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Funding Their Future

Why entrepreneurs are tapping into the British Business Bank Funding Their Future

Fork Truck Borders Instruction of Berwick-upon-Tweed urgently needed a new forklift for the company’s burgeoning training programme, but was turned down for an overdraft by its bank, even though its account had been in the black for seven years.

In Birmingham, chef Rosie Ginday wanted to expand her successful high end Miss Macaroon patisserie, which employed young people with social problems, but couldn’t get finance to open another branch of the business.

Today Fork Truck Borders has its new equipment, bought with a loan negotiated in 24 hours, and Rosie has opened another store and created new jobs. She’s now planning yet another shop in Leeds.

One-stop shop

So what was the key that finally opened their banks’ coffers? A guarantee from a bank you never see on the high street called the British Business Bank, the state owned economic development bank set up by former chancellor George Osborne in 2012 to create a one-stop shop to increase the supply of credit to small and medium-sized businesses.

Fork Truck Borders Instruction got its money through the bank’s Referrals to Designated Platforms funding options scheme, while Miss Macaroon’s funding was arranged with a lender by the bank’s Enterprise Finance Guarantee programme.

“Without that loan, I wouldn’t have been able to progress with our plans to open brand new stores,” Rosie says.

Fork Truck boss Douglas Younger adds: “Getting the funding quickly helped in a time of need after our bank turned us down. The Business Bank was a lifesaver.”

The original motive behind the Business Bank was that SMEs needed new ways of borrowing and too much business lending was concentrated on the big banks, rather than peer-to-peer lenders and other alternative providers and platforms.

The idea was to make small business owners more aware of available financial options through two main channels:

• Managed investment. The money is invested with lenders and then directly distributed to small businesses.

• Direct capital investment. The government provides equity or debt investments to lenders. They in turn would use the money to provide a lending service to small businesses.

You won’t actually get money direct from the Business Bank. Its aim is to increase the supply of credit to small businesses by working with other financial institutions to increase funding by providing guarantees for loans.

Critics and supporters

Not everyone thinks the Business Bank is the answer to all small business prayers. Critics have claimed it’s little more than a rebadging of existing schemes, is failing to meet the scale of the challenge and should be supported by a network of regional banks to allow it to work faster and more efficiently.

Bank supporters reply that it was needed because research has shown that over 70 per cent of small businesses looking for finance only ask one lender and, if turned down, many simply give up rather than look for alternative options.

Last year 25 per cent of the 220,000 small businesses looking for loans or overdrafts were refused by their banks and only seven per cent of these were referred to other possible sources of money.

The Business Bank says it has been trying to remedy this situation since 2012, when the scheme kicked off with a £300 million fund to be match funded with private investment, which would pump £600 million into cash strapped SMEs.

Keith Morgan, the bank’s CEO since 2013, says: “Our key aims are to increase the supply of finance in the marketplace, to create a more diverse finance market and to achieve this by managing the taxpayers’ money more efficiently.”

Now bank programmes support more than £3.4 billion of finance to over 59,000 small businesses and participate in a further £5.8 billion finance to middle-sized enterprises.

Its Enterprise Finance Guarantee programme enables lenders to make loans of from £1,000 to £1.2 million to small businesses that have been turned down by other forms of debt finance because they couldn’t guarantee the loan.

Recently, British Bank Investments, the bank’s commercial arm, completed a commitment that will put €140 million of investment into fast growing technology focused SMEs. The investment programme has already committed over £615 million to providers of finance to other small businesses.

In addition, a start-up loans scheme operated by another bank subsidiary has now delivered over 50,000 loans, which have put a total of £350 million into new and early stage businesses across the UK. An independent study found that a third of the start-ups admitted they probably wouldn’t have survived without the support of the programme.

Matchmaking service

One of the latest Business Bank schemes is a matchmaking service, which has already led to over 250 small firms receiving a total of £3.8 million from alternative lenders.

This referral scheme requires nine of the UK’s biggest banks to pass on the details of SMEs they have turned down for loans to four finance platforms - Funding Xchange, Business Finance Compared, Funding Options and Alternative Business Funding.

These platforms then share the information with alternative finance providers and broker possible deals. Loans resulting from the scheme already range from £200 to £500,000, with an average of £16,000. Clients range from construction businesses to retail, technology and science.

The bank has also made available another £40 million of investment to support lending to small businesses through the Funding Circle, a platform that connects small investors with SMEs in search of funding.

To date, 73,000 personal investors, local councils and financial institutions have lent over £1.7 billion to more than 18,000 UK small businesses, providing a £2.7 billion boost to the economy.

A typical recipient was Hayley Katsis, a London medical professional working with surgeons specialising in foot disorders. To expand her business, she needed a bank loan to obtain more specialist medical insurance, but her bank turned her down.

Hayley remembers: “They couldn’t offer me funding because my situation was outside their criteria. But they referred me to the Business Bank’s Funding Options, which quickly and smoothly got me the right loan.

“Building the business wouldn’t have been possible without this funding. Funding Options was a hidden gem.” Read more like this

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