from the Bank of England, which suggested that there might be a reluctance to step up commercial real estate lending given the losses experienced by a number of building societies since the crisis and the depressed nature of commercial property outside of London and the South East of England. With building societies not having the requisite expertise in underwriting of commercial loans and the requirement for additional capital buffers against any increased commercial lending, it is the view of the BoE that it is unlikely that the sector will be able to participate in developing the SME market in the future.

Informal investment

The first report emphasised the importance of accessing greater amounts of private sector funding to Welsh SMEs, especially through ensuring that more informal investment by business angels is attracted to Wales. This type of investment has enormous potential in developing the Welsh economy if utilised properly, as it tends to focus on high potential start-ups, innovative or technology-intensive firms. Most of these cannot access traditional funding due to their lack of collateral, limited cash flow and investment risks to investors.

There have been two positive developments in terms of informal investment in Wales since the first report was published. The first is the extension of the UK Government’s Angel Co-Fund to all parts of the UK in July 2013 that was previously only available in England. It invests amounts of £100,000 to £1 million into SMEs with high growth potential, working in partnership with syndicates of experienced business angels. This could present an opportunity for increased amounts of funding to be channelled to businesses in Wales and it is critical that a system is put into place that ensures business angels in Wales take full advantage of this new scheme.

The second is the creation of the Dragon Seed Enterprise Investment Scheme (SEIS) Fund by xénos – the Welsh business angel network - in partnership with Amersham Fund Managers and Seed Mentors. This aims to focus mainly on start-ups through attracting £1 million of funding from private investors who are prepared to support Welsh businesses. It is a welcome proposal in that it combines a mentoring model with seed capital (with specialist mentors being provided from xénos registered investors). Such initiatives, if joined up in a coherent way, could help to boost investments in high potential companies in Wales.

This is something that is needed, as one of the issues that emerged from the second part of the review is the lack of an overall coherent policy focus in Wales on high growth start-ups where the majority of angel funding could and should be utilised. For example, the High Potential Start-Up programme developed by the Welsh Government seems to be performing well although there seem to be no actual formal linkages with Wales’ only business angel network. There is also again a failure in terms of using the entire business support system in Wales to ensure that all viable businesses that require finance can look for different sources.

For example, whilst xénos receives 300-400 enquiries per year, only 60-70 are passed onto investors with no system in place to refer them to other sources of funding. Again, business support and financial support instruments in Wales could be working more closely together and there is no reason why those proposals that are rejected by xénos cannot be referred to other sources of funding and support, especially if their business plans are not yet fully developed.

There were discussions held with representatives of xénos and a number of issues emerged as to the current disconnect with other aspects of the business and financial support system. These included:
  • Lack of capacity and time to undertake due diligence of proposals, especially as angel investors are expected to put their own time and money to do the very necessary due diligence before making an investment. This can deter them from becoming angels in the first place, restrict the number of deals they can do and extend the due diligence period to the extent that companies run out of time to raise the necessary funds;
  • More support is needed for entrepreneurs to ensure that their business plans are specifically ‘investment ready’ for business angels and, where necessary, that they have a greater understanding of concepts such as valuations;
  • Higher levels of support for investor readiness as new members of xénos can take up to two years before making their first investment and greater support is needed to help develop and prepare individual for equity investments
  • Gaining access to a wider network of business angels outside of Wales, which could result in more deals being completed;
  • Adjusting UK Government schemes to local conditions. For example, given the lower amount of angel funding requested by Welsh business, the current rule for the Angel Co-investment Fund (minimum of £100k investment) may be restricting access from this source of co-funding for smaller deals;
  • A lack of awareness by high net worth individuals of the potential of using SEIS and Enterprise Investment Scheme (EIS) for investing in small businesses as part of their portfolio;
  • Few links between the High Potential Start-up programme and xénos and almost none with the university sector. 
One suggestion, supported by a number of respondents, was for a more specialist fund that would focus on start-ups and seed funding. For example, given the limitations of the current process, xénos suggested that there is a requirement for a “Wales Angel Co-Fund for Start-Up and Early Stage Businesses” that would focus exclusively on providing seed capital to high potential start-ups and would co-invest with experienced angels. Such funding should fit into the ‘lifecycle approach’ to support high growth businesses in Wales. Linking into established and successful programmes, such as Angels Den, could help to develop an active and ultimately self-sustaining entrepreneurial ecosystem that will, by increasing levels of scalable entrepreneurial activity in the economy, drive economic growth and job creation.

