Contents Foreword 1 Introduction by Patrick Reeve Executive summary 1. Business confidence and growth ambitions 2. Availability of finance

Transcription

1 2014

2 Contents Foreword 1 Introduction by Patrick Reeve 3 Executive summary 4 1. Business confidence and growth ambitions 4 2. Availability of finance 6 3. Management skills 8 4. Apprenticeships 9 5. Optimists v pessimists Training staff Accessing new markets and technologies Spotlight on threshold businesses 12 B The Albion Growth Report 2014

3 Foreword While growth is back, there are some important puzzles about the character of that growth including how sustainable it might be. This year s Albion Growth Report provides valuable clues. In its survey of 450 small and medium-sized enterprises, it finds that 62% are expecting growth over the next two years. The highest level of confidence is found in the North West (83%), closely followed by London (81%). Across business sectors too, we see a balance that belies the alarmism of those who suggest that we are in a solely consumption-led recovery. Retail and distribution businesses are not overly exuberant; by contrast it is production businesses that report the highest levels of confidence 83% of them are expecting growth. That confidence is reflected in recruitment intentions. 33% of the companies surveyed were planning to increase their headcount, compared to virtually none that were looking to decrease it. A third of businesses were thinking of launching or expanding an apprenticeship scheme too. The strong jobs performance of the economy so far in this recovery looks set to continue. But what does all of this mean for the demand for finance? A third of the businesses surveyed plan to raise finance in the next 12 months. More revealing though is how they plan to do it and why. Compared to last year, the proportion using bank loans or overdrafts has fallen. Asset-based leasing, invoice discounting and the use of credit cards have become less common too. Indeed, fewer of those businesses looking for finance, plan to use it solely as working capital; ambitions are rising. Getting to a more plural market for business finance in the UK may potentially have lots of advantages, for financial stability as much as for innovation. The big question then is how to enable these businesses to make the most of the opportunities that they see ahead of them. While the role of bank finance is diminishing, it is still the largest source of finance by far: 62% of the businesses surveyed have used it in the past year. Hence a continued focus on efficient supply and effective competition in this sector is vital. The demand for equity though is growing. Over a fifth of the medium sized businesses in the sample are willing to exchange equity for hands-on support. Intriguingly, those businesses that have tried to raise finance before, are three times as willing to make that exchange as those that have not. Getting to a more plural market for business finance in the UK may potentially have lots of advantages, for financial stability as much as for innovation. In the early stages of this recovery, it may be that we are advancing on that road. Emran Mian Director Social Market Foundation The Albion Growth Report

4 In the Albion Growth Report survey of 450 small and medium-sized enterprises, it finds that 62% are expecting growth over the next two years. The highest level of confidence is found in the North West (83%), closely followed by London (81%). Confidence is reflected in recruitment intentions. 33% of the companies surveyed were planning to increase their headcount, compared to virtually none that were looking to decrease it. While the role of bank finance is diminishing, it is still the largest source of finance by far: 62% of the businesses surveyed have used it in the past year. Two thirds of the companies surveyed are now anticipating growth over the next two years and only 3% think that they will shrink. Perhaps the most interesting perspective to come out of this year s report is the light shone on threshold companies, with turnovers between 500,000 and 1 million. 2 The Albion Growth Report 2014

5 Introduction by Patrick Reeve The Albion Growth Report is designed to shed light on the factors that both create and impede growth amongst small and medium-sized businesses in the UK. It is an annual survey, across a random sample of 450 businesses, and it seeks to understand what drives SMEs forward, what holds them back, whether there is a link between the two and what the resulting implications are for both Public Policy and for the investment behaviour of providers of capital. This is the second Albion Growth Report and it builds on the observations and preliminary conclusions of last year s survey to start aggregating trends and themes, which we look forward to tracking for years to come. This year s report builds on the confidence that we saw last year and which surprised many observers. Two thirds of the companies surveyed are now anticipating growth over the next two years and only 3% think that they will shrink. Red tape remains the largest single barrier to growth, but concerns over managing cash flows is a close second. Interestingly, this is seen as a problem of success rather than of failure, with cash-hungry sectors, such as production, both more optimistic about prospects and more concerned about the implications of growth on short term funding than other industries. As with last year, there is a stark contrast in a whole variety of perspectives between those companies which are fundamentally optimistic in their outlook and those which are pessimistic. The pessimists, again, blame those factors that are outside their control for their own difficulties in achieving growth, such as regulatory change and red tape. The optimists, by contrast, are much more self-critical, This is the second Albion Growth Report and it builds on the observations and preliminary conclusions of last year s survey to start aggregating trends and themes, which we look forward to tracking for years to come. and more concerned about factors within their own control, such as their own management expertise, the scale of their ambition, or a lack of business mentoring. Importantly, they are also much more likely to seek longer term equity-type finance. But for me, perhaps the most interesting perspective to come out of this year s report, is the light shone on threshold companies, with turnovers between 500,000 and 1 million. These are companies just on the cusp of change from being little more than sole traders to becoming proper businesses with a real infrastructure. The report shows how all the pressures created by growth are magnified and thrown into stark relief in those companies moving through this particular stage of transition. For them, cash is tight and they need finance for growth. They particularly value skilled staff and recognise their vital contribution to growth, but find it hard to recruit them. They struggle to enter new markets and feel a little overwhelmed by red tape. By recognising their own need for expertise, they are much more likely to give up equity for hands-on support. Thus it is these threshold companies, which are on the cusp of the breakthrough in growth, which will be helping to drive the UK s economy forward in the years ahead. Patrick Reeve Managing Partner Albion Ventures LLP Expectation of growth 62% 3% Expecting to grow Expecting to shrink The Albion Growth Report

