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UK firms are being held back by a lack of funding

Alexander Schey and Toby Schulz founded Vantage Power in 2011, to develop technologies to radically reduce emissions in heavy-duty vehicles.   

Their technology can be found powering London's hybrid buses, as well as in industrial and marine environments. The business has grown and now employs a team of highly specialised engineers working on emissions-reducing technology.  


But when it came to seeking the "large amounts of funding" needed for their early project, they did not bother even trying the route favoured by most small firms seeking external finance.  

"A bank loan was never an option," says Mr Schey.

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"Our first round of funding was over £500,000, which is a sum of money a bank would never consider loaning out to a start-up company with no revenue or assets."  
Instead they went for angel investment - and found it paid off for them.   

Angel investment is a type of equity finance, where money is raised through selling shares in fast-growing companies. An angel investor, a wealthy individual who invests their own money in entrepreneurial companies, can also bring their knowledge and experience to the firm.   

"Unless you have your own money to invest in starting your business, which we didn’t, equity funding is really the only way to get enough funding in, for technology development," says Mr Schey.   

"This is not necessarily the case for other businesses that may be able to generate revenue very quickly, but it was the case for our hardware and technology-heavy business."  

According to the UK Business Angels Association, angel investing is the most significant source of investment in start-up and early-stage businesses looking to grow, with an estimated £1.5bn a year invested by angels in the UK. 

 

It's not the only alternative funding option. Equity finance also includes crowdfunding - generating funds, usually online, by asking a large number of people to donate relatively small sums in exchange for shares in an unlisted company.  

Other avenues include peer-to-peer lending, where small businesses or individuals seeking to borrow money are matched up with people willing to lend via online platforms, asset-based funding - where businesses borrow against the value of their assets - and asset funding, a means through which small businesses can set up payment plans to obtain plant and machinery early. They either eventually own the asset by using hire purchase agreements or simply lease it for the full period of the agreement. 

But according to the FSB's Going for Growth report, only 13 per cent of small firms are currently applying for any external finance at all. 

And those that are, tend to approach one of the big four banks, RBS, Barclays, Lloyds or HSBC, who control 80 per cent of the commercial loan market.  

Since the 2008 financial crash, borrowing from banks has become more complex. Banks are less likely to take on the most risky propositions - so small business seeking early stage funding can struggle to get traditional bank loans. And many small businesses believe credit is relatively scarce.  


Often small firms simply approach their own bank for a loan, rather than considering alternative options which may be better suited to them. Only nine per cent of those seeking finance looked at equity as an option - the type of funding sought by Vantage Power.  

Angel Investor, and FSB member, Peter Cowley said: "Following the 2008 financial crisis, there has been a material reduction in the proportion of smaller businesses seeking external finance. Trust, once lost, is hard to win back.

"The latest data from the British Business Bank suggests that 70 per cent of smaller businesses would rather accept slower growth, than seek to maintain or increase growth by attempting to access external finance.

"So much more needs to be done to rebuild trust and tackle both latent, as well as discouraged, demand."

The FSB's Going for Growth report says more should be done to "signpost" small firms to different types of finance - and to encourage them to take risks and invest to grow.  

It calls for more pressure on banks who turn down loan applications from small businesses, to point them towards alternative financing options.


Back at Vantage Power, Alexander Schey admits that raising equity funding is not easy but adds: "It’s also not as big a barrier or challenge as first time entrepreneurs might expect.   

"There is a growing number of experienced angel investors who want to back smart people and ideas, and the best of these investors will help the entrepreneurs through the process in order to achieve a mutually agreeable outcome. I would definitely do it again."