Solving the growing business equity dilemma

Dominic Buch of Caple explains a new way for small engineering firms to raise funding for growth

Small and medium-sized engineering firms make significant contribution to the UK economy but many struggle to access capital. If these SME engineering firms are to reach their full potential, they need funding in the form of unsecured lending.

The equity dilemma

We know that too many SME engineering businesses struggle to access capital.  But why? Too often the lack of additional assets to offer to lenders as security prevents these businesses from raising further bank financing to develop their business.

While banks can fund an amount that reflects the tangible assets in a business, they can’t help if a business has no further assets. Prevented from additional secured funding, business owners often have to consider giving up equity to raise funds or agree to personal guarantees.

Our research of 300 SME business owners shows they do not want to issue equity in their business to fund growth.  Indeed, more than half (53%) would be unlikely to issue equity to fund growth. Instead, if they could, more than three quarters (76%) would prefer to raise money through long-term debt.

We call this the “equity dilemma” and too many business owners face it.  They must consider the difficult choice of scaling back their growth, diluting their ownership or agreeing to personal guarantees.

This lack of access to unsecured lending is a critical barrier to growth among SME engineering firms.

 Unsecured funding for growth

Growing firms need unsecured credit of between £500,000 and £5m.  Business looking to access loans of these size are usually too big for peer-to-peer platforms but too small for banks and debt funds.

Caple is the first in the UK to offer long-term unsecured lending based on the future cash flows of the SME.  We do not require any collateral or personal guarantees as security.

The loans we facilitate are part of BNP Paribas Asset Management’s SME Alternative Financing direct lending platform.  This enables UK SMEs to access funding from institutional investors, a source of capital that hasn’t previously been available to them.

BNP Paribas Asset Management aims to provide €1bn per year in funding to SMEs across Europe and €400m in the UK.

A blended approach

One of the benefits of unsecured lending such as Caple facilitates is that it is complementary to existing bank financing.  This means SMEs can have both bank lending and a loan through Caple.

Growing engineering firms can access a blend of different funding options from a range of providers.  This usually reduces the overall cost of financing, helping enhance growth potential.

How engineering firms access funding

Accountants and business advisors play a vital role in helping SMEs access funding.

In a world where high street banks provided all the credit, this was unnecessary.  However, with a larger number of non-bank entities now in the market, understanding the quality, reputation, suitability and cost of a creditor has never been more important.

Accountants and business advisors are an integral part of how we support growing SMEs to access unsecured lending.  We originate loans through our local partner network of accountancy and advisory firms.

In addition to advice and origination, advisors also assess the eligibility of their clients for funding, supported by our technology platform.  They prepare business plans and financial forecasts that make the case for funding.

The demand

We have completed three deals for UK engineering and manufacturing firms.

We supported Intastop, which designs and manufactures specialist internal building protection products for doors, walls and people, with a £700,000 eight year fully unsecured loan. Intastop plans to use the funds to invest in the machines and people it needs to manufacture more of its products in the UK.

We also supported Grayson Thermal Systems, a leading design and manufacturer of engine cooling, heating, ventilation and air conditioning systems, with a £2m loan.  Grayson will use the loan to invest in product development in key growth markets such as electric vehicles.  The firm is also going to establish a new production facility.

Most recently, we helped Spinnaker International Ltd, a world-leading manufacturer of cash protection boxes and asset tracking technology, with a £3m loan. Spinnaker will use the loan to increase its presence in new geographical markets.  It will also invest in research and development, through its new innovation centre.  Spinnaker expects to create a further 15 to 20 jobs as a result of its growth plans.

In total, we have now completed deals worth £23million. Given the benefits of unsecured debt finance, we anticipate doing a lot more.

In all of our deals, the SME business owners were keen access funding to drive the growth of their business.  But they wanted to do so in way that meant they retained control of their business and supported the funding they already had in place.

When engineering firms are such an important part of our economy, we need to help them secure the finance they need to grow.  And we need to do this without pushing them towards diluting equity and losing control.

Now there is another way to solve equity dilemma.

Dominic Buch is co-founder and managing partner of Caple