Whilst xénos is clearly continuing to be proactive in trying to develop its impact on Welsh business, discussions with others within the informal investment field in Wales and elsewhere suggested that the current model operated by xénos – acting as a hub and facilitator for individuals to come together to form a syndicate to invest in a single company – may need to evolve. In Scotland, the current approach is to focus on the development and support of angel “groups”, which are essentially a formal group of individual angels established with the intention of investing together in multiple deals over an extended period of time. Their advantages over individual or syndicates of business angels are quality dealflow, multiple skills, diversification of risk and more funding.

The emergence of such groups has been promoted and supported by LINC Scotland, the national association for business angels in Scotland. It has not only helped existing groups of business angels to work more efficiently but has acted as an incubator to new syndicates. With twenty angel ‘groups’ comprising of over 800 investors operating across different regions and in different sectors, informal investment has been taken to a new level in Scotland - in August 2013, the first Scottish angel investor network for women, funded by high net worth women, was launched in Edinburgh.

The advantage of the angel ‘groups’ concept is that it does not solely rely on the traditional business angel who invests directly into a business and then becomes personally involved in its development. Instead, these groups are made up of “silent” angels who are high net worth individuals that are willing to invest in high potential Scottish businesses but are not interested in either assessing the initial deal or the subsequent management of the investment. Instead, they are happy to ‘piggyback’ onto the judgement of experienced angels within their syndicate. As a result, this has opened up substantial amount of additional capital from high net worth individuals into the Scottish SME sector. It also gives the SME an advantage in that it now has potentially twenty different groups of investors to approach for support.

The Welsh Government’s Creative Industries sector panel suggested that sector-specific angel networks should be encouraged in Wales, and angels (or syndicates of angels) with specific creative sector expertise would be a valuable resource, able to provide both finance and mentoring.

According to the latest data for investment by angel groups in Scotland, the total aggregated investment (i.e. including co-investors) has increased from £6.8 million in 2002-03 to £30.9 million in 2012 (peaking at £34.5 million in 2011). In contrast, the value of xénos deals over the same period has increased from £1 million to £3.9 million. This may suggest that there is an increasing appetite for angel investments across both countries but it clearly demonstrates that the scale of investment is somewhat different, even though the business population of Scotland is only 1.6 times that of Wales. This is not to say that xénos is not fit for purpose but the model being adopted in Scotland is attracting higher levels of informal investment through the group model.

With evidence from Europe, North America and Australasia showing that angel investing is changing from an individual process to one in which angels are joining together in organised and managed groups to invest, there is clearly an opportunity to do the same in Wales. The key issue is how xénos could evolve into such a model over time as there needs to be different and more effective mechanisms to attract greater number of investors to support early stage businesses in Wales.

For example, the Welsh Government could develop its own co-funding approach in a number of key sectors, such as creative industries, ICT, energy and environment and life sciences, to attract greater amounts of private sector investments into these growing industries. This could take various forms, ranging from support for specific angel groups, direct matching grant support to the development of new financial instruments, such as the creation of an equity guarantee scheme that could, as an innovative tool, be funded through the UK’s Business Bank.  There is also the question, if co-funding results in larger deals, in how crowdfunding can be utilised to support smaller investments into new businesses.

However, it is not only the smaller end of the market that may have difficulty in attracting financial support. Another experience from Scotland, highlighted in the paper by Mason et al. (2013), is the fact that whilst the angel groups are providing capital for deals under £1 million, there has now emerged a further equity gap beyond this stage that even the biggest syndicates cannot fund. In this respect, any new funding model in Wales must consider how it can support the demand for growth funding in amounts of £1 million or more, potentially building on initiatives such as the new Life Sciences Fund but extending it into other sectors such as energy and environment, creative industries and ICT.

Whilst funding over the lifecycle of a business is not a new concept, there has been no focus to date by Welsh Government in having a coherent approach to supporting high potential and growing firms over their lifetime. Undertaking such a process should not be too difficult if the different elements of business and financial support already in existence could be brought together and supplemented by other developments.

