AUGUST/SEPTEMBER 2022 www.businessleader.co.uk THE BUSINESS LEADER GUIDE TO FUNDING GROWTH AND INVESTMENT IN YOUR BUSINESS bank to the future With an increasing demand for automated banking experiences, how are fintechs taking opportunity to consolidate their progress in financial services? take a deep dive into ipoconditionsmarket three key 2022 trends in start-up equity funding
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The research showed that the biggest barriers faced by SMEs in sourcing external finance/and or capital were that it was too expensive (23%), the process took too long (19%) and that there was a lack of flexibility with repayment terms (17%). SMEs also cited other barriers such as the fact that the lender didn’t understand their business (16%) and that they received poor customer care (10%).
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PLC.commissionedThisbusinesstoOveraccesstheexternalmedium-sizedMoreKILLINGTAKESGOVERNMENTSTAKEINKITTENSthanoneinfivesmallandenterprisesthatneededfinanceand/orcapitaloverlastcoupleofyearswereunabletoit.aquarter(27%)havehadstoporpauseanareaoftheirbecauseofalackoffinance.isaccordingtonewresearchbyManxFinancialGroup
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The UK Government has taken a stake in sex party brand Killing Kittens, as a result of the Future Fund investment. The loan of £170,000, which was given to Killing Kittens as part of the government’s Future Fund investment, was given to the business in 2020 to help it through the pandemic. Now, the loan has been converted into an equity stake in the company. UK
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22% OF SMES IN NEED OF EXTERNAL FINANCE OVER THE PAST TWO YEARS WERE UNABLE TO ACCESS IT FUNDING
Further research found that male-owned businesses receive seven times more funding than those owned by women, which shows that although progress has been made, better support is needed for female business leaders on their funding journey. Commenting on these findings, Joanna Scott, Managing Director of BOOST&Co, says: “More support is needed for female and ethnic minority founders to change the perception that funding is less widely available to these groups. We must work to identify and remove the barriers to applying for, and receiving, funding and look at why some female-owned businesses may be more reluctant to pursue debt funding as an option.”
Business Money - A special publication by Business Leader Magazine 1
FUNDING NEWS 1/4 OF ACCESSINGMATTERSLEADERSBUSINESSSAYGENDERWHENFUNDING
ID-PAL SECURES €7M IN SERIES A FUNDING ROUND Ukrainian-founded Preply reached a record-breaking milestone in the company’s funding history, raising $50m USD in its series C, amassing more than USD $100m in investments since Despiteinception.thewar in Ukraine, founders Kirill Bigai, Dmytro Voloshyn and Serge Lukyanov have succeeded in building a truly global business, expanding the team to over 400 employees of 58 different nationalities across 30 countries worldwide. From an education start-up, Preply has become a global e-learning powerhouse that connects the world’s largest live language learning community. The Series C round was led by Silicon Valley based Owl Ventures, the largest Education Technology investor in the world.
ID-Pal, an identity verification provider, announced a €7m (£6m) Series A funding round to further fuel expansion into international markets. The round was led by Inspire Investments with confidence shared by Act Venture Capital who have now participated in ID-Pal’s last two rounds. Inspire Investments is led by Derek Delaney, CEO of Waystone, and is the private holding company for the management of Waystone.
UKRAINIAN FOUNDED PREPLY RAISES $50M USD SERIES C
Research by independent asset manager BOOST&Co has revealed that more than a quarter of SMEs believe that debt funding is more widely available to male-owned Ofbusinesses.thosesurveyed for the Geared for Growth report, 27.5% of business leaders agreed with the statement that debt funding is more widely available to businesses owned by men. This view was particularly prevalent in certain regions of the UK, including London, the South East and Scotland. Research by The Gender Index found that women-led firms in the UK disproportionately attract less investment than those led by men, despite the fact that more women are starting more companies than ever before.
The gap between what customers expect and what traditional banks deliver poses a significant threat to long-term relevance and growth. Digitalization is changing how people interact and do business, and developments in banking technology continue to influence the future of financial services worldwide. A UK Finance spokesperson told Business Leader: “An efficient, innovative and competitive financial services industry is critical to the future growth and prosperity of the UK economy. Over the past few years, we have seen a number of new entrants to the market, including specialist and digital-only banks. This means there are a range of finance solutions available for businesses and banks to constantly review their services and product offerings. The diversity of the financial services industry has been a driver of competition and improvements to customer service and innovation.”
IS TRADITIONAL BANK LENDING UP OR DOWN? UK bank-to-business lending fell to minus £1.6bn over 2021, following £35bn net of corporate loans in 2020, according to the EY ITEM Club for Financial Services Forecast. Net growth is expected to pick up in 2022, rising 2.4%, as firms borrowing is expected to reach just over £11bn. Overall, the total stock of business debt is set to fall by 0.3% in 2021, a sharp contrast with 2020’s 8% rise.
According to the Euro Bank Lending Survey, there was a considerable increase in demand for business loans in the fourth quarter of 2021, a net percentage of 18%, after 8% in Q3 2021, the largest net increase since the rise in loan demand in the first half of 2020. This demand was driven by short-term working capital needs and a significant pick up in firms’ longerterm financing needs for fixed investment. Business lending is forecast to grow 2.4% in 2022 (to just over £11bn) based on normal economic conditions returning, as firms re-focus on growth over debt Banksrepayment.areagreeing to approximately 85% of all lending applications made by SMEs, according to UK Finance, and a burgeoning £6.26bn market in alternative lending represents a major opportunity for innovative rivals.
The European banking system has survived the economic shock caused by the pandemic, thanks to the coordinated reaction by banks, policymakers and authorities. Furthermore, unlike previous economic crises, banks didn't witness substantial losses - ROE in 2020 was 6.7%, substantially above the 4.9% witnessed in 2008.
An increasing demand for automated banking experiences is transforming the industry. The coronavirus pandemic has accelerated this digital disruption, giving fintechs an opportunity to consolidate their progress in financial services.
MORE PROVIDERS ENTER THE FUNDING SPACE: Previously, banks counted on their size and regulatory protection to weather disruption, but they must deliver more than return on equity to survive. The fintech industry is the UK’s strongest start-up sector, with more than 1,600 high-growth fintech companies, 17 unicorn companies (half of the UK’s billion-dollar start-ups), and more venture capital investment than any other industry. Competition and choice in commercial banking are good for consumers, leading to enhanced products and services. For example, HSBC is offering global wallets and digital banking products that allow businesses to see all their global operations on a single pane of glass. Head of Tech Sector, Roland Emmans leads the Growth Lending business at HSBC, ensuring the bank continues to evolve and support high-growth businesses. With more financial providers available than ever before, what do unicorn firms want, and how can traditional banks keep up? bank to the future
August – September 20222
FEATURE
Helen Bierton, Chief Banking Officer at Starling Bank commented: “Our small business customers requested this feature, so we’ve delivered. Uptake of Bills Manager has been strong among our personal current account customers and we’re confident it will help hundreds of thousands of small businesses better manage their money too.”
Cont.
Business Money - A special publication by Business Leader Magazine 3 Emmans explains: “Being able to share perspectives and insight is invaluable. We created growth lending because these businesses grow really quickly and we want to make sure we are working with them earlier than we would normally do.”
The UK’s largest challenger banks, Starling, Monzo and Revolut, tend to offer more targeted solutions to customers than traditional banks. By providing greater personalisation and a more customeroriented approach to banking, they have created a real threat to the long-standing incumbents. As businesses become increasingly dynamic, fast-paced, and mobile-ready, challenger banks are offering banking at our fingertips. They’re agile and committed to building services and products that meet customer needs.
The financial services industry has always been a tech-intensive sector. From the first ATMs in the 1960s to user-friendly retail banking mobile apps in the 2000s, banks have always invested heavily in better serving Helen Bierton
For example, Starling, winner of Best British Bank four years running (2018 -2021) at the British Bank Awards, has just introduced Bills Manager to help businesses streamline their finances.
customers.TRADITIONAL BANKING “UPTAKE OF BILLS MANAGER HAS BEEN STRONG AMONG OUR PERSONAL CURRENT ACCOUNT CUSTOMERS AND WE’RE CONFIDENT IT WILL HELP HUNDREDS OF THOUSANDS OF SMALL BUSINESSES BETTER MANAGE THEIR MONEY TOO.”
However, some traditional banks like HSBC are adapting their products and services to compete and support high-growth businesses. Growth Lending is proof that HSBC is tweaking its traditional risk appetite and recognising there is a gap in the market for these kinds of products. “Growth Lending is for businesses who want to become global tech players by working with a global bank”, says Emmans.
Whether traditional banks choose to adapt or not, mobile banking is here to stay. Across Europe, the use of online and mobile banking surged by up to 20% during the pandemic. To survive, the banks of the future must incorporate emerging technologies, remain flexible to adopt evolving business models and put customers at the centre of every strategy.
SUPPORTING SCALE-UPS: The UK is equipped to foster start-ups, but it lacks support for businesses as they enter the high-growth phase. Characterised by big valuations and avant-garde innovation, banks traditionally offered few products suited to this kind of business plan but are now showing an interest in the start-up ecosystem. Banking is not only about lending. These scale-up businesses, with thin management teams and fast growth, want a real human being that can help them navigate and short circuit the challenges they face, according to Emmans.
