BLOG - Being in the know
Andy Thomas, Investment Director Greater Manchester Loan Fund
“For SME’s, the challenge isn’t so much that there is a funding gap, but rather that there is a knowledge gap.” A professional contact of mine made this remark to me recently, and it’s an interesting observation. Since the onset of the credit crunch, the focus has been on the lack of finance available for small and medium sized enterprises that have good business plans but never-the-less fail to gain financial backing for their projects.
Of course, increased lending from the banks will play a huge role in correcting this, but there is a limit to the risks that a bank ought to take on, even in a well-functioning credit environment. A gap in the market therefore exists between lower risk, lower return bank debt, and higher risk, higher return equity finance, which has led to the growth of a number of alternative funding sources.
Last year, The Greater Manchester Loan Fund was established by AGMA, the 10 Local Authorities that make up Greater Manchester. It’s a £20m fund, managed by Maven Capital Partners, and designed to provide loan finance of between £100,000 and £500,000, with the potential for follow-on money of up to £750,000. Loans can be provided for up to 5 years, and we have until 2018 to deploy all of the capital.
The GMLF is by no means the only alternative source of finance available to businesses in the local area. The North West Fund, for example, has a range of products available operated by several fund managers, which includes loan, mezzanine, and equity finance. More recently, we’ve seen the rise of Crowd Funding and Peer-to-Peer lending and, whilst it’s still too early to say how attractive these platforms may be for investors, and therefore how sustainable they will be in the long run, they represent a credible alternative to bank-lending.
Each funder has its own set of eligibility criteria. The GMLF is restricted to businesses that have an established trading base within Greater Manchester and the Fund is operated on a wholly-commercial basis, so focussed due diligence will be undertaken on all business plans. The Fund also needs to preserve and create 800 jobs in the area over the coming years, so we’re looking for ambitious businesses that are seeking growth. The other non-traditional sources of finance will have their own restrictions too, be it based upon geography, sector, personal guarantees, security, or loan purpose.
The knowledge gap exists when SME’s that are seeking to raise finance are not aware of these various alternative sources of funding, and moreover, are unsure as to which particular fund is most suitable to their specific situation. It would seem to me to be a real failure if a business could not put its plans into action simply because the market did not connect the right borrower, to the fight funder, at the right time.
The solution may not always even be as binary as finding the single right funder, but instead the right group of funders. We recently teamed up with FW Capital, who manage part of the North West Fund, to provide a funding package to telemarketing company Intelling Limited. Neither funder could provide the right solution on its own, but by combining the two resources, the business was able to raise the money it needed to grow.
So is there still a funding gap? Yes, although the shortfall is certainly narrowing. It will be an uneven pattern across the country since so many of these funds, like ours, are limited by geography, but applications to the GMLF since launch have been very strong, indicating some pent up demand from borrowers. One of our main tasks as a fund manager however is to promote the Fund as much as possible, so that we can play our part in ensuring there aren’t viable projects that do not go ahead simply because of a knowledge gap.