Government Schemes Encourage Private Sector Investment to Finance Small Businesses
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Government Schemes Encourage Private Sector Investment to Finance Small Businesses

According to official government statistics, the number of small and medium-sized enterprises in the UK stands at a record 4.9 million, up over 100,000 since last year. These SMEs are responsible for employing 14.4 million people with a total turnover of nearly £1.6 trillion, close to half the total amount for all UK businesses.

SMEs make up the backbone of the UK’s economy and the nation’s prospects of continued economic growth will be determined by how well these businesses are able to thrive. Despite continuing efforts by small businesses to forge ahead through new technology, innovation and investment in training, SMEs are still struggling to obtain adequate funding.

In response to this, the government has introduced a raft of new schemes designed to encourage the formation of new small businesses, as well as help existing companies to expand. Government schemes designed to help small businesses include the Business Finance Partnership, the Business Angel Co-Investment Fund and the Start-Up Loan Scheme. These programs provide investment in SMEs through a combination of private sector and government money.

The Business Finance Partnership

The Business Finance Partnership, for example, was established to increase lending to businesses from alternative finance channels outside the traditional banking sector. The government states that some £1.2 billion will be invested in SMEs through the scheme, with this figure being at least matched by private sector investors.

According to a policy report earlier this month by the Department for Business, Innovation and Skills, the government has already distributed £172m, and this figure been matched with private sector investment of over £700m. This means every £1 of taxpayers’ money has resulted in £5 of lending to UK SMEs, with 18 medium-sized and nearly 900 small businesses directly benefiting so far.

The non-traditional lenders that have received government investment in their alternative finance schemes include companies providing mezzanine loans, leasing and professional loans, invoice financing options, supply chain finance and online platforms that give small business owners the opportunity to borrow directly from investors.

Other Government Schemes

Another enterprising government scheme set up to help small businesses is the Business Angel Co-Investment Fund, which has earmarked £50 million for investment in SMEs in UK regions struggling to attract traditional lenders. Under the scheme, entrepreneurs (or “business angels”) will provide much-needed capital to start-ups or existing small businesses in exchange for a share of the business.

Meanwhile, the public/private Enterprise Capital Funds programme is encouraging venture capital investment in promising early-stage SMEs. New SMEs often struggle to acquire equity finance due to the high costs for investors in undertaking due diligence, so the ECF programme has been created specifically to address this problem. Young entrepreneurs can also benefit from the government’s Start-Up Loans Scheme, which will provide over £80 million in seed capital to 18-30 year-olds seeking to set up their own companies.

With government-led public/private initiatives encouraging growth, the number of SMEs in the UK looks set to top 5 million soon.