Increasingly in this space where you have businesses that are growing at pace, the list of requirements includes a good digital product offering, a human being that has worked through the challenges before and also lending. FINANCES Emmans
August – September 20224 However, there’s been major growth within the alternative lending market, with changes to the way businesses go about accessing capital and facilities playing a major role. The pandemic has cemented a mass transition from traditional to alternative finance among UK companies. Circumstances including a pandemicdriven cash flow crisis and the rise of fintech and challenger banks, is spurring the rise of alternative lending models. A burgeoning £6.26bn market in alternative lending now represents a major chance for these lenders to meet the evolving needs of their customer base. This increased competition spurs innovation, benefits customers and drives progress. The fintech industry has experienced massive growth, and according to the Business Research Company, the global fintech market was valued at approximately $128bn in 2018 and is expected to grow to $310bn at an annual growth rate of nearly 25% through 2022. LOSING CUSTOMERS: Retail banks are currently lagging in their ability to offer true omnichannel experiences, as customers turn to competitors that offer more personalized experiences, according to the World Retail Banking Report 2022 (WRBR). Bankers are worried about their ability to offer high-quality experiences to their clients, according to a report from Capgemini and Efma. For their latest WRBR, the two firms surveyed 8,051 consumers and 142 banking executives based in 29 countries. According to the survey, 75% of customers are attracted to the fast, low-cost, easy-touse products and experiences of fintechs and 50% of respondents say their current banking relationships aren’t rewarding. Three quarters of those surveyed are attracted to fintechs’ seamless services. For all the progress made by the challengers, they do not dominate the banking space. Consumer research confirms this ‘legacy’ trust factor. Capgemini's World FinTech Report 2021 concludes: “While consumers increasingly accept fintechs, they continue to trust traditional banks, and 68% say they would try a digital-only offering operated by their primary bank.”
The incumbents are still here. And they are re-inventing themselves. They possess advantages including customer trust, regulatory know-how and product expertise, but according to the survey, they are feeling the strain, with 70% of banking executives concerned they lack sufficient data analysis capabilities. In the report’s ‘Voice of the Customer’ survey, about 75% of respondents said they are attracted to these new, agile competitors because of their fast, easy-to-use products.
FEATURE “WE HAVE BUILT MARKET-LEADING DIGITAL TOOLS TO MAKE IT EASIER AND QUICKER FOR COMPANIES TO MANAGE THEIR
AND MORE AND MORE CUSTOMERS ARE SWITCHING TO USE THEM.”Roland
TRADITIONAL BANKING
“WHILST DIGITAL BANKS ARE OVERTAKING TRADITIONAL BRICKS AND MORTAR BANKS, IT’S NOT TOO LATE FOR MORE TRADITIONAL COMMERCIAL AND BUSINESS BANKS TO BRING THEIR PROCESSES UP-TO-DATE AND ADEQUATELY COMPETE.” launches £1.25bn fund to supports smes in the north west HSBC UK has launched a £15bn lending fund for small and medium-sized businesses with £1.25bn ring-fenced to support local economies, employment opportunities and drive growth across the North West. Whilst concerns about the broader market remain, HSBC’s customers are thinking about growth via investment, acquisitions and capital expenditure. Businesses have told HSBC that they are ready to invest for growth and are confident about the prospects for their own businesses.
THE BANK STRIKES BACK Self-service options, IoT sensors, and AI are being deployed to offer customers new services, identify business needs and uncover new growth opportunities. From managing new regulatory requirements to turning sustainability promises and net-zero commitments into action, and driving digital transformation, this coming year is set to be as demanding as the last. The future of banking is being shaped by technology. “As consumers, we expect things to be as simple in our business life as they are in our domestic life,” says Emmans. In 2022, traditional banks are rethinking their banking approach with a digital-first and transformation strategy. The question is not which banks will transform, but which banks will break new ground and succeed.
hsbc
Recognising that partnering with tech brands and transformative fintechs is key to supporting innovation and meeting customer needs is crucial, and HSBC has more than 1,000 of these partnerships across the globe. Banks are having to evolve, reimagine and modernise their business-lending processes, to take advantage of new opportunities and capture more of the forecast growth. According to a World Bank report, the world’s micro, small, and medium-size enterprises have unmet finance needs of approximately $5.2tn a year, roughly 1.5 times the current lending market for such businesses. ARE THEY SEEING THEIR CUSTOMER BASE INCREASE OR DECREASE?
Fintechs tends to focus on start-ups and their efforts to unbundle the financial service industry’s suite of services. Despite their wealth, talent, and rich history of innovation, banks have been sluggish to respond to the upstart movement.
Other big banks have also introduced changes to their activities to support scale-ups. Barclays has joined forces with the Cambridge Judge Business School to create the Barclays Scale Up UK Programme to support high-growth businesses beyond their day-to-day banking needs. Likewise, NatWest Group is set to launch an online-based lender for small businesses. The plan would likely see NatWest use Vodeno’s data technology to make lending offers to businesses that the large corporate lenders would currently overlook.
digitally — with little interest in branches — banks and credit unions can no longer count on geography to engage customers.
According to Fintech and Banks: How Can the Banking Industry Respond to the Threat of Disruption? only 7% of banks set up their own fintech labs; the majority (63%) have preferred a passive approach of investing in start-ups. Emmans outlines what HSBC has done to keep pace: “We have built marketleading digital tools to make it easier and quicker for companies to manage their finances and more and more customers are switching to use them. For example, over 30,000 business customers have signed up to HSBC Kinetic, our mobile-first banking service for small businesses. It was the first digital-only bank in the UK to offer business loans to help customers kick start business growth and has leant over £1.9m in the first three months of going live.”
It’s no surprise that millennial consumers consider traditional high-street banking to be a thing of the past. To survive and avoid losing customers to more agile fintechs, traditional banks need to rework their business models and drive greater customer engagement. Whilst digital banks are overtaking traditional bricks and mortar banks, it’s not too late for more traditional commercial and business banks to bring their processes up-to-date and adequately compete. If they don’t make changes, money and customer losses will be such that they’re unlikely to survive another downturn.
Business Money - A special publication by Business Leader Magazine 5 HOW WILL THESE BANKS FUNCTION IN THE FUTURE? WILL THEY BE SMALLER OR LOOKING FOR GROWTH?
Younger consumers grew up almost entirely within a digital world, using a smartphone or tablet to manage almost any aspect of their lives. With so many consumers now comfortable banking
Our OFXperts are happy to chat, so you can make more informed decisions about your money.
As major economies strain under cost of living pressures, central banks are getting aggressive on interest rates. The difference from country to country, known as interest rate differential, has a high bearing on currency volatility. Our OFXperts explain what this means for UK-based SMEs. C entral banks are moving rapidly to take the heat out of their economies. By altering interest rates central banks can impact spending and its effect on how much things cost. Why interest rate changes drive FX volatility A currency tends to appreciate relative to a peer as the gap between interest rates widens. As interest rates go up, investors buy holdings in the currency where the yield is higher, and the increase in demand sees the currency gain in value. On the other hand, as investors sell off lower-yielding currencies, the drop in demand decreases currency value.
Whether you’re trading in pounds, euros, or dollars, it’s a volatile time for exchange rates. Shifts between the time you receive and pay an invoice can mean you’re paying more than you budgeted for. Or, if you’re an exporter receiving payments in foreign currency, the value of that revenue can change. Even small movements can make a big impact on your bottom line. What is hedging? Hedging is the process of protecting yourself from a future change in price. In foreign exchange, it works by taking a position that prevents you from losing out if the currency market moves against you. At OFX, we use Forward Contracts to ‘fix’ the rate available to you for an agreed amount for a period of time, say, up to one year. But there are things you need to be aware of when determining if hedging is right for your business. Are your payments regular or ad hoc? Jake Trask, OFXpert since 2012, works with SMEs on managing currency risk every day. Here are some of his top tips: “Hedging is a strategy suited to a company that has a regular need to buy goods or services from overseas, rather than someone who buys on a very ad-hoc basis.” If your business buys ad-hoc, then you have more flexibility in the payments you make. So, locking in a rate for a period of time prevents you from taking advantage of potential market movements in your favour. Trask said: “A business should look to hedge when it has finalised an order to buy goods or services and it needs to mitigate the foreign exchange risk in buying those goods or services. But you need to be sure that the vendor is definitely going to deliver on your contract. So, signing contracts is very important. If the vendor does not deliver, or you end up hedging based on an estimate of your foreign exchange needs in the future, then you have committed Exchange rates? It’s our favourite topic.
Recent pound moves
Take control of FX with OFX
The race to hike rates and pound volatility
On June 15, as the US Federal Reserve announced its highest rate increase in nearly 30 years, the value of the pound dropped sharply against the US dollar. The next day, the Bank of England quickly followed suit, raising rates to the highest level in 13 years and signalling that more hikes are likely, leading to a rally for the pound.
Approximate
OFX is authorised by the Financial Conduct Authority as an Electronic Money Institution (Firm Ref. No. 902028)
OFX tracks economic data and FX market moves 24/7 (so you don’t have to)
OFXpert tips 1. In volatile markets, it’s vital to stay in the loop on currency movements.
Currencies change in value H1 2022
Visit OFX.com or talk to an OFXpert on 0207 614 4195 to buying an amount of currency at a locked-in rate, which could leave you with a considerable loss if the contract is not fulfilled. Are you comfortable if you miss out on a better rate?
A market rate is essentially a ‘wholesale’ rate that is available only to large financial institutions or those who purchase large volumes of currency. Customer rates charged by OFX include a margin and are not market rates.
Recent data tells the tale of surging inflation, with readings consistently outstripping analysts’ expectations. March US inflation 8.5% – 40 year high April UK inflation 9.0% May US interest rate increases to 1% UK interest rate increases to 1% ECB hold rates June US interest rates reach 1.75% UK interest rates reach 1.25% UK inflation 9.1% – 40 year high
If you have chosen to use a Forward Contract to fix a rate, you need to accept that if currency market volatility worked to your advantage, you would still have to abide by that contract, said Mr Trask. “Companies should be happy to pay a fixed rate for the duration of a contract. Even if the market rate pushes higher, they are still obliged to complete the Forward Contract.”
What if you want the best of both worlds? “Some clients will do a combination of hedging half their exposure and doing half at the ‘spot’ or ‘on the day’ rate to potentially take advantage of upticks in the rate.” The real benefit for companies who hedge in this way is that they have set currency costs for a period of time. It may mean losing out if currencies move in your favour, but you will also be reducing the risk of any costly surprises.