Venture capital

The latest data from the British Venture Capital Association (BVCA) shows a mixed picture for venture capital investment in Wales:
  • A total of 37 Welsh companies received venture capital investment of £87 million in 2012. Whilst it represents a decrease on the 50 companies that received funding in 2011, the amount invested had increased by 74 per cent. This represented 4.5 per cent of all venture capital backed companies in the UK but only 1.5 per cent of the total amount invested; 
  • The average investment per business into Wales was £2.3 million, which was the second lowest of all the UK regions (after Northern Ireland);
  • Only ten per cent of this funding was for venture capital (seed, start-up and early stage) within Wales, with the largest amount of funding going into later stage deals (40 per cent);
  • The two sectors receiving investment were healthcare and consumer services (£52 million) and oil and gas, basic materials and industrials (£30 million).
As stated in the first report, Finance Wales has had a positive impact on formal equity investment within the Welsh business community, despite some significant recent losses in the market. However, some respondents have suggested that there is a need to develop programmes that create demand for venture capital not only for new start-up businesses but also growth firms where equity investment is key for further development.

In this respect, there has been a positive development during 2013 with Finance Wales recently appointing Arthurian Life Sciences Ltd to manage a new £100m fund which will invest in life sciences and related medical, pharmaceutical and healthcare companies currently based in Wales (as well as those companies from across the UK, Europe and the rest of the world where such investment will bring meaningful developmental and economic benefit to Wales).  The fund will make initial investments of between £500,000 and £5,000,000 and will preserve capital to provide follow-on investments.

This is a welcome development and one that could result in funds being established for other key sectors such as ICT and the creative industries although, as with informal investment, there remains some disconnectivity between the development of such funds and other elements to support high growth firms in Wales. However, there is a question as to whether there should be a more strategic approach to supporting growth firms and their funding via equity investments?

As stated in the first report, there needs to be a more comprehensive approach to the funding and support of innovative businesses in Wales as, done properly, this could have a transformational effect on the Welsh economy. It is surprising to find that Finance Wales’ investment teams have no formal relationships with private equity and venture capital firms that operate in the same deal range (which includes the Business Growth Fund that operates in the £2-£10million space). Research has shown that venture capital firms benefit from having a wide range of relationships, especially if these involved other well networked venture capital firms and this leads to improved performance, as measured by successful exists in particular . Currently, Finance Wales’ only semi-formal relationship is governed by a memorandum of understanding (MOU) with Fusion IP.

There also seem to be no links with UK Government programmes that provide equity for growth businesses. For example, there have been no Welsh investments from the UK Innovation Investment Fund (UKIIF) established in 2009 as a £150 million venture capital fund of funds that aims to drive economic growth and create highly skilled jobs by investing in innovative businesses where there are significant growth opportunities.

In addition, the £197 million Enterprise Capital Fund, which is intended to address a long-term structural weakness in the provision of risk capital for SMEs in the UK, has only made investments of £5.1 million in three Wales-based companies. This equates to 1.8 per cent of all investments and 2.5 per cent of the value of investments from the fund. If Wales had received its fair share of this funding, an additional £12 million of potential funding could have been invested into Welsh businesses. It is also disappointing that the Business Growth Fund still only has one investment in Wales – SHS Integrated Services – despite research showing that the potential Welsh market for their funding is around 85 mid-sized growth firms.

Peer-to-peer lending and crowdfunding

As the first report noted, there is increasing attention being placed by SMEs on peer-to-peer (P2P) and crowdfunding as new types of lending platforms to raise capital. However, there has been concern that both P2P lending and crowdfunding need a regulatory framework to protect both investors and businesses.

Last month, the Financial Conduct Authority (FCA) outlined how it will regulate these alternative sources of funding. For example, consumers willing to lend money to companies through peer-to-peer websites will receive explanations of the key features of the loans as standard. They will also benefit from an assessment of the creditworthiness of borrowers before granting credit, and crowdfunding sites, or platforms, will need plans in place to ensure loan repayments continue even if a crowdfunding company collapses. A fourteen-day cooling off period will allow both borrower and lender to withdraw without penalty from the agreement if either changes their mind. Whilst crowdfunding is already regulated, the FCA believes that investments should only be promoted to those who understand the inherent risks or have the financial capacity to cope with any losses. These regulations will apply from April 2014 and will make the P2P and crowdfunding market more accessible, help foster competition and facilitate access to alternative finance options while also providing additional consumer protection.

The largest P2P lender in the UK is Funding Circle. As of the end of last month, it had lent over £166 million to over 3,000 businesses since it was started at an average lending rate of between 7 per cent and 9 per cent (which is lower than the average cost of funding from Finance Wales). In Wales, Funding Circle has lent £6.4 million to 108 businesses at an average of £59,000 per firm. This is a considerable acceleration on the funding situation back in June 2013, when £4 million had been raised for 72 Welsh businesses, and perhaps reflects the current stalemate in lending from the banks.

