BLOG - Unlocking Finance for Growth
Andrew Craig, Partner
Access to finance continues to be one of the key challenges facing SMEs in pursuing their business plans and maximising growth potential. With the current economic climate making it harder for companies to borrow capital, as many banks seek to repair their own balance sheets, the Scottish Loan Fund (SLF) was set up to help address the clear funding gap that exists between the two extremes of high risk, high return equity finance and lower risk, lower return bank debt. Established by the Scottish Investment Bank, and funded by both the public and private sectors, the Fund has made more than £113 million available to ambitious Scottish businesses.
The SLF was launched in March 2011 to support the growth and development of small and medium sized enterprises (SMEs) across Scotland, and to date has committed well over £30 million of funding to growth-focused businesses. The Fund, which is managed by Maven, is now recognised as a prime source of growth capital for Scottish SMEs and continues to receive and welcome applications for funding from businesses across the Country.
The Fund is able to support a variety of corporate scenarios, such as finance to purchase new equipment, support investment in new products, or fund entry into overseas markets. What the SLF cannot do is provide capital to allow existing shareholders to realise value in the business, as it is very much intended to support growth and development.
In keeping with an intention to provide broad support to Scottish SMEs, the SLF has no sector bias and has already been able to back companies across a diverse range of industries including, energy services, engineering, telecoms, manufacturing and software.
One of the key benefits of the Fund is its ability to structure loans over a period of between three and seven years. This is longer than might be available with other sources of funding, allowing repayments to be tailored to match the cashflows of a business. There is also the flexibility to offer capital repayment holidays in the early years, to help ensure that the company has sufficient headroom to deliver its business plans. Another key attraction for an SME is that the Fund does not take a direct equity stake in the business, allowing management to retain full equity and operational control.
A good example of the funding flexibility was the Fund’s investment in Linlithgow based Calnex Solutions Ltd. Calnex, which employs almost 50 people, is a leading provider of solutions for Ethernet testing including synchronisation. The business has established a blue-chip customer base, which includes developers of next generation smart devices, such as Nokia and Samsung, as well as global telecom companies such as Vodafone which deploy the technology on their networks.
The opportunity to work with Calnex was identified through Maven’s extensive involvement in the Scottish SME sector and allowed us to build a good relationship with the management team, led by Chief Executive Tommy Cook. The company had considered securing a further round of equity funding but was attracted to the flexibility offered by the SLF in terms of access to capital, and having repayments structured to match anticipated cashflows without impacting on the ability of the company to continue to invest in on-going R&D.
The Fund operates on a wholly commercial basis and all investment decisions are taken by Maven. It is important to emphasise that the Fund is complementary to other sources of funding for businesses, rather than operating in direct competition. The SLF works closely with both banks and other sources of capital, such as angel and private equity houses, to deliver a funding package tailored to the individual needs of an SME and its shareholders.
The investment and due diligence process is tailored to reflect the dynamics of each transaction and, given the skills and experience of the team in completing SME investments, the external due diligence exercise is very focused and cost effective as a result. Whilst the average timetable to complete an investment is around eight weeks, transactions have been completed in as little as four weeks.
We would encourage management teams to get in touch with the SLF team at Maven to discuss how the Fund may be able to help them realise their plans to grow and develop their businesses.