Sign up to receive OFX daily currency ofx.com/forex-newsupdates: 2. If you don’t have time to follow FX markets, speak to an OFXpert who knows them inside out. We’re available 24/7: 0207 614 4195 3. Consider how rising inflation and interest rates may impact currency in the months ahead – it could save your business money Jake and See Wah, OFXperts EURUSD 10% GBPUSD 12% difference between highest and lowest market rates in H1 2022
August – September 20228
fundamental benefits
tough conditionsmarketbut the remain a deep dive into ipo market conditions the decision to undergo an Initial Public Offering (IPO) is a big decision for business and requires a huge amount of work and But the rewards can be huge with access to funding being abundant and other benefits, such as engaging and rewarding employees. will firstly, look at the current market for IPOs and then give some advice on how can best prepare business for this funding option. CONDITIONS Buoyed by strong stock markets and the need for yield, investors poured money into IPOs in 2021, resulting in a recordbreaking year for IPOs both globally and in the GlobalUK.IPO activity hit an all-time high in 2021 as the market continued to roar back after a strong second half in 2020. A total of 3,022 new listings globally were announced last year, which raised $601.2bn among them (according to White & Case). BUT WHAT DID THIS MEAN FOR ACTIVITY IN THE UK? In a record year for IPOs, the London Stock Exchange was the largest centre for IPOs globally outside of the US and Greater China. Over 120 companies chose to list on the London Stock Exchange, raising £16.8bn the strongest year for IPO capital raising since 2007 and the highest number of IPOs since 2014 (according to their data) GOING FORWARD However, this year the global IPO market, and in the UK, has slowed with experts pointing to global challenges such as conflict, inflation and economic and political instability.
Making
Technology and life science IPOs, which had been the key growth area in recent years, saw a marked decline, with a combined 197 IPOs in H1 2022 compared to 504 in the first half of 2021. China accounts for over half of all global IPO proceeds and Shanghai was the leading global exchange in terms of proceeds in H1 2022, hosting 69 IPOs and raising over $32.6bn in the process, representing a 46% increase in proceeds when compared to the same period in 2021. “THE PIPELINE OF IPOS IS HEALTHY, WITH A NUMBER OF DELAYED IPOS BECAUSE OF THE TURBULENT MARKET CONDITIONS IN THE FIRST HALF OF THE YEAR. THIS PROVIDES A MORE POSITIVE MEDIUM TO LONGTERM OUTLOOK.”
Scott McCubbin
This article
The London Stock Exchange has reported a slow first half to 2022, with 26 issuers raising £595m in the first half of 2022, compared to 47 issuers raising £9.4bn in the same period the year before. In the second quarter of 2022, the main UK market listed six IPOs which raised £192m in total, whilst the Alternative Investment Market (AIM) saw just one admission, raising £6m. The largest main market IPO in the period was Financials Acquisition Corp, which raised £150m. The only AIM admission was EnSilica plc, which raised £6m. UK IPO performance during Q2 2022 starkly contrasts the same period in 2021, when there were 12 IPOs on the main market and 13 on AIM, raising a combined total of £3.8bn – a value 19 times higher year-on-year.
FEATURE taking
you
Scott McCubbin, EY UKI IPO Leader, comments: “The London IPO market has experienced a very difficult start to 2022. There is a perfect storm of geopolitical pressure creating a challenging macroeconomic landscape, which is compounded by inflationary pressures focused on high energy and commodity prices leading to associated interest rate rises. We expect a weak IPO market for the remainder of 2022 due to these challenging conditions. “However, the pipeline of IPOs is healthy, with a number of delayed IPOs because of the turbulent market conditions in the first half of the year. This provides a more positive medium to long-term outlook, although the timing of a rebound is hard to predict given the uncertain geopolitical and macroeconomic landscape.”
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MARKET
WHAT IS HAPPENING AROUND GLOBAL TRENDS? Similar to the UK markets, global IPO activity declined significantly in H1 2022. The global IPO markets reported 630 IPOs in H1 2022, raising $95.4bn. This represents a 58% valuation drop when compared year-on-year and is 46% lower in terms of the number of IPOs. Global energy IPOs led the way in terms of proceeds, with $27.9bn raised in total – more than any other single sector.
your
“Our IPO marked the culmination of seven years of hard work. It was particularly exciting to take customers with us on our journey, and we were thrilled that so many wanted to take part in this phase of our growth by applying for shares in our customer offer.” Cont.
WHAT ARE THE BENEFITS OF LISTING?
“A listing makes the most sense to me now because you have more control over your destiny, and when I look at the greatest businesses in the world, they are listed.”
Julian Hearn HuelFounder Romi Savova PensionBeeCEO
Business Money - A special publication by Business Leader Magazine 9 IPOS
When combined with the Shenzhen and Beijing exchange, China accounted for 28% of global IPOs by number and 51% by proceeds in H2 2022. The NASDAQ, which was the most prevalent market in 2021, saw a marked decline, with only 48 IPOs in H1 2022 compared to 162 in the equivalent half in 2021, with a reduction in the number of technology IPOs specifically. HOW ARE UK BUSINESSES REACTING? With a tougher global and domestic market, what are UK companies doing? Research from Coupa Software, a Business Spend Management (BSM) platform, has revealed serious last-mile struggles as many UK businesses have delayed their IPOs due to current market conditions. findings suggest that unpreparedness to manage financial risk and controls in the current economic environment may result in six to eighteen-month delays in IPO. In their fast-paced journey from early-stage start-up to growth, international expansion and finally towards an exit, less than a quarter (20%) of finance leaders in the UK are confident that their financial processes are robust and scalable enough to support their own company’s growth ambitions. In addition to this lack of confidence, 87% of finance leaders admitted their company has delayed or is planning to delay an IPO. The top reasons cited for delaying an IPO are all related to concerns with current market conditions, specifically rising interest rates (31%), supply chain shortages (31%) as well as recent stock market volatility (31%), and rising inflation (23%).
The
WHAT IS IT LIKE TO IPO? Despite the difficult conditions, many leaders are still looking to plan to IPO, such as Huel founder Julian Hearn. On why he is deciding to do this, he comments: “A company called Highland Europe invested £20m in 2018 and everybody within the business has share options, which means that they are invested in the company. I like the idea of that, and I think it’s motivating for recruitment and retention. So, there must be some sort of exit event at some point for people to realise those “Theinvestments.options on the table are to sell to a trade parent or to go it alone forever and be like Mars and try to stay private and release dividends at some point. For me though, an IPO works best because I certainly wouldn’t want to sell it to someone who wouldn’t love it enough, would under-resource it and not ensure it reaches its full potential.
Having control of your destiny is one of the benefits of listing that leaders who have gone through the process talk about. One of the major 2021 floats was PensionBee. The company’s CEO Romi Savova explains why they decided to float and how they’ve benefitted from it. She said: “Making the transition from being a private company to a publicly traded company was always part of our strategy to be the best online pension provider. We knew it would enable us to access capital, so we could further develop our customer-focused proposition and extend our reach to millions of consumers across the UK, whilst continuing to use our voice to make positive changes in the pensions industry. “There is a significant growth opportunity for us, as a result of the acceleration of the shift to digital and the frequency of individuals moving jobs, combined with the ever greater need for financial wellbeing.
“MAKING THE TRANSITION FROM BEING A PRIVATE COMPANY TO A PUBLICLY TRADED COMPANY WAS ALWAYS PART OF OUR STRATEGY TO BE THE BEST ONLINE PENSION PROVIDER. WE KNEW IT WOULD ENABLE US TO ACCESS CAPITAL.”RomiSavova Scott McCubbin EY Partner & UK&I IPO Leader
“Our estimated market share is currently around 0.4%, which means there’s a huge opportunity for us to grow and continue to work towards our mission of making pensions simple, so everyone can look forward to a happy retirement.
Other parts of the process you should consider include selecting the right banking institution to manage the listing – as well as aiding in the due diligence and filings. They will also provide the underwriting services, pricing, and produce the engagement letter which is a vital part of the process.
1. The intention to float – the company announces to the stock market that they wish to float the company by way of an IPO or new issue.
Joining a public market such as AIM or the Main Market can both help businesses to grow and enhance their profile. A listing on the London Stock Exchange gives companies access to deep pools of capital, both at IPO and for the long-term.
According to Hargreaves Lansdown, there are five parts to launching a successful IPO.
An IPO, or stock launch, is a public offering in which shares of a business are sold to institutional investors (entity or pool of multiple people) and sometimes retail investors (individual).
WHAT ARE THE BENEFITS OF GOING PUBLIC?
5. Shares admitted to the stock market – also known as the secondary market, the shares can be bought or sold during normal market hours. Once on the secondary market, the price of the shares can rise and fall.
3. Sales of shares – applications for the shares begin. The IPO will be open for a fixed time known as the Offer Period.
STEP-BY-STEP GUIDE TO AN IPO
August – September 202210 FEATURE IPOS
Here is a short guide to what you need to know when going through an IPO.
WHAT IS THE DIFFERENCE BETWEEN AIM AND THE MAIN MARKET?
Although it can vary depending on where a company decides to list, there are some key similarities that business owners need to be aware Companiesof.with the goal of listing often announce their intentions a considerable time before the IPO date. In the ‘pre-IPO’ stage, the business will have typically grown to have a value of more than $1bn, and have scaled with a smaller number of shareholders including early investors, alongside professional investors such as venture capitalists, seed funding specialists or angel investors.
Before a listing, an IPO is typically underwritten by one or more investment banks, who then arrange for the shares to be listed on one or more stock exchanges around the world. This is known as floating or going public, and results in a privately-owned company being transformed into a public company.
how do you launch an initial public offering?
AIM is the world’s leading growth market, traditionally home to ambitious companies looking to raise long-term equity finance.
Over its 24-year history, more than 3,800 companies have raised nearly £110bn through AIM, with 60% of this being through further issuances. The Main Market generally admits larger, more established companies and offers the potential to be included in indices such as the FTSE 100, FTSE 250 and others. Companies on AIM may decide to proceed to the Main Market once they reach a certain size and stage of development.
There are several key metrics that are used to measure whether an IPO is a success. The first is market capitalisation. This is the stock price and the total number of a company’s outstanding Anshares.IPOcan be considered a success if the difference between the offering price and the market capitalisation of the listed business is less than 20% within 20 days of the launch date.
The reason for launching an IPO is primarily to raise new equity capital in order to grow the business.
4. Offer Period closes – applications will be finalised and investors allocated the shares based on the size of their application and any relevant scaling.
