Small business appetite for equity finance increases

Small business appetite for long term equity-based finance has increased significantly in the last 12 months, research finds.

Demand for traditional bank debt has continued to fall, according to a study by Albion Ventures.

More than two in five (44 per cent) small and medium-sized enterprises (SME) owners would consider taking equity finance, up from 34 per cent a year ago. In 2013 just 12 per cent of SMEs were willing to swap equity for support.

More than a quarter (26 per cent) of business owners would consider a ‘Dragons Den’ style exchange of equity for hands-on support from venture capital, private equity or business angels, rising to almost four in ten (35 per cent) among firms with more than five employees.

Over the same period, demand for traditional bank finance fell to 45 per cent, down from 49 per cent in 2015, suggesting that the UK SME sector is pivoting away from its reliance on debt.

In its analysis of the largest barriers to growth, the report shows that access to finance, arguably the highest profile concern facing small firms in recent years, has fallen to seventh place in 2016 (and 13th among firms with over five employees), down from sixth in 2015 and fourth in 2014.

IT sector keen on equity

On a sector basis, appetite for equity finance is the strongest by far among IT and telecom firms (52 per cent), manufacturers (40 per cent) and transportation and distribution companies (32 per cent). Construction firms trail at just 13 per cent.

Regionally, SME owners in London are the most likely to consider equity investment (37 per cent) followed by those in the East of England (35 per cent) and Scotland (29 per cent).

Millennial entrepreneurs are by far the most enthusiastic towards equity finance with 40 per cent considering this approach compared to 29 per cent of CEOs in their forties. Male business owners are far more likely to consider equity from venture capital, private equity and business angels (28 per cent) compared to just 16 per cent of females.

Patrick Reeve, managing partner at Albion Ventures says, ‘It’s a vote of confidence in the post-Brexit economy that demand for equity finance continues to grow among entrepreneurs, underlining a psychological shift from the traditional reliance on bank debt as the source of growth finance.

‘What is particularly welcome is the emergence of the ‘Dragon’s Den generation’ – those under 35 who embrace an equity culture. The greater willingness of younger CEOs to use equity rather than banks to secure the funds they need suggests we’re shifting towards a more entrepreneurial model as seen in the US.’

Further reading on financing a business

The alternative finance market: What is out there?

Ben Lobel

Delphine Hintz

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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