6 New organisations over 1/2 million 2013 registered with Companies House Expectation of growth Expecting growth UK SMEs 2014 Confidence by sector of productivity growth over next two years 84% Production On average, companies expect to grow productivity by 9% over the next months. 63% expect to see productivity increases and 31% expect to maintain current productivity levels. 62% 59% 34% 36% UK SMEs % UK SMEs 2014 Regional confidence in growth over next two years 50% South Eastern Retail & Distribution Expecting no growth 83 % North West UK SMEs % East Anglia 43% Construction 81% London Executive summary 1. Business confidence and growth ambitions One of the highest profile themes in the financial headlines over the past few years has been SMEs access to finance and their ability to grow. According to this year s Albion Growth Report, the confidence of entrepreneurs to start new ventures and for owners to expand existing organisations has already started to gather pace. More than half a million (526,446) new organisations registered with Companies House in 2013, an 8.7% rise on the 484,224 established in According to Albion s 2014 Growth Report, business optimism, which surprised many commentators last year, continues to build, with almost two thirds (62%) of SMEs thinking their business will grow in the next two years, up from 59% in Only 34% of respondents think that their business will remain the same size, falling from 36% in 2013 and, significantly, only 3% think that they will shrink or wind down. Despite the oft-mentioned twin speed economy, businesses in the North West are most confident about the future, with 83% anticipating growth in the next two years. London closely follows, with 81% expecting their businesses to grow. At the other end of the spectrum, South Eastern and East Anglian businesses are the least optimistic, with 50% and 39% anticipating growth respectively. When it comes to business confidence within sectors, production is particularly strong at 84%, which bodes well for an industrial revival, while education and health show a similar level of optimism. This compares to 53% in retail & distribution. Fewer than half (43%) of construction companies predict growth over the next two years, although this is a significant improvement on 2013, when only 33% expressed this view. On average, companies expect to grow productivity by 9% over the next months. 63% expect to see productivity increases and 31% expect to maintain current productivity levels. Smaller businesses with employees predict the highest growth in productivity 4 The Albion Growth Report 2014

7 rates at 13%. Businesses in the North West are the most optimistic about productivity with 90% of firms anticipating growth, closely followed by 79% of firms in Yorkshire and 71% of London based businesses. Scottish firms are least likely to anticipate productivity rises, which are predicted by just 44% of businesses in Scotland. Companies in the services and manufacturing sectors are the most optimistic about improving productivity in the coming years with 67% and 64% respectively anticipating productivity rises. Importantly, those that have tried to raise finance are confident that productivity will grow by as much as 15%. The biggest driver for positive growth in productivity, by far, is improvement in market conditions, cited by 42% of respondents. Technology will also play a part (14% on average, though rising to 23% for production companies) as will management (13%) and skill levels (11%). Red tape is seen as the top barrier to growth, in line with last year s report, although its perceived risk has reduced, as 26% of companies cite it as a significant barrier, down from 29% in However, 26% of respondents also claim they have seen a significant increase in the burden of compliance over the past two years. Red tape was seen as a particular concern to the transport and communications sector and, as with last year, those who are more pessimistic about their prospects are also more concerned about red tape. Cash flow is the second biggest threat to higher productivity in business, cited by 21% of firms as a major challenge. Sole traders particularly feel this burden, with one in four (25%) calling it a major issue, compared to just 12% of firms with over 50 employees. Despite their optimism on their growth prospects, it is the transport and communications sector that is most worried about cash flow, possibly indicating the cash-hungry nature of growth in that sector. Regulatory change is also seen as a major barrier to growth and it is a much greater perceived threat for sole traders than for those firms approaching mid-size. The confidence of entrepreneurs to start new ventures and for owners to expand existing organisations, has already started to gather pace. Confidence of improving productivity in next two years 63% Expect to increase productivity 31% Expect to maintain current productivity levels Perceptions about the negative effect of other barriers to growth including lack of access to finance, difficulty in finding skilled staff and pace of technological change have all improved since the 2013 report, in line with the economic recovery. Interestingly, two indicators that worsened were absence of business mentoring and lack of management expertise. Indeed both these concerns were far more likely to be acknowledged by those who were optimistic about the future than those who were pessimistic. Red Tape Red tape is seen as the top barrier to growth, in line with 2013 Regional optimism of improving productivity Most optimistic sectors of improving productivity 67% 64% Services 44% Scotland 90% North West 79% Yorkshire 71% London Biggest driver for growth in production 42% Improvements in market conditions Manufacturing Despite their optimism on their growth prospects, it is the transport and communications sector that is most worried about cash flow, possibly indicating the cash-hungry nature of growth in that sector. The Albion Growth Report

