“Problems of Success”

I attended the launch event for Albion Venture’s third annual Albion Growth Report this morning. The report surveys over 1,000 SMEs in order to give readers an insight into how small businesses are feeling at the moment – how confident they are, where they see challenges ahead and what the perceived barriers to growth are.

The reports findings can perhaps be summarised by a phrase Patrick Reeve, the Managing Partner of Albion Ventures used – now that the UK economy has returned to growth he feels that the issues SMEs face are “problems of success rather than problems of failure.” Some of the key findings highlight this positive picture of the UK SME sector today:

• 61% of SMEs are expecting to grow their business over the next two years
• 50% of companies think that productivity will increase and only 3% think that it will fall
• 44% of SMEs want to raise investment to develop their business
• But access to finance is decreasing in importance as a barrier to growth
• And less that half of SMEs claim that bank loans and overdrafts are their first choice for source of finance

It’s worth looking at some of the findings in a bit more detail:

Productivity

50% of companies think that productivity will increase. Interestingly, the Report found that there was a strong positive correlation between companies that were investing in training their staff and companies that felt productivity would increase – taking these two stats together perhaps indicates that there is a strong cohort of proactive companies that are not just waiting around for business conditions to improve and are taking control of their own destiny. These are the companies that are investing in staff, technology and infrastructure, carrying out R&D, developing new products and trying to enter new markets. Many of them are “Threshold Companies” – companies with a turnover of between £500,000 and £1m, who are trying to break through to the next level and become established medium sized enterprises.

Access to Finance

44% of firms who  tried to obtain finance were successful in 2015, up from just 26% in 2013, a clear, positive change. However, while bank loans and overdrafts were a source of finance for 76% of lending in 2013, the proportion fell to 62% in 2014 and just under half (49%) in 2015. 

Meanwhile the popularity of using equity or other long term finance soared from 6% in 2014 to 29% in 2015. Perhaps this is a positive outcome of the credit crunch – we’re finally seeing the growth of an equity culture for SMEs in the UK, which everybody at the launch event seemed to agree was a very encouraging development.

The Skills Gap

The picture was not entirely positive though – the Report found that finding skilled staff is the second biggest barrier to growth for SMEs and the panel at the event debated who should be responsible for filling that skills gap – the employees themselves, the employers, or the state. The consensus in the room when I took a quick straw poll seemed to be that it should be a combination of all three.

Red Tape

Red tape was seen as the number one barrier to growth for the third year running. I guess this is kind of inevitable – who wants to spend valuable time filling in forms – but a couple of good points came out of the discussion at the event. Firstly, Wyndham North of HMT pointed out – quite reasonably – if you want positive government intervention in the sector, such as the SEIS scheme, then that will inevitably come with some additional rules and administration. 

Secondly, it was felt that the more optimistic, proactive entrepreneurs were less likely to site red tape as a barrier – something that was borne out in the survey for the report and in some of the anecdotes that were shared in the room. 

Finally, Modwenna Rees-Mogg of Angel News pointed out that if red tape is the number one concern for SMEs, and not bigger issues around growth and finance,  that’s actually a pretty positive indicator.

Young Entrepreneurs

The Report had a spotlight on young entrepreneurs – those that are under 35. This group are more optimistic about the future, more likely to request mentoring, more likely to see external investment and more likely to consider equity funding – but also more likely to be unsuccessful in their quest for funding. Richard Chadwick revealed that many of the young people who came to the Prince’s Trust for help starting a business were unaware of the help and support that was available for them.

Summary

The Albion Growth Report is short, factual and informative, and anybody who is interested in small company investing should read it – it paints a positive, but realistic, picture of the SME sector. For me there were two big takeaways: on the positive side the growth of an equity culture should mean that SMEs can access much more suitable sources of finance. On the downside, the skills gap, even though it is a “problem of success” is a concern for the future – it will be interesting to see if it’s being addressed, or getting worse, in next year’s report.

If you would like to download a copy of the report you can find it on Albion Venture’s website here: www.albion-ventures.co.uk