2. Preparation of Prospectus – the company will then prepare and release a Prospectus. This aims to be the definitive document relating to the launch and will describe the offer in detail. Applications to buy shares during an IPO or new issue should always be made on the basis of the information contained in the company’s Prospectus and any supplementary documentation the company may produce, as the Directors have to give a full and fair description of the business including the risks.
WHAT DOES A COMPANY NEED TO FLOAT?
HOW CAN YOU TELL IF YOUR IPO IS A SUCCESS?
Becoming a public company is a significant decision. Companies should have a well-defined business plan, a demonstrable track record and a clear equity story. Planning is essential to a successful float and can take 6–12 months. Companies will need to appoint advisors for the IPO, a law firm, broker, and others depending on the market they are planning to join. To meet the requirements of the market, companies along with their advisors will look at whether they have the right corporate structure, governance and controls.
We also spoke to the London Stock Exchange Group (LSE), to give businesses all they need to know about London’s international public markets.
Rising costs and supply chain pressures translate to challenging times ahead for business leaders. Yet research by American Express[1] reveals a majority (67%) feel optimistic about the next six months and are developing strategies to mitigate any disruption to business as Oneusual.way they’re doing this is by prioritising managing cashflow, which almost threequarters (73%) of business leaders say has become more important over the last year as they look to protect their operation against rising costs. Any businesses looking to improve cashflow should consider their approach – here are steps to take:
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1. ENCOURAGE FASTER PAYMENT TERMS As soon as you close a deal, you might be tempted to celebrate straight away. But the deal isn’t necessarily a success until such time your customer makes payment in a timely manner. Without it, you risk a cashflow shortage even if your business is profitable on paper. Speed up payment terms by incentivising your customers to make their payments as fast as possible. For instance, you could offer a discount if they make payment within a week, or include a discount on future orders, gift certificates or merchandise.
Business Money - A special publication by Business Leader Magazine 11 ADVERTORIAL
3. CUT UNNECESSARY SPENDING Business expenses can sneak up on you: unused office space, built up inventory, along with costly employee spending. Individually, they might not be much, but together can be a serious drain on cashflow. Dedicating time to expense management, using a simple system like AmexExpense, can make a positive difference. In terms of employee spending, the app reduces time spent on reconciliation and can provide a range of insights, guiding any controls required to keep your business on track.
2. REVIEW YOUR ACCOUNTS PAYABLE TERMS While you speed up cash inflows, see what you can do to slow cash outflows. When an invoice comes in, check the terms to see how long you can delay payment. And don’t be afraid to negotiate – can vendors give you longer payment terms in exchange for your business? Could you qualify for a discount if you pay early? That gives you the opportunity to boost profit margins when cash is plentiful while buying more time when it isn’t. With an American Express® Business Card, you get up to 54 days until payment is due, so there’s more time between paying suppliers and outstanding accounts – and your cashflow is maximised. Your business can remain interest and credit free, while giving you more wiggle room on your balance sheet.
[1] American Express and Cebr surveyed 502 business decision makers across companies of all sizes in the
Fieldwork was undertaken between 29th April and 9th May 2022. CONCENTRATE ON CASHFLOW: 4 TIPS FOR BUSINESSES By Amanda Salt, Vice President, UK SME Sales, Global Commercial Services at American Express To find out how American Express® Business Cards can support your business, please visit: www.americanexpress.com/en-gb/business/charge-cards/
4. PLAN AHEAD Every business needs a cashflow forecast. It will help you understand income and outgoings over a set period. That way, you know when you will have a surplus or a deficit of cash in your account, helping to plan your expenditure accordingly to ensure a consistently healthy cashflow. Actively managing cashflow will ensure your business has the funding available to make payroll, cover bills, pay taxesultimately putting you on a much stronger footing when operating in a challenging economic environment. UK.
She says further: “A debt partner is typically much more transactional and less focused on the nuances of the business. I have also been guilty of using equity financing for working capital, which is very expensive and very inefficient. Equity funding should be used for growth and not working capital, so you need to be very clear about what you will use debt or equity funding for. “VCs are very much focused on the team and the founders and their vision, whereas debt providers look at the balance sheet of the business and they don’t like lossmaking companies. VCs don’t mind if they can see a growth path. It can be framed as responsible lending versus ambition and vision.”
Alex agrees that making the most of the investors you bring on board is important, times like this, the tide goes out and you can see who is swimming naked”
Debt and equity remain the two most popular ways to fund a business venture or supercharge its growth journey. We look at the benefits and drawbacks to both funding levers, giving you an insight into how you can best maximise each option.
On how best to approach this, Tom March, Managing Partner at Redrice Ventures, says: “You need to have the comfort that, if there is debt in the business, it is “THE KEY PART OF RAISING DEBT IS UNDERSTANDING WHAT THE COLLATERAL IS THAT THE BORROWER CAN USE TO LEVERAGE AND RAISE CASH, WHETHER THIS IS INVENTORY OR MACHINERY, FOR EXAMPLE.”
Dominika Minarovic, who is the Cofounder of BYBI Beauty, says that when growing her company, she has always tried to supplement an equity round with debt.
It is also important for businesses to consider the implications of raising equity, if they have debt on the book too. serviceable and that they will maintain that approach if they bring equity into the business too. You can use debt to benefit everyone in the business and it can work well alongside equity, which is a better funding lever if you are investing in growth and innovation.”
Julian Hornby
REVIEW in
Flexible funds to accelerate growth
DEBT VS EQUITY – WHAT ARE THE BARRIERS? There are pluses and minuses to both raising debt and equity, and Julian Hornby, who is Principal at Growth Lending, elaborates further on what they are, when it comes to debt. He says: “The key part of raising debt is understanding what the collateral is that the borrower can use to leverage and raise cash, whether this is inventory or machinery, for example. Companies with no track record and without a huge asset base to lend against will naturally find this harder. Earlier stage businesses may need a personal guarantee and that is a big decision, and it is a barrier that can sway individuals towards equity.”
However, Alex Wright, who is the Founder at Dash Water, believes that giving away equity early in a business journey is not always a smart move.
LEVERAGING THE NETWORK OF INVESTORS Dominika also says that funding growth in your business using equity enables you to access benefits that debt funding can’t give you, such as accessing a network of experienced investors and gaining support and learning from them.
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He explains: “When funding growth in our business, we raised both debt and equity in the early years, but when you give away equity in your business, it is very hard to get back because the value of your equity may be more valuable in the future. So, the longer you can delay giving away equity, the better it can be for your business.”
It’s rare to see a business that doesn’t raise funding at some point in its lifecycle and television shows like Dragons’ Den have historically made giving away equity a much more palatable proposition than taking on debt.
About debt working alongside equity, Julian adds: “It can be a positive if somebody has raised equity and is now looking for additional debt, but we need to make sure it is extending the growth runway and you’re not throwing more cash into a failing business. If we can sit alongside an equity provider and gain the confidence that the business is performing well, then it can work.”
She explains: “As a start-up, raising debt or unsecured finance can be challenging as you won’t always have assets to lend against. So, what we try and do is maximise an equity round and use it as leverage to get good debt. “Giving equity away at any stage can be impactful for your own stake holding though. Many founders struggle down the line as they may have given away thirty or forty percent of their business and then, when the company is more successful and established, you don’t have as much equity to give away and this can impact how much you are able to raise.”
Alex also says that one of the key benefits to debt financing is that it enabled him to enhance his working capital cycle, especially in the earlier days of the company, and debt also allowed him to scale-up much faster.
COSTS OF BRINGING ON DEBT When it comes to bringing on funding, there are also costs that business owners and professionals should be aware of. Dominika explains: “You need to think about legal costs when you are bringing on equity or debt. There are costs to drafting a shareholder’s agreement, for example.”
My advice is whatever funding you bring in, make sure you get a bit more and don’t be too cute with the quantity you’re trying to raise.”
Another subject that is quite rightly getting lots of airtime in the funding sector is diversity and inclusion, but with less than three percent of all VC raises going to female founders, there is much more work to be done.
On what advice Dominika has when pitching to investors, she says: “You need to have lots of confidence, and you need to have a clear vision about where you want to take the business. Don’t be burdened by the tales of the market. You also need to know your numbers and even if they don’t understand your business or sector, they’ll be impressed by the growth potential of the company.”
Flexible funds to accelerate growth
and he always asks one question when he is going through a funding round: how are you going to add value to my business?
“For us, it’s not about going for high-profile names for the sake of it but bringing people on board who are going to add value. If they are taking equity in your business, you need to ensure they are only demanding of your time in a positive way and they align with your vision, won’t cause friction with other shareholders, and cause any disruption. Good equity investors can add lots of value to your business if you bring on the correct ones at the right stage of your “Investorsbusiness.canpromise
On this subject, Alex says that he has applied the Rooney Rule in his own business, whereby a minimum number of candidates that he interviews need to be from an ethnic minority background, and it could be a suggestion for funders applying this role with the portfolio of businesses they see.
CHALLENGES One of the overarching challenges facing the funding space, is the cost of debt rising due to inflation and the base interest rate Alexrising.concludes by saying that the market is tough, but there will always be opportunities for strong companies: “In times like this, the tide goes out and you can see who is swimming naked. Businesses that operate in favourable times but do not have a good business plan, will struggle when conditions worsen.
DEBT VS EQUITY Business Money - A special publication by Business Leader Magazine 13
“The time consumed raising funding is pretty hefty too, both from the preparation of investment and financial information to answering questions around duediligence.”
the world and it is important that you dig into the detail and what time investors can give you. If you need to write this down, then it is worth it.”