8 2. Availability of finance SMEs trying to raise finance 10% 80% 2014 of which succeeded 17% 71% 2013 of which succeeded It appears that more of the SMEs applying for finance are receiving the funds they need to grow. Access to finance is only fifth on SMEs list of concerns, but have SMEs become more realistic about raising finance? While only one in ten SMEs had tried to raise finance in the previous 12 months compared to 17% in the 2013 survey, success rates for applications rose to 80% of firms compared to 71% in Thus it appears that more of the SMEs applying for finance are receiving the funds they need to grow. In terms of sectors, the number of retail and distribution companies attempting to raise finance fell, from 17% last year to 14% in 2014, as did the number of manufacturing businesses (from 26% to 8%). However, manufacturers who did apply for finance were significantly more likely to receive it than previously 88% of manufacturers who applied for credit were successful compared to 65% in Optimism about future growth is further evidenced by the fact that a third of SMEs plan to raise finance in the next 12 months, with the highest proportion of these being based in Greater London. The reasons given by SMEs for raising finance provide a fascinating snapshot of their current situation. 27% said that they targeted capital for business development with an additional 23% looking to expand their premises. This compares to 26% and 5% respectively in Reasons for seeking finance 27% 26% 23% 5% For business development For expansion of premises The findings suggest that SMEs are moving on from seeking finance just to pay the bills to a new, healthier era of business expansion and growth. 6 The Albion Growth Report 2014

9 There has been a 25% drop in the number of respondents who said they had sought credit or investment to fund working capital (from 32% in 2013 to 24% in 2014). This suggests that SMEs are moving on from seeking finance just to pay the bills to a new, healthier era of business expansion and growth. As in 2013, the vast majority (85%) of SMEs that didn t seek to raise finance in the previous 12 months gave the reason that they did not need it, suggesting that SMEs are in reasonable shape. Surprisingly, despite other indicators, the percentage of SMEs that said they did not look for finance because they did not think the time was right to expand the business, grew from 5% in 2013 to 7% in The percentage of those who said they simply did not want to take on additional debt also grew from 6% to 7%. Only 2% (the same as in 2013) said that they did not seek to raise finance because they believed it was a poor environment to secure credit. Interestingly, given all of the publicity about bank lending, the percentage of SMEs borrowing or funding that was done through bank loans or overdrafts, fell significantly from 76% in 2013 to 62% in However, other lending methods including mortgages (7%), cash loans from friends/family (5%) and equity investments from venture capital and long-term angel investments (6%), still have a long way to go before they catch up with traditional loans. The reasons given by SMEs for raising finance provide a fascinating snapshot of their current situation. 27% said that they targeted capital for business development, with an additional 23% looking to expand their premises. SMEs reasons for not seeking finance Did not need it 85% 7% 7% It was not the right time to expand SMEs that secured funding through bank loans and overdrafts 62% 76% Did not want to take on extra debt 2% Believed it was a poor environment to secure credit SMEs plan to raise finance in the next 12 months Interestingly, given all of the publicity about bank lending, the percentage of SMEs borrowing or funding that was done through bank loans or overdrafts fell significantly in The Albion Growth Report