Wales has also developed its first ever P2P platform last month. Funding Empire, based in Cardiff, has been set up by a number of professionals coming together to combat the problem of banks not lending to businesses. Unlike some other P2P lenders, Funding Empire accepts loan applications from start-ups and provides them with free mentoring and support to ensure they are ready to apply for funding through the platform.

The other important development in alternative funding is crowdfunding i.e. the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organisation. The two main crowdfunding platforms currently in the UK at the moment are Crowdcube – which is meant for users to invest small amounts and acquire shares directly in start-up companies - and Seedrs  - which, as a nominated agent, pools the funds to invest in new businesses.

To date, there has been one investment by Crowdcube in Wales, namely Affresol in Swansea, which has developed a technology process that produces a "synthetic" concrete (called TPR) from waste diverted from landfill. Seedrs has twice raised money for Wales-based start-up Veeqo - the first round raised £30,000 from 66 investors and the second round £120,000 from 32 investors. Currently, there is no Welsh crowdfunding organisation although there are advanced plans to develop one in the next few weeks that, whilst it will be based in Wales, will also invest more widely.

One of the advantages of crowdfunding is that it is an extension of the current informal investment funding model operating through business angels, albeit with more participants. However, the evidence gathered seems to suggest that Wales has not yet grasped the opportunities that are available from crowdfunding, especially in relation to being part of a coherent approach to supporting high potential start-ups that may need some initial financing before going to more established funding sources. As a recent Scottish report noted, there seems to be very little knowledge amongst potential start-ups, through the business support system, of the opportunities that are available from crowdfunding.

Funding of social enterprises

Whilst this review has focused primarily on access to finance issues affecting privately owned SMEs, it acknowledges the important and potentially expanding role played by social enterprises, and meetings have been held with various organisations to discuss potential solutions, including the Wales Co-operative Centre. Whilst there is no statutory definition of a social enterprise, it is generally accepted they are organisations that are largely defined by their commitment to a social mission, which conduct entrepreneurially driven trading operations. Surpluses generated by these operations are usually expected to be reinvested for the purpose of furthering the organisation’s social mission.

The Welsh social enterprise sector is broadly similar in character to that of the privately held company sector. Whilst there are a small number of large organisations, it is generally dominated by small and medium sized social enterprises. Irrespective of size, all social enterprises with ambitions to develop their business need to access growth capital although because their ownership and balance sheet structures reflect their social mission, social enterprises tend to be constituted as companies limited by guarantee. This denies them recourse to shareholders for the purposes of raising capital and, as a consequence, they are largely debt funded. Within Wales, the social housing movement has illustrated the capacity of parts of the social enterprise movement to innovate. By funding their investment needs via the bond markets and asset backed loans, Registered Social Landlords have demonstrated the benefits that can flow from operating at scale.

The financing requirements of smaller social enterprises are served by a number of funds. For instance, the Wales Council for Voluntary Action effectively operates as a fund manager for the Community Investment Fund. This applies a combination of public money, in the form of grants and its own resources and is meant to address projects with a higher risk profile. The market is also served by specialist banks - such as Unity Trust and the Charity Bank - that raise their funds from commercial sources.

Evidence suggests that the average loan to a social enterprise across the UK falls within a range of £150,000 to £175,000, although this may be smaller in Wales. Facilities tend to be secured loans with a typical maximum value of around £1.5 million.  Whilst there is no overwhelming evidence to indicate whether a funding gap exists in this market, it is possible there may be issues at the larger end of the scale. This might arise in the case of a start-up that needed to acquire significant assets to fulfil its business plan. In considering the development of any remedies, it is imperative they must be designed in a way that avoids the creation of a market distortion since this could run the risk of hampering the commercial development of a market that is still in its infancy. Any proposals for introducing new publicly funded measures should be discussed with the licensed and regulated banking institutions that act as specialist lenders to social enterprises and draw their funds from commercial sources. However, there may be an opportunity to establish a specific fund that is dedicated to providing financial solutions for social enterprises, as well as the co-operative and mutual sector.

Although not directly related to issues around access to finance, it is noted that public funds have been committed to the provision of business advice services intended to meet the unique requirements of social enterprises. Nevertheless, if the Welsh Government’s ambitious objectives for the role of social enterprise in the economy are to be met, then two structural issues should be addressed. The current arrangements appear to be fragmented and run the risk of diluting the overall impact of the programme. They also enable the provision of advisory services but they do not incorporate the participation of a regulated social lender.

