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February 2010

Mind the funding gap?

It’s become a national, if not international sport, to criticise the government and banks since the credit crunch for not supporting UK businesses enough. However, according to Scott Taylor, director at Hall Morrice, entrepreneurs with a strong business vision should do their research before joining the critics on the sidelines who believe that, for the right deal, raising deal finance is well nigh impossible.

“It’s a fallacy that there’s no funding for businesses,” says Scott. “It’s true that some funding routes available pre 2008 are now curtailed for businesses, but there are significant pots of money available via government and bank initiatives – and we’re securing some of these for our clients. There are schemes which are supporting the lending of large sums of money – and it is important to realise that these are not just for companies which faced a struggle with working capital during the recession, but for new starts, mergers and acquisitions and MBO/MBIs.”

The Enterprise Finance Guarantee (EFG) is a guarantee facility for small businesses in the UK with an annual turnover of up to £25 million, intended primarily to improve the availability of working capital through term loans and the consolidation of overdrafts. However, as Scott points out, it also supports lending for business growth and development, including M&A transactions, in cases where a sound proposition may otherwise be declined due to a lack of security.

“Up to £500 million of new bank lending will be guaranteed by the Government between 1 April 2010 and 31 March 2011 with eligible businesses being able to borrow between £1,000 and £1,000,000 when this may not otherwise have been possible for them,” comments Scott. “There are over 30 main lenders who will lend to eligible businesses under EFG such as Royal Bank of Scotland, The Bank of Scotland, Lloyds TSB and Clydesdale Bank. Figures from the main banks show that NatWest/Royal Bank of Scotland has so far lent about £250m through EFG, with Lloyds TSB at £226m, Barclays at £150m, and HSBC at £86m. British banks have also borrowed £1.39bn from the EIB – the European Union’s finance arm and by February, banks have approved £726m of loans to 2,769 small businesses.”

“Talk of funding blocks doesn’t stop a true entrepreneur. Local business people are utilising these schemes to acquire or buy-out businesses where there may be succession issues, consolidation opportunities for efficiency and job protection, or indeed the opportunity to take a business out of a distressed situation through acquisition. It’s a vibrant time for our corporate finance division as we work with management teams whose sectors and business fundamentals are all robust and attractive to lenders. However, in some cases the business may not be asset rich or indeed management may often be of modest means or have much of their wealth tied up in marital assets.”

Hall Morrice recently advised a team of experienced engineering professionals all working at large oil service companies. The team spotted a niche opportunity in oil field services and had the contracts lined up to deliver a successful new start company with an ambitious growth strategy. However, crucially, they lacked the funding to pursue the opportunity.

“With the EFG scheme, we are able to show clients like this that their business opportunities can be pursued either as a standalone venture or bolted onto an existing business via an M&A transaction. In either event, the EFG scheme is an excellent source of funding to support such a proposal, often alongside other bank, venture capital or private equity funding.

Scott has hopes that the current, or any future, government will continue to foster an entrepreneurial UK; one in which job and wealth creation are valued and for which we have a social responsibility.

“I’m an advocate of schemes like the EFG. I hope that it is extended beyond the recession and its immediate aftermath. Such a scheme has a pivotal place in supporting small and medium sized businesses at any time and not just through a recessionary period. The guarantee covers many types of lending so it is flexible for a wide range of businesses with loan terms between three and five years for refinancing existing term loans; conversion of an existing overdraft into a term loan to meet working capital requirements; or as a guarantee on new or increased overdraft borrowings. It will not only fund working capital, but investment for businesses who have growth or development plans.

Finding the right professional advisors is another priority in Scott’s book for entrepreneurs.

“It’s not enough to find some one who can deliver advice in a vacuum,” he says. “There may be work required prior to seeking funding to make sure that the right management team is in place and that may mean the right dealmaker can effect crucial introductions to strengthen the team, the finance bid and the ultimate success of the venture.”

“I like to think that I work in the round with entrepreneurs to realise their ambitions,” he says. “Professional dealmaking advice should involve innovative thinking and a creative approach on deals. That’s why the current financial backdrop has created an exciting landscape for inspired entrepreneurs and resourceful dealmakers.”

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