INCREASING DIVERSITY
Alex adds: “It is also worth looking into how the hierarchy of debt is structured within your business, as you might not want existing debt to be subordinate to other debt finance in the business. You also need to confirm you are OK with how your debt is structured, from a legal perspective.
three key 2022 trends in start-up equity funding article by sam simpson, founder at founder catalyst
FEATURE We’re more than half-way through 2022, and it is fair to say we are seeing huge changes both politically and socially. Not only are we still living through the aftereffects of the global pandemic, but we are also now facing a once-in-a-lifetime cost of living crisis and the realisation of the impact of Brexit is continuing to unfold. All of this, of course, has an impact on the way businesses, and especially startups, in the UK are funded and a few new connected realities are beginning to come to the fore. 1. Economic instability is resulting in less VC investment in early-stage businesses. In terms of the scale of equity investment in the UK, roughly £24bn was invested in nearly 3,000 companies in 2021, and the bulk of this investment went to later stage scale-up companies rather than earlier stage pre-seed/seed investments. Whilst the amount of money invested by VCs has quadrupled in the past five years, the amount being invested in the early stages has remained static. We are also yet to completely see how the various recent shocks to the UK economy (inflation, cost of living, volatility in the public equity markets, crash in crypto) will impact investment in the non-listed equity space. Alarmingly though, according to Beauhurst’s 2022 Q1 report, we’ve already seen a nearly 10% decline in investment in the seed stage when compared with 2021 Q4. 2. As a result, start-ups are increasingly reliant on angels to invest during seed stages. Angel investment is becoming an increasingly vital source of funding to bridge the gap between founders ‘bootstrapping’ their business and potentially seeking VC investment. Whereas VC will generally only invest when you are in a position to scale-up (i.e. you’ve got revenue, proved product market fit and have a proven scalable business model), angels will happily invest in businesses from the idea stage onwards. 3. But because angel investors almost exclusively invest via SEIS/EIS, it is crucial start-ups be compatible with the schemes if they have any hope of funding. For investors, the benefits of investing in SEIS compatible start-ups are clear: under the SEIS/EIS schemes, investors get 50% or 30% of their investment back respectively in tax relief, no Capital Gains Tax on exit, and loss relief to further soften the blow if the start-up fails. For founders, the terms received on the investment are often more ‘founder-friendly’ than those from other sources of funding. This is driven by a combination of market norms coupled with the SEIS/EIS legislation being proscriptive about the terms under which an investment can be made under the schemes. THE OUTLOOK It’s no doubt this is going to be a tricky year for start-ups looking for investment. And the barriers to funding are high, but they’re also not insurmountable. Most important is finding a team of people with the right knowledge and skills to help founders navigate the choppy waters of the funding journey.
ANGEL INVESTMENT
CYBSAFE SECURES $28M IN SERIES B FUNDING ROUND FUNDINGINDOORNEWSROBOTICS SECURES $15M IN SERIES A ROUND Doron Ben-David, Co-Founder and CEO (Left) & Amit Moran Co-Founder and CTO (Right) Oz Alashe MBE CybSafeCEO
Before you approach potential investors, it is vital to get your ducks in a row. It depends upon how sophisticated your angel investor is, but whenever I am approached to invest, I quickly work through the following preliminary 1.questions:CanIsee your pitch deck, proposed term sheet & three-year model? You should have these to hand (you’ll need the pitch deck and threeyear model as a minimum to apply for SEIS/EIS advance assurance). If not, then it is worth producing them and polishing them before reaching out to any potential investors. You can produce a term sheet for free on the FounderCatalyst platform. 2. How much are you raising and at what valuation? How much is already committed? Ok, this is three questions, but they are all related and hopefully very easy to answer. Lots of founders avoid putting the valuation in the pitch deck, which is odd as its the very next thing they’ll be asked by potential investors. Many angel investors will only consider investments that are SEIS or EIS eligible and even then, they will only start considering your investment in earnest once you have advance assurance confirmed by HMRC. 3. Do you have a lead investor in place? Many investors like to see a lead investor in place. The lead investor typically has several functions: they will lead the due diligence process (meaning that the other investors don’t have to do the heavy lifting), lead the negotiation on behalf of other investors and will typically be part of the ongoing advisor team. Angels are, generally, busy people. You should do all you can to try and make their life easy. For example: 1. There are rarely second chances - don’t approach angels until you have your ducks in a row – i.e. you have a polished pitch deck, you have advance assurance in place, etc; 2. Consider the timing of your round carefully; 3. Be responsive to angels when they inevitably ask questions about your investment proposition thinking of doing an earlystage fundingequityround? Indoor Robotics, an indoor drone technology company that recently launched Tando™ drone, announced the closing of a $15m Series A funding Theround.round of funding was led by Pitango and included Target Global, European Innovation Council Fund, and Spider Capital. This round enables Indoor Robotics to boost product development and enable intelligent indoor security worldwide. Behavioural security platform CybSafe has raised $28m (£22.4m) in a Series B funding round, taking their total funding to $40m (£32m). CybSafe was founded by CEO Oz Alashe MBE and closed its Series A funding round in 2021, securing £5.6m. Since their Series A, they have expanded their enterprise and mid-market customer base, adding many new customers, including Credit Suisse, HSBC, FNZ Group, Barclays Bank, and Moody’s.
or talk to one of our experts today: 0330
theportfolioinvestorbyengineeringspecialistofbuy-inmanagementinheadroomandcapitalthesupportfacilitiesprovidedWeneeds.recentlyinofworkingcashthe(MBI)asuccessfulbusinessaprivateequitywithexistinginterestswithinsector.Thebusiness had traded successfully over a number of decades and the vendor was looking to make his exit. The result was a £4.15m ABL transaction with property and plant & machinery facilities, and a term loan alongside an invoice finance facility. The mix of assets funded enabled flexible repayment periods ranging from 5-10 years on the loans. We also enhanced the loan to value for the first 6 months and the ability for the client to make bullet repayments - a flexibility that ensured the cost of finance was beneficial to the business. With one eye on the emerging headwinds, it also ensured that the business was able to generate significant cash availability which enabled them to retain preferred customer status with its key suppliers and secure access to Wesupplies.have seen powerful growth in demand for ABL and invoice finance – providing £250m of working capital facilities to SMEs in the last year. If your clients are looking to raise finance in order to refinance, fund growth or use in an acquisition, don’t forget about the funding potential locked up in their business assets.
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ASSET-BASED LENDING CAN HELP BUSINESSES ACCESS CAPITAL TO FUND GROWTH
National Business Development Director Invoice Finance, Aldermore Bank For more information:
For many businesses including SMEs, the trading outlook is hard to call. There are plenty of positives and reasons to plan for growth – but at the same time, a number of significant headwinds are building up which are causing concern. Costs have been rising significantly, as have energy prices and interest rates moved up again, with further rises expected this year. This means it’s really important for businesses to think about their cash flow position and the sources of funding that can help them access capital to keep growth plans on track. For some businesses, there may be sufficient revenue coming in and existing finance facilities in place to support growth on its own. But for others, it may mean that additional sources of working capital are needed as the business moves into expansion mode. That’s where asset-based lending (ABL) can prove a valuable part of the financing mix. ABL offers fast access to working capital tied up in assets. This can be across a wide spectrum including receivables (invoices), inventory, plant and machinery, property and other assets, providing businesses with access to a facility that injects cash and creates more Figuresheadroom.from UK Finance (December 2021) show that total advances for asset-based lending and invoice finance have risen 25% year-on-year. And at Aldermore, we have been seeing this increased demand from our own SME customers. ABL is a great alternative to traditional term loan borrowing such as a bank loan or overdraft. A flexible and tailored package can be created, that is scalable to grow in line with business
August – September 202216 ADVERTORIAL
Chris Meldrum, www.aldermore.co.uk/asset-based-lending 363 5616 to status. Security be required. Any property or asset used as security may be at risk if do not repay any debt secured on it.
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WHY IS ABL A GOOD OPTION FOR BUSINESSES AND WHAT TYPES OF COMPANIES USE THIS FUNDING LEVER? Asset-based lending is a good option for businesses, as the loan amount is contingent upon the value of a company’s balance sheet assets. This can offer a greater degree of certainty, alongside the added benefit of speed. This type of funding also offers a ‘one-stop shop’ able to provide lending against assets, flexibility on the deal structure, and access to government-backed loans. The flexible funding packages offered by ABL can give companies the ability to support greater flexibility with working capital and provide a platform for future Throughacquisitions.ABL, we have been able to offer businesses a wide range of complementary funding options, allowing the flexibility to structure a deal to match the requirements of the business.
To give you an overview of asset-based lending (ABL) and why it is a good funding option for businesses, we spoke to Managing Director at Arbuthnot Latham, Tim Hawkins. can your business benefit from asset-based lending?
18 INTERVIEW ASSET-BASED LENDING
how
Compared with last year, when 80% of the deals were management buyouts (MBOs), management buy-ins (MBIs) and acquisitions, we are now seeing a 50/50 split of transactions between MBOs, MBIs, acquisitions, and refinance opportunities with many businesses actively reviewing their cashflow management in an inflationary Weenvironment.arealsoseeing some sectors performing surprisingly well and require refinancing away from a traditional lender to an asset-based lender that will allow them more working capital and enable expansion. Examples of these sectors include manufacturing, construction, cleaning services, and service businesses in the infrastructure sector. Construction is performing well, with current order books in good shape, but a slowing housing market could affect this. Services businesses in the infrastructure sector are also performing well, with engineering benefitting from strong order books. We have also seen strong demand in the healthcare sector with dominant manufacturing and engineering transactions. This year, around half of the deals we have seen have been private equity-backed, aimed at acquiring businesses that have divested from their parent company. This is happening as larger corporates streamline their business by focusing more on their core activities and less on their subsidiaries.
CAN YOU TELL US ABOUT CURRENT TRENDS YOU ARE SEEING IN THE ABL SPACE?
Dr Glenn Craib: “In terms of what you need to know – it can be complicated and time-consuming. Just looking at some of the trends and changes above, many businesses might want to seek advice. Your accountant should be able to help –if not in doing the claim for you, at least recommending an adviser. “And remember – just because HMRC pays an R&D tax claim, this doesn’t necessarily mean it has been approved. HMRC have a ‘pay now – ask later’ approach – so you should consider using a specialist who will defend your claim in the event HMRC ask questions.”
what next for r&d tax credits?
JennyRELIEF?Tragner: “R&D tax relief is a government incentive designed to reward UK companies for investing in innovation. It’s a valuable source of cash for businesses to invest in accelerating their R&D, hiring new staff and, ultimately, “Companiesgrowing. that spend money developing new products, processes, or services, or enhancing existing ones, may be eligible for this relief. R&D tax relief reduces a company’s Corporation Tax liability or provides a cash payment. If a business is making a claim for the first time, it can typically claim R&D tax relief for its last two completed accounting periods, if it meets the criteria.”
Dr Glenn Craib: “HMRC are increasingly focussed on the costs of the incentive and compliance. There are concerns that the incentive isn’t really increasing R&D activity (particularly in the SME sector). In a largely unregulated market, HMRC is aware of the large numbers of socalled ‘specialist advisers’ competing for business, potentially inflating claims and suggesting eligibility that just doesn’t exist. “On the back of recruiting more than 100 extra staff, they have announced further enhancements to their extensive compliance checks which will result in increased claim processing times. At the time of writing, they are aiming to either pay the payable tax credit (or get in touch with claimants) within 40 days –they will revert to their standard 28-day processing times as soon as they possibly can.”
WHAT ELSE SHOULD BUSINESSES BE AWARE OF?
FEATURE R&D TAX CREDITS
HOW DO I KNOW IF I’M ELIGIBLE FOR R&D TAX CREDITS? WHAT IS THIS TAX
WHAT ARE THE CURRENT TRENDS AROUND R&D TAX RELIEF THAT BUSINESSES SHOULD BE AWARE OF?
WHICH SECTORS WILL BE BOOSTED BY THESE CHANGES?
Jenny Tragner: “Despite some misconceptions, this incentive always has been available to any sector. From cheese-making to chemical engineering, to construction and digital development, R&D can occur and apply equally to any field of science or technology. “A word of warning, there’s a lot of misinformation swirling around regarding the types of projects that attract relief, particularly from opportunistic, spurious advisers looking to take advantage of companies who may have made adaptations in response to the pandemic.
To find out more about Research and development (R&D) tax credits as a funding option for businesses, we spoke to Jenny Tragner, Technical Director at R&D tax relief consultancy ForrestBrown and Dr Glenn Craib, Operations Director at tax relief specialists ABGI UK.
IS THIS RELIEF JUST FOR TRADITIONAL SECTORS OR ARE YOU SEEING A BROADENING OF THE TYPES OF BUSINESSES THAT CAN APPLY?
HOW WILL THE PROCESS CHANGE FROM APRIL 2023?
Dr Glenn Craib: “In the March 2022 Spring Statement, the Chancellor confirmed the expansion of R&D tax relief to include all data and cloud computing but has also included all mathematics. This will be a real boost to sectors such as artificial intelligence, quantum computing and robotics. “He also provided clarification on relief only being available to subcontracted R&D activity carried out in the UK.”
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• Each claim will need to be endorsed by a named senior officer of the business • Companies will need to inform HMRC, in advance, that they plan to make a claim
Dr Glenn Craib: “The government is making the following changes from April •2023:All claims to the R&D reliefs – either for a deduction or a tax credit – will in future have to be made digitally • These digital claims will in future require more detail – for example, on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome
Warren Mutch, Head of Speciality Finance at Shawbrook, explains how specialist lenders can continue pursuing growth while keeping the lending taps on with a Platform Lending facility. Lending businesses are highly capital intensive. But capital may be less certain to come by in the coming months. So, how can specialist lenders secure funding certainty in uncertain times?
Shawbrook’s Platform Lending facility can make the difference, providing 100% of the loan value up front. How it works Through Platform Lending, the lender can originate and service the loan but sell it to Shawbrook. That compares to the typical process of a provider lending to the alternative finance business, who then lends the money to the end-customer. For non-bank lenders, there are a number of sources of wholesale funding – from a relatively straightforward Block Discounting facility through to committed revolving credit facilities. These products are designed to enable the lender to build a loan book over time by leveraging their initial capital.
capital may be tight, but specialist lenders can keep finance flowing
Andrew Voss, director at Bluestone Mortgages, said: “Our home finance products are already helping thousands of customers across the UK that struggle to get past automated application processes. Whilst Bluestone has a diverse range of funding for its mortgages, the platform lending arrangement with Shawbrook provides a stable, flexible and simple source of capital. This allows our management team to focus on delivering mortgage products to those that are underserved by traditional mortgage lenders and high street banks.”
As such, Platform Lending makes the process less capital intensive. In principle, each loan is purchased at a premium to its face value, determined by the economic profile of that receivable, with the lender also receiving a servicing fee.
Uncertainty in the economy could restrain investors for some time to come. So, while the capital required to sustain and grow a lending business is less certain to come by, speak to Shawbrook about how Platform Lending could help your specialist lending business grow and thrive. Shawbrook Bank is a leading lender to the Speciality Finance sector in the UK, serving more than 80 non-bank lending clients, from early stage fintechs to long established PLCs. www.shawbrook.co.uk
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The sale of the loan effectively represents a 100% advance, so specialist lenders don’t have to worry about securing a senior and mezzanine funder, while leveraging their own Platformequity.Lending is already giving more flexibility to providers including The Mortgage Lender and Bluestone Mortgages and helping these businesses to fully utilise their origination capabilities. By using the purchasing power of Shawbrook, they can maximise their ability to drive originations and earn income from it.
Enter stage: Platform Lending In today’s macroeconomic climate, the cost of funding is increasing and the capital required for these businesses to front even the equity portion of a loan, after senior lenders and mezzanine lenders are in place, has become increasingly Thischallenging.iswhere
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A Platform Lending facility is another option, allowing the non-bank lender to originate and service loans but without retaining them on balance sheet.
Speciality Finance Funding for specialist lenders, from a specialist lender Consultative support and tailored funding for specialist lenders. • Consumer finance • SME lending • Bridging & development finance Contact Us Today 07769 742 shawbrook.co.uk/specialitystructuredfinance@shawbrook.co.uk127
“Due diligence is a daunting, timeconsuming, and distracting process. The questions that are asked can make you feel like a fraudulent criminal. But it can be a helpful tool in many ways. “I know several companies whose businesses have become better through the shortcomings highlighted by due diligence.’
DRAGONS’ DEN STAR AND HOST OF THE DIARY OF A CEO PODCAST STEVEN BARTLETT EXPLAINS THE TYPE OF PEOPLE HE LIKES TO INVEST IN “A good idea with a bad entrepreneur is a bad investment but an average idea with a great entrepreneur can be a good investment. This is something I’ve learnt along the way. It’s interesting because when I was 18 years old, an investor agreed to give me £10,000, and he said, ‘I don’t know what your business idea is, but I know you’re going to do something good one day.’
“I remember thinking this guy is an idiot and it wasn’t until I invested in a great product which had awful founders that I realised what he meant.”
August – September 202222 ADVICE With a plethora of funding options available for businesses, it can be difficult to know which one is right for you and your company. Despite there being record levels of funding available, it is also helpful to know how best you can approach funders and investors. To help with this, we’ve compiled the best advice from our interviews with some of the UK’s most prominent investors and funders. being realistic andnot giving your business “Sometimesaway. by settling for a slightly lower valuation, you will get much better deal terms. It will leave you in a very positive position and with less pressure to achieve another high valuation in the next round. Insisting on a maxed-out valuation can lead to a down round in the next raise and that is a really bad look.” investors share their knowledge on how best to gain funding
Angel investor and author of ‘Money Train: 10 Things Young businesses need to know about investors’, David Pattison, says that alignment and timing are very important. “When you are choosing your investors, make sure that everyone understands the timelines, the strategy and the management aspirations. Pay particular attention to the ideal exit/sale timing. “Funds almost always have a life. Most are around ten years but if you are a late investment, you may be looking at a period of five years. An investor looking for an exit just as the business is flying can be very financially debilitating and a huge distraction. It also causes a lot of friction. “Agree on these areas before taking investment. Things are allowed to change on the way through because stuff happens, but again they need to be mutually agreed.”
MAKING DUE DILIGENCE WORK FOR YOU
“In my experience, business owners do not welcome investors trying to run the business for them. Particularly individual investors with too much time on their hands, and often outdated working models.”
RAISE MONEY AT THE RIGHT TIME AND AT THE RIGHT VALUATION “In most cases, fundraising is left too late. This always gives the upper hand to the investor. Valuation is an emotional area. Most business owners see it as some form of a gladiatorial arm wrestle and want to maximise the valuation. I am suggesting
MAKE SURE YOU HAVE THE RIGHT INVESTORS “If your investors are significant shareholders, you are going to spend a lot of time with them. You must work out early what type of investor you want. Anything on a range from arm’s length or helpful strategic partners.
Business Money - A special publication by Business Leader Magazine 23 ATTRACTING FUNDING BUSINESSMAN AND INVESTOR TEJ LALVANI TOLD US WHAT’S IMPORTANT WHEN SEEKING FUNDING
FOR ALL STAGES OF THE MONEY
gained in raising seed and Series A rounds is certainly valuable, but the differences of what is expected at Series B or later must be well understood.
AND SHOW YOU ARE RESOURCEFUL TOO “I really want to understand how resourceful that entrepreneur has been on the journey so far. Have they wasted money? And, how much of the business do they really understand themselves? “Furthermore, it is a simple thing, but what are they going to be like to work with? Are they going to take advice?
THE KEY TO FUNDING Firdaus Nagree, an investor and the founder of a high-growth company called FCI London says: “The actual numbers and projections are key. Often entrepreneurs can spend too much time on snazzy looking decks, but when you get to the nuts and bolts, such as what is your cost per acquisition, your runway to profit, CTR and digital marketing plan, for example, then they do not have the answers.
The team at Frog Capital specialise in the growth opportunity between venture capital and private equity and their advice is: “Pitching for late-stage funding is different to gaining funding as a start-up business. Understanding the process and getting the pitch right (e.g. the narrative, the metrics, the deck, etc.) is critical. These need to be tailored from stage-tostage to factor in the specific audience requirements. That does not mean writing a pitch that over-caters to investors, but rather adjusting it to ensure it speaks their language with the appropriate tone of voice and focuses on key topics. “Some elements of a good pitch are universal but zoom in on the later-stage fundraising and you’ll see there are some key pitfalls to avoid. Growth stage investors will be listening for different things than early-stage investors.
Josh Robson Head of Public Affairs ScaleUp Institute Anthony Rose SeedLegalsFounder Lalvani
“Rather than just saying it is a £1.5bn market and we are going to do this and that – I think it pays to be clear and humble about what you are going to do with the funding. You need to be very specific about where every single penny is going to be spent. For a final point, you also need to try and work with funders that love what you do and who you are, and investors that will cheerlead for you.”
Anthony Rose, who is the founder of SeedLegals, adds: “An irony is that the time when it’s easiest to raise money is when you don’t need to raise it. If your business is tripling year on year and you are in the news everywhere, investors will be calling you. Your first round of investment is all about having investors perceive that you’re bigger than you really are, so it’s important to engage in marketing and get your brand and name recognised.”
Tej
Businessman&Investor
IT IS NOT ABOUT SELLING A DREAM BillANYMOREReichert, Managing Director at Garage Technology Ventures, says the fundamental difference between early stage and late-stage pitching is this: “Selling a dream vs. selling an operating company and your ability to execute your
The set of numbers, metrics, and evidence that a later-stage investor will want to see is greater. History and track record are key to demonstrating sustainable growth “Expectpotential.more data-driven discussions and more ‘difficult’, forensic questions. Latestage investors will look to be convinced by data at a more granular level, not just by the bigger picture vision. “Demonstrating a keen handle of KPI monitoring helps create a sense of control.
“While their equation for building conviction around an investment may have the same variables (i.e. team, market, traction, etc.), their coefficients are often different. A pitch that reflects the growth stage investor’s mindset will make it easier for that investor to assess the opportunity.”
RAISING PROCESS, TALKING TO FUNDERS, AND EXPLORING OPTIONS BEFORE COMMITTING IS ALWAYS GOOD JoshADVICERobson, who is Head of Public Affairs at the ScaleUp Institute, comments: “I think the important thing for a business is to really think carefully about what it is you’re trying to do with the money and what do you need it for. It is said a lot, but it is important to also go out and talk to the funders and the people who can lend you money.
“Theplans.experience
“I believe that transparency and integrity are very important. I need to understand that what they are telling me is the truth. And if there is a problem, they will let me know about it. I also believe that I need to get a sense of how resourceful they are going to be. Sometimes getting an investment may not be a good thing because then you can get complacent.”
Investors will want to see that you have got the discipline of having a metrics dashboard in place for several quarters and they will expect you to be tracking against specific performance metrics.”
ADVICE WHEN ACCESSING LATER STAGE CAPITAL
“There are also some great tools that are emerging, like the finance hub by the British Business Bank, which are demystifying the maze and can give you a good understanding of what is available and how it can help your business.”
FEATURE
Following a huge spike in the median deal size last year, mostly due to increases at the growth stage, this figure has settled on £1.10m in H1 2022—still almost double that of H1 2020 (£582k). So far this year, UK companies have secured 62 megadeals (equity rounds in excess of £50m), a record 29 of which were gigadeals (£100m+).
THE UK’S TOP-PERFORMING SECTORS
Securing a record 140 deals, worth £2.72bn in total, green technology companies raised 18p in every £1 invested in H1. These figures mark a 47% increase in cleantech deal volume since H2 2021, and a staggering 167% increase in the amount raised.
We’ve seen some huge deals secured by UK fintech companies in H1, from Checkout.com’s £730m round back in January to Paddle’s £163m ($200m) round in May. So it comes as no surprise that fintech continues to dominate the UK equity market. In total, the sector secured 172 deals in the first six months of the year, worth a combined £4.38bn. But it’s certainly not alone, as several other tech sectors have flourished in recent months... Close behind fintech is artificial intelligence, with AI companies raising 162 equity rounds in H1 2022—the sector’s best performance to date. Meanwhile, cleantech has shown strong growth so far this year, with increased focus on the sector following COP26 in November.
REGIONAL DISPARITIES DEEPEN
equity market update 2022 in association with beauhurst, the research and database company tracking the uk’s fastest-growing start-ups and scale-ups. www.beauhurst.com
MEGADEALS APLENTY
While London continued to dominate the UK equity market in H1 2022, it wasn’t the only region to see record deal numbers during this period. The Capital secured 753 rounds, while Yorkshire & The Humber raised 52, drawing with the record set in H1 2021, and the South West raised a new high of 81.
Several regions have also seen dramatic increases in the amount invested this year. Most notably, in the North East, deal value has grown from £302m in H2 2021 to a mammoth £1.91bn in H1 2022. The vast majority of this stems from Northumberland-based cleantech company Britishvolt, which has completed three fundraisings already this year, worth a combined total of £1.79bn. In London, the amount invested also increased considerably, from £8.41bn in H2 2021 to a record £10.1bn. As traditional regional disparities remain, three in four megadeals completed were secured by companies headquartered in the Capital. And across all announced equity deals during H1, the majority (52%) went to London—the biggest proportion on record. This compares to just 1.4% for Northern Ireland, 1.7% for the East Midlands and 2.3% for the West Midlands.
h1
LOOKING TO THE FUTURE Here at Beauhurst, we’re cautiously optimistic for the year ahead. The UK’s high-growth ecosystem seems to have withstood the worst of the economic downturn, as investors continue backing ambitious businesses, with more capital being deployed than ever before. In the coming months, we hope to see this funding being distributed more evenly across the country, to support the next generation of startups and scaleups in the UK.
INVESTMENT INCREASING AT EVERY FUNDING STAGE Deal volume reached record levels at the Seed and Venture stages in H1, with 575 and 620 equity rounds completed, respectively. Companies operating at the later stages fared less well, with Growthstage figures declining slightly, from a high of 200 (in H2 2021) to 190. At the Established stage, deal numbers landed on 71, roughly in line with H2 2021 but down from a record 93 in H1 2021. In terms of amount raised, equity investment has risen across the board this year. The growth stage still accounts for around half of investments (£7.32bn), followed by the Venture stage (£3.81bn) and then Established (£2.67bn). The seed stage was the only stage of evolution not to reach record levels of pounds invested, hitting £1.09bn, up from H2 2021 (£996m) but below the peak seen in H2 2020 (£1.14bn).
How has the UK equity market fared so far in 2022? A record £14.9bn of equity investment was deployed to high-growth companies in the first six months of the year—up 37% on the amount invested during H1 2021 (£10.9bn), and marking a 23% increase on the previous record in H2 2021 (£12.1bn). Deal numbers have risen 10% since H2 2021, to a total of 1,456 announced equity rounds, and were just shy of the record set in H1 2021 (1,460). As in 2021, fundraising activity was somewhat weighted towards the start of the year. Q1 2022 saw the greatest number and value of equity deals of any quarter to date, with £8.64bn invested, across 793 rounds. In comparison, Q2 saw just £6.25bn invested, across 663 rounds—these are still impressive figures, however, particularly amidst the current macroeconomic climate. Despite concerns of an investment slowdown, 2022 is off to a strong start, with more pounds invested in H1 than in the whole of 2020 (£11.4bn).
Business Money - A special publication by Business Leader Magazine 25 EQUITY INVESTMENT
August – September 2022 REVIEW
alternative finance: a contemporary answer to an age-old dilemma
In a world defined by decreasing government quotas and heightened regulation, there is a move away from conventional bank loans toward non-traditional alternatives. From its inception after the 2008 financial crisis, the alternative finance sector continues to evolve, becoming a crucial part of the modern-day funding ecosystem.
The global alternative finance market size was valued at $6.62bn in 2021. This market is bursting with potential and is expected to increase by approximately $176bn from 2020 to 2025, as per the latest report by Technavio. The market’s growth momentum will accelerate at a CAGR of 10.18% during this period, as businesses are now approaching alternative finance first rather than turning to it as a last resort when traditional banks won’t lend. The Global Alternative Finance Market Benchmarking Report published by the Cambridge Centre for Alternative Finance (CCAF) in April 2020, showed that the UK market remained the largest contributor by volume to the European alternative finance Alternativesector.finance is an attractive option for middlemarket businesses looking to drive growth, develop their operations or undertake acquisitions. The rise in technology adoption throughout the working world has supported its progress, with alternative finance offering more flexibility and variety in their lending solutions. This couldn’t come soon enough as figures from the Federation of Small Businesses show just 9% of small firms applied for finance in the first quarter of 2022, the lowest proportion since SBI records began. The latest Bank of England figures also show the annual growth rate of lending to SMEs is at a record low, despite small firms making net debt repayments of close to £1bn in March alone. Lending to big corporates, by
Alternative finance is a significant funding option for these businesses seeking finances for growth. According to the UK’s Financial Conduct Authority, digital challengers now have around 8% market share for personal current accounts, up from 1% in 2018, with exceptional growth across the business community. When it comes to business lending, traditional banks may still have the majority market share, but their growth has plateaued. John Davies, Chairman of the Association of Alternative Business Finance explains that alternative lending options came just in the nick of time. “Back in 2008, an alternative to traditional bank lending was extremely necessary as the traditional banks urgently needed to rebuild their capital buffers and could not fully meet the demand for finance for SMEs that wanted to invest and grow. A range of alternative lenders moved into this space using new technology and expertise to make quick and well-informed lending decisions.”
Business Money - A special publication by Business Leader Magazine 27 ALTERNATIVE FINANCE contrast, has increased significantly since the start of the year.
The CCAF, along with the World Economic Forum and the World Bank, have published the Global COVID-19 Fintech Impact and Industry Resilience Study. The results show that digital lending firms globally saw a 37% increase in revenues during the first year of the pandemic. Also reviewed in the study is the ability of fintechs to further financial inclusion. CCAF states that a large proportion of surveyed firms indicated that many clients are new customers and from groups that have faced challenges in accessing financial services via traditional Theagents.alternative finance market is characterised by the existence of established companies, as well as new up-and-comers. Leading key players include Fleximize, Reward Finance Group, Liberis, and Revolut. FLEXIMIZE Fleximize is a digital lender providing unsecured and secured business loans to small- and medium-sized enterprises in the UK. The company has lent over £250m to businesses across the UK via its product suite, excluding Government-backed loans and is forecast to lend over £100m in 2022 while retaining an industry-low default rate. The lender is best known for its Penalty-Free Promise, a pledge that means a customer will never overpay on a business loan with them. REWARD FINANCE GROUP Reward Finance Group provides assetbacked short- to medium-term lending solutions to SMEs.
“THERE IS A TREMENDOUS VARIETY OF FINANCE OPTIONS AVAILABLE THAT FIT THE NEEDS OF SMES AT DIFFERENT STAGES OF THEIR DEVELOPMENT.”JohnDavies Cont.
THE RISE OF ALTERNATIVE REVENUE STREAMS Low growth rates, rising costs and increasing regulations are creating a challenging landscape for financial institutions. Banks refused to lend to one-third of British small businesses who applied for a loan last year and nearly one million businesses faced pushback from banks, according to research by open banking provider Yolt. The main sticking points were timing, too much debt and insufficient collateral. Collectively, UK businesses missed out on £3.6bn worth of much-needed finance, solidifying the need for alternate lenders who go on a case-bycase basis and place customer-centricity at the “Thereforefront.isatremendous variety of finance options available that fit the needs of SMEs at different stages of their development. Forms of the much-valued bank overdraft, borrowing against your online payments (paying a percentage on each transaction) and a wide range of flexible and fixed loan products. Importantly, non-bank lenders take the time to understand different businesses’ needs and don’t go for a onesize-fits-all approach”, says Davies.
CROWDFUNDING IN A CRISIS Bank lending to businesses has dropped in the UK, and businesses are looking elsewhere, but new research suggests that approximately 20% are being held back by a lack of awareness around growth funding options. These options include crowdfunding, P2P lending, angel investment, retail bonds invoice financing and discounting, amongst others. The alternative finance models of crowdfunding and P2P lending have been growing rapidly in popularity over the last few years, as businesses turn to them for much-needed finance. The difference between P2P lending and crowdfunding is that you do not give away any equity, but rather pay interest on the money you borrow. In the past decade, traditional banks have become less inclined to lend to SMEs. Some of this reluctance follows the longstanding repercussions of the 2008 global financial crisis. The recent pandemic has yet again exacerbated the situation. The conventional way of doing business - particularly when it comes to financing and lending - just isn’t cutting it for a lot of businesses. It’s not surprising then that global alternative finance grew by 24% in 2020, despite the pandemic disruption, according to new research from academics at Cambridge University’s Judge Business School. The study found the total volume of digital lending and digital capital raising (excluding that which occurred in China) grew 27% from 2018 to 2020 to $113bn. Most of this growth (24%) occurred in 2020.
The lender’s CEO, Rob Straathof, says “Our Revenue Based Finance enables customers to take funding with one simple agreed up-front fee, which gives them certainty on the costs of the funding. By working with our partners, we can offer pre-approved finance making the application journey a few simple clicks, giving them more time to do what they do best, growing their business. Better yet their payments are automatically deducted from their card takings each day and so their payments are directly linked to the revenues they create. It also means that customers don’t need to worry about a big monthly payment each month.”
With an ever-present need for new capital sources for innovative firms, the growth of alternative finance and the ethos that it’s grounded in will be a vital component in UK economic success going forward. Alternative lending has gone mainstream and UK businesses and those across the globe will be all the better for it.
In 2018, the approval rate for bank loans was approximately 26%, that same rate reached 57% for alternative lenders. Alternative lenders are adaptable and can benefit businesses in several ways, including speeding up the lending process, increased flexibility and lower application requirements. Alternative lenders are more agile, more likely to adopt new technology, and navigate the new normal business landscape better than bigger, more established financial institutions. The easy application process, as well as the flexible underwriting terms and the diverse types of funding available, are also clear advantages. Alternative finance providers use comprehensive algorithms, risk assessment models and valuable data to accelerate their approval process. Further positives of working with an alternative lender include fewer restrictions on what you can use the money for, the loans can be approved almost instantly, and your business doesn’t need to have a stellar financial history.
THE FUTURE OF FINANCE Regulatory pressure threatens growth in the alternative finance sector. Increased regulation could thwart growth in crowdfunding and P2P lending. However, some solutions, including invoice, asset finance and asset-based lending are now far more mainstream and, in a bid to remain competitive, are offered by the high street banks. “BY WORKING WITH OUR PARTNERS, WE CAN OFFER PRE-APPROVED
MORE WORK TO DO A review regarding challenger banks by the FCA in 2021 found evidence of good practice, including innovative use of technology to identify and verify customers at speed. However, the results also detailed that challenger banks need to improve how they assess financial crime risk, identifying a rise in the number of Suspicious Activity Reports reported by challenger banks.
Rob Straathof
FINANCE MAKING THE APPLICATION JOURNEY A FEW SIMPLE CLICKS, GIVING THEM MORE TIME TO DO WHAT THEY DO BEST, GROWING THEIR BUSINESS.”
WHY GO ALTERNATIVE?
The increased appetite for alternative finance can only be a good thing for the sector - the pace of delivery and flexibility on offer is a better fit for many, compared with traditional lenders. Banks cannot transform their business model overnight but want to be able to offer the same kind of solutions and services non-traditional lenders provide. Collaboration between alternative finance firms and banks is likely to strengthen over the next few years, with institutional lenders allocating funding lines to alternative finance providers and P2P property lending platforms.
With a regional presence in Leeds, Manchester, Birmingham, London and Edinburgh, the company lends from £50k to £5m across every sector. “It’s like dealing with a traditional bank but without the red tape, delays in decision making and underwriting restrictions. But more than that, you can also talk to a human being, as each account is allocated its own portfolio manager who will work with our clients every step of the way. This no-nonsense approach has brought enormous success to Reward. With eleven years of continuous growth, we have supported more than 400 SMEs, resulting in us breaking through the £150m loan book milestone,” says Nick Smith, the company’s Group Managing Director LIBERIS Born in London in 2007, Liberis has seen rapid growth over the past 5 years and now operates in 8 countries and has funded over £600m to thousands of small businesses. More recently Barclays have made an investment of £35m, which will help the company to further power its rapid growth across more geographies and with more major global brands in the pipeline.
MONZO The digital bank enables its users to manage business finances via an app. Monzo has also teamed up with Funding Xchange, a funding marketplace that works with multiple lenders to find the right funding for your business goals. Monzo was named Best British Bank at the British Bank Awards 2022.
Sarah Pritchard, Executive Director, Markets at the FCA said: “Our three-year strategy highlights our commitment to reducing and preventing financial crime. This is important in creating that confidence for consumers and market participants in financial services and in demonstrating that the UK is a safe place to do business.”
WHAT NEXT?
August – September 202228 REVIEW
“In the future, alternative lenders are going to have an increasingly important role to play in supporting UK SMEs, with the banks focussing on the very large companies and big infrastructure projects. This will leave non-bank lenders to focus on SMEs and provide them with what they tell us they need - immediate access, service and quicker decision making,” says Davies.
1. All figures are based on fieldwork conducted by Opinium on behalf of American Express. Fieldwork was undertaken between 27th May-6th June 2022, amongst 1,008 SME senior decision makers in the UK. utilise invoice financing?
WHAT TRENDS ARE YOU SEEING IN THE SPACE THAT YOU OPERATE IN?
The current challenging trading environment means many SMEs are reassessing their approach and strategies in order to stay competitive. American Express research found that the key areas SMEs are focusing on are managing costs (42%), increasing sales and marketing activity (25%) and improving cash flow (22%).
Invoice finance is suitable for a wide range of businesses. It is a fantastic way of unlocking working capital that is ‘locked’ on your balance sheet. Any businesses that sell now for future payment can benefit. The easiest type of business to finance via invoice finance are those who ‘sell and forget’ with no ongoing maintenance, service or additional product due. That said, the beauty of invoice finance is its flexibility and its ability to accommodate most invoicing scenarios. In addition, Invoice finance is a great product for growing businesses. As it is secured primarily on the invoices you raise, as you raise more invoices your access to working capital grows alongside. Equally, for businesses with a more stretched cashflow, the instant access that invoice finance provides can be hugely beneficial as you don’t need to wait for your customer to pay to bring the cash from a piece of work into your business.
ALTERNATIVE FINANCE COMMENT
WHAT TRENDS ARE YOU SEEING IN THE INVOICE FINANCE SPACE?
Whilst cost management will be essential to navigate the months ahead, we expect to see more businesses place greater focus on their sales and marketing strategies to stay competitive – particularly in consumer-facing industries like retail.
WHAT TYPE OF BUSINESSES TYPICALLY BENEFIT FROM INVOICE FINANCE AND HOW IS THIS FUNDING STRUCTURED?
Business Money - A special publication by Business Leader Magazine 29
WHAT ARE THE MAIN CHALLENGES YOUR BUSINESS CUSTOMERS ARE FACING?
The ‘core’ invoice finance product has remained very stable during my 20 years in the industry. However, the evolution of tech has allowed the product itself to evolve. We increasingly see invoice finance providers taking advantage of open finance and open banking to enhance and speed up the invoice finance ‘process’ at all stages. In addition, both open finance and open banking improve the visibility that the lender has of their client’s performance. This real-time visibility typically gives the invoice finance provider comfort, allowing them to provide additional finance and offer even more flexibility.
The pandemic was a catalyst for consumers spending more money online and increased demands for payment methods that offer a frictionless experience. Whilst payments systems and tools may not be at the top of any SME leader’s to-do list, by getting these right, they can turn first time purchasers into returning customers. Growing numbers of SMEs are investing in a choice of tools and technology that not only smooth the customer payment journey, but provide crucial insights into customer behaviours and preferences, allowing them to refine their offer both in store and online.
MARKET TREND UPDATE
To give you an overview of invoice finance and why it is a good funding option for businesses, we spoke to Head of Relationship Management and Client Services at Ultimate Finance, John Lightfoot.
Having been challenged for over two years across the pandemic, SMEs are facing a fresh set of challenges spanning rising inflation, supply chain issues and ongoing labour shortages. Our research found that over half (52%) of SME leaders state that the rising costs of goods, services and energy present the biggest challenge to the running of the business in the next six months. At the same time, SMEs are also under increasing pressure from their customers; six in 10 (60%) report that customer expectations are increasing, whilst a further 52% say their customers are increasingly driven by price when it comes to making purchases with them. SMEs will need to consider how they can best meet these demands, in tandem with contuing to provide a memorable customer experience. However there is positivity, as 61% state that they expect a growth in sales over the next 12 months.
how can your business
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