Therefore, there is scope to develop an approach for social enterprises that brings together finance and business support for the sector. For example, there is considerable potential offered by ‘investment readiness’ programmes that combine specialist advisory services for the sector with specialist lending experience for the sector.

Summary of main findings

This section has examined how non-bank lending has recently developed in Wales, supplementing the evidence provided in stage 1 of the report.

The data suggests that, possibly as a result of lower lending by the high street banks, there has been increased use of invoice discounting, leasing and other forms of non-bank finance during the last 12 months, although it is disappointing that building societies seem to be withdrawing from being a potential source of funding for SMEs in the immediate future. Despite the increase in non-bank lending, one of the real concerns raised by both the NACFB and ABFA is the lack of awareness of alternative sources of funding amongst the business community. Both organisations suggest that there is funding available but that the demand remains low due to a lack of understanding of different alternative sources of funding.

Since the first stage report was published, the Welsh Government has been in talks with the NACFB to develop various means of co-operation to ensure that Welsh SMEs can get access to non-bank lending. Similar discussions have been held with ABFA to examine how public sector business support could and should be providing information on these alternative sources of funding for their clients. In that respect, this report agrees with the FSB in that there is still scope for greater market penetration and awareness amongst businesses and that the Welsh Government could look at using its resources to provide more information on these alternative sources of finance whilst also considering whether they should form part of existing lending schemes.

In terms of more specialised funding, there is considerable scope to improve informal investment and venture capital as a source of funding to SMEs in Wales. To date, informal investors have not been used as effectively as they could have been in supporting start-ups in Wales, despite the relative success of xénos. However, the current xénos model could be improved and this was a view of its own representatives and others externally. There also seems to be a lack of coherence when it comes to the management and development of equity funding in Wales and more could and should be done to ensure that there is greater focus on venture capital for growth firms at all stages of development within Wales.

There is also a greater role that can be played in helping to develop new support networks for growing firms, especially as financial support alone is not in itself sufficient to secure the success of early stage businesses. For example, the Finnish Innovation Agency Tekes has proposed that it will use €20 million annually to boost the seed and early stage venture capital market, mainly through a variety of small targeted funds. An evaluation of the Scottish Enterprise Seed Fund  also noted that one of its successes was that those participating had access to finance from the fund and co-investors, as well as business advice from the Scottish business innovation and support network.  As far as the review has noted, there is not a specific joined up approach between business support and finance that is operated via  xénos, Finance Wales or other public funds, and which is targeted at Welsh growth businesses.

Therefore, in terms of supporting growth businesses via sources such as informal investment and venture capital, there is a need to ensure that there is funding at all stages of the life cycle of such businesses and, more importantly, that every effort is made to leverage greater amounts of private sector funding into Wales.

There have been positive discussions with P2P lenders and crowdfunding firms and there is an opportunity for the Welsh Government, through working in partnership with such organisations, to stimulate greater use of these sources of finance in the future.

Discussions with the banks suggest that one potential route for promoting P2P lending would be via a direct referral system from Welsh High Street banks, Finance Wales and Welsh Government itself and this should be explored in further detail. In addition, the FSB has suggested that the Welsh Government could consider investing in peer-to-peer funding as an alternative mechanism for financial support. This would be particularly attractive given the weaknesses in some of the current models in delivering finance.

For example, with the UK Government currently lending 20 per cent of every loan to all businesses, discussions with Funding Circle have suggested that Welsh Government could create a “top-up” for this (between 10-20 per cent of any loan) so to ensure that Welsh companies get specific access to the funding they require. Therefore, if the Welsh government were to set up a new £2 million P2P Investment Fund, this could generate an additional 170 investments into Welsh businesses.

In terms of crowdfunding, the Welsh Government could again play a more active role in raising awareness and understanding of this concept. In addition, with the scale of business angel deals increasing, there is scope for the development of a specific funding mechanism to support the number of investments below £50,000 that are too small for most angel syndicates or groups to make. Therefore, a Welsh crowdfunding co-fund, working with existing providers, could help to stimulate the start-up market in Wales, but would have to form part of a more coherent approach to the support of new businesses.

Finally, whilst this report was not established to consider the funding of social enterprises there may be synergies with some of the financial solutions being put forward for the SME sector. It is therefore proposed once the report from the Co-operatives and Mutuals Commission is published, the Welsh Government may wish to consider how any financial and business support for the social enterprise sector can be integrated into the proposals of this review.


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