10 The number of firms which lack core skills inversely correlates with company size as firms build the teams they need as they grow. Willingness to exchange equity for hands-on support depending on previous experience 15% 5% SMEs that had tried to raise finance before SMEs that had not tried to raise finance before Barriers to growth 9% 9% Lack of management expertise Lack of expertise Lack of business mentoring 32% 15% SMEs that think they lack expertise in certain areas SMEs with 100+ employees that think they lack expertise in certain areas 3. Management skills Given the rise in the number of SMEs which feel that a lack of management skills could restrict growth in 2014, it is not surprising to learn that 32% of firms feel that they lack expertise in certain areas. The number of firms which lack core skills inversely correlates with company size as firms build the teams they need as they grow. Even so, 15% of firms with more than 100 employees feel they lack key expertise in some areas. 9% of SMEs believe a lack of management expertise is a significant barrier to growth and a further 9% say a lack of business mentoring is a threat to the growth of the company. SMEs that have already tried to raise finance are three times more likely to be willing to release equity in return for business support, than those who have not (15% versus 5%). This suggests those who have been through the process, value the support that a business partner can provide. Their experiences have led to more positive attitudes towards external investment and a willingness to consider the value created by the right partner, rather than just the percentage of equity held. 9% of SMEs believe a lack of management expertise is a significant barrier to growth and a further 9% say a lack of business mentoring is a threat to the growth of the company. 8 The Albion Growth Report 2014

11 4. Apprenticeships One in three businesses are looking to increase their overall headcount and only 2% are looking to decrease it. In the light of this positive news, it is worth reviewing attitudes towards labour supply, including apprenticeships. Tax incentives introduced to boost the take-up of apprentices in the UK s workforce are beginning to take effect, according to this year s report. While only the minority (12%) of SMEs surveyed for the report have an apprentice scheme in place, a further 23% are considering launching one in the future and only 1% of firms are currently running a scheme they will terminate. The highest take up of apprentices is in the East Midlands, where one in four firms have an apprentice scheme. London based businesses use far fewer apprentices, with just 1% of firms claiming they currently run an apprentice scheme. Looking at the key benefits from apprenticeship schemes, firms appear to be primarily motivated by financial considerations in the shape of reducing staffing costs, but also many see it as a chance to show their Corporate Social Responsibility credentials (44%) by investing in the local community. The tax incentives appear to be boosting take-up for the scheme, cited by 38% of firms who employ apprentices. Other benefits from apprenticeship schemes include reducing staff turnover in the long term (15%) and creating career opportunities, particularly for those who have not attended university (3%). 14% of SMEs would be more likely to consider taking on an apprentice as a result of the Government s relief on national insurance contributions for employees under 21, but this rises to 34% for SMEs with more than 50 employees. SMEs in the South are twice as likely as those in the North to cite tax relief as a key driver for running a scheme. SMEs apprenticeship schemes 12% 23% Apprenticeship schemes in place Plan to launch an apprenticeship scheme in future Highest take up of apprenticeship schemes East Midlands 25% Key benefits of apprenticeship schemes Corporate Social Responsibility 44% 49% 38% Reduced staff costs Tax incentives 1% Plan to drop existing apprenticeship scheme Looking at the key benefits from apprenticeship schemes, firms appear to be primarily motivated by financial considerations in the shape of reducing staffing costs, but also many see it as a chance to show their Corporate Social Responsibility credentials (44%) by investing in the local community. 15% Reduced staff turnover 3% Reduced staff turnover SMEs in the South are twice as likely as those in the North to cite tax relief as a key driver for running a scheme. The Albion Growth Report

12 Optimists firms that are far more aware of their limitations than pessimists, and are more likely to seek alternative sources of finance and external support. 72 % Optimists anticipate growth Optimists anticipate growth in in productivity in in next two years 14% Optimists would consider Optimists would consider running an an apprenticeship scheme Optimists were concerned about their management expertise Optimists had successfully raised finance Pessimists firms that are more likely to blame external factors and are also more likely to rely on debt finance than to release equity in return for hands-on help. 41% Pessimists anticipate growth Pessimists anticipate growth in in productivity in in next two years Pessimists would consider running an an apprenticeship scheme Pessimists were concerned about their management expertise Pessimists had successfully raised finance Predictably, optimists have higher hopes for the future than pessimists 70% anticipate growth over the next two years, compared to 37% of pessimists. 5. Optimists v pessimists In the inaugural Albion Growth Report published in 2013, we identified two distinct groups of businesses: optimists and pessimists. Defined by their views on their growth outlook of both the UK economy and their own businesses, the two groups exhibit very different attitudes towards their prospects for success. Optimists are far more aware of their limitations than pessimists and are more likely to seek alternative sources of finance and external support. They are also a lot more confident about their future and they tend to identify issues within their control as problem areas to address. Pessimists are more likely to blame external factors and are also more likely to rely on debt finance, than to release equity in return for hands-on help. The findings from the 2014 Growth Report reaffirm the division between optimists and pessimists. For example, one in ten optimists (10%) had successfully raised finance compared to just 2% of pessimists, while over double the proportion of optimists (13%) are likely to recognise a lack of management expertise as a threat to growth compared to pessimists (4%). Looking at the challenges faced by these two groups, optimists are more likely to identify mentoring schemes, a lack of management expertise and the scale of management ambition as key challenges; while pessimists are far more likely to blame regulation, workers productivity and red tape, while overestimating management abilities. The value of apprenticeship schemes is much more apparent to optimists than pessimists over three times as many optimists (14%) run schemes as pessimists (4%). Almost three quarters of pessimists (69%) say they would not consider running an apprentice scheme in the future. Predictably, optimists have higher hopes for the future than pessimists 70% anticipate growth over the next two years, compared to 37% of pessimists. They also predict higher growth in productivity, with 72% of optimists expecting it to grow over the next two years, compared to just 41% of pessimists. Half (49%) of pessimists predict zero growth in productivity. Significantly, 24% of pessimists do not know what is causing a change to productivity in their businesses, compared to just 7% of optimists. 10 The Albion Growth Report 2014

13 6. Training staff One of the biggest challenges for organisations looking to grow their businesses to the next level is how to identify and retain the strongest team. As the market recovers, competition for the best people begins to tighten and employers need to consider how they reward and retain their staff. Salary and benefits are important, but employees also need to know that their company is investing in their future with training and development. The research shows that firms are most likely to focus their training resources on skilled staff, with almost four in ten firms (39%) committed to this, compared to only 27% who plan to train and upskill semiskilled staff and 14% for low-skilled and low paid staff. One in five (20%) SMEs surveyed feel that they do not have a business duty to train and upskill anyone in the company. 7. Accessing new markets and technologies Companies that want to expand often do so by entering new markets, whether it is different geographical regions or sectors. Despite the general growth in optimism amongst this year s SMEs, only 37% said that they had entered new markets over the past two years compared to 53% in This suggests that they are more focused on expanding into their core markets where more opportunities exist compared to 12 months ago. While the majority (57%) of those who have attempted to enter new markets have done so without any difficulty, the remaining (43%) experienced a range of problems, underlining how difficult it can be. Specific challenges they have faced include a lack of expertise around their target market (cited by 16% of those who experienced problems compared to 10% in 2013); finding the competition too strong (11% versus 22%); lacking the financial resources (8% versus 15%); too many regulatory obstacles (10% versus 6%); and lack of demand (8% versus 23%). From a sector point of view, double the number of service providers successfully entered new markets (29%), than businesses in the retail and distribution sectors (15%) When it comes to adopting new technologies, our research showed that proprietary, in-house R&D was favoured over the purchase of established third party technology, which is encouraging for the UK s research base. Within that, the manufacturing sector was most keen on developing their own technology, while, regionally, firms in the North West were most committed to conducting their own R&D. SMEs focus on training resources 39% 27% Focus on training skilled staff SMEs that entered new markets in the past two years Plan to train and upskill semi-skilled staff 37% 53% Challenges in accessing new markets 14% Plan to train low-skilled and low paid staff 16% 10% 11% 22% Lack of expertise Finding competition too strong SMEs surveyed felt that they did not have a business duty to train and upskill anyone in the company 8% Lack of financial resources From a sector point of view, double the number of service providers successfully entered new markets (29%) than businesses in the retail and distribution sectors (15%). 15% The Albion Growth Report

14 8. Spotlight on threshold businesses One of the most difficult stages of development for any organisation is the breakthrough from start-up to established company. These threshold businesses on the cusp of blossoming into mediumsized companies and currently in the 500,000 to 1 million turnover bracket share many traits and this year s report looks at statistics around threshold businesses to check up on their appetite and predictions for growth. This year s report looks at statistics around threshold businesses to check up on their appetite and predictions for growth. The need for finance to grow business The research found that these companies definitely want to grow by securing finance one in five (19%) say that they have tried to raise finance compared to the average of one in ten (10%). Importantly, threshold businesses are more likely to seek finance for growth than other sizes of SMEs (68% compared to the average 41%). Significantly, their chance of success is also much higher all the surveyed companies in this turnover bracket who applied for finance did so successfully. In line with their ambition to grow, this group is also more likely to grow its headcount (55% compared to the average 33%). However, they find it more difficult to find skilled staff a challenge for 30% of these companies, compared to 18% of all surveyed which is reflected by the fact they are more willing to train their skilled staff than both companies