And, with the added possibility of a second Scottish independence referendum, commentators are warning of an unsettled outlook for the next five years in terms of the availability of finance.
Since the global financial crisis just over a decade ago, debt funding has been difficult for many businesses, with traditional banks reluctant to lend and imposing strict conditions when they do. In the first six months of this year, analysis by Experian found that only about 4 per cent of acquisitions were funded by bank debt, with more businesses turning to private equity, often from London or overseas.
But the overall funding picture is mixed, depending on the type and size of business. Michael Stoneham, banking partner at UK top 50
and Scotland’s leading law firm, Brodies, says that the position for big deals is generally positive. But for small-to-medium enterprise (SMEs) the situation is more difficult – particularly for businesses looking to scale-up.
Stoneham explains: “The debt funding market is finding it easier to service the big deals rather than the small deals. The smaller deals are looking for non-debt solutions, either through the angels or venture capitalists or from the government through the Scottish Investment Bank (SIB).”
Brian McMurray, partner and head of equity funding at business advisers and accountancy firm Anderson Anderson & Brown (AAB), takes a similar view. “The traditional banks are still lending, but since 2008 they have been very cautious in their approach to managing risk. There is availability there, but businesses need to meet strict criteria,” he says.
What could create more uncertainty for smaller businesses is the imminent transition from the SIB to the new Scottish National Investment Bank (SNIB).
Benny Higgins, strategic adviser to the First Minister on the establishment of the SNIB, wrote in The Scotsman earlier this year: “The SNIB must support the ambition of small businesses...by adopting a mission-led approach to patient finance, the bank will enable our country to be fit for purpose for the middle years of the 21st century.” But it is still early days and commentators say there is not yet clarity on what level of support SNIB will offer to SMEs.
Stoneham says: “What is not clear at the moment is how much of a focus SNIB will continue to give the SME sector, as opposed to high-profile transformative projects, such as those in the low carbon sector. It’s another uncertainty to add to everything else.”
He points out that issues around some of the challenger financial organisations that have entered the market show it is not easy to establish a new and effective bank and get it up-and-running quickly.
Turning to equity funding, McMurray says decisions often come down to what stage a business has reached in its development and what sector it is in. While he says there is an appetite among private individual investors and angels to provide funding to certain companies, the real challenge is that so many businesses are currently looking for finance.
“This demand has partly been created out of the various accelerator programmes and suchlike that exist,” he adds. “There are a lot of early-stage, typically tech businesses, looking for investment so it’s very competitive at the moment.”
While he says that there are a large number of venture capitalist (VC) and private equity (PE) funds, they are focusing on sectors where they have expertise and a proven track record.
McMurray says: “There is still a lot of nervousness, rightly or wrongly, for some businesses in taking that type of money. It often comes with conditions attached and there is always the concern of going from privately owned, with the owner/manager making all the decisions, to having to answer to an investor.”
Stoneham believes that angel investors are shifting to less risky deals with shorter terms because they want to get their capital back more quickly to recycle it.
And while the government is active in equity, McMurray points out that it tends to be drawn to co-investments rather than taking the lead.
McMurray’s advice to small investors is to take time, take a step back, take advice and examine all the funding options before going down a certain route.
Looking ahead, Stoneham points to the more positive outlook recently given by the Bank of England, if Brexit does happen early next year.
In its November monetary policy outlook, the bank said that, on the back of the UK and EU agreeing a withdrawal agreement and the political declaration in October and Westminster approving the second reading of the Bill, some of the uncertainty facing businesses and households has been removed.
Its statement added: “Reflecting government policy, the Monetary Policy Committee’s projections are now conditioned on the assumption that the UK moves to a deep free-trade agreement with the EU... UK demand is projected to recover and to grow faster than the subdued pace of supply growth.”
Stoneham welcomes the Bank’s statement that it expects a gradual economic improvement as it could encourage lenders to support more businesses. However, he says the potential of a second debate around Scottish independence could prove to be a concern. “It’s a relevant additional issue for investors from outside the UK looking at Scotland,” he notes.
McMurray says it is difficult to predict what funding will look like in Scotland five years from now.
He concludes: “The more uncertainty there is, the more cautious lenders are. People still remember the financial crisis, although it was a number of years ago now. Maybe in five years’ time people might be prepared to take more of a risk on lending.
“Potentially there will be more international investments, as we have seen in the tech space. And overseas investment might be something that is more readily available further down the line, if people see the UK as a good place to invest.”
This article first appeared in The Scotsman’s winter 2019 edition of Vision. A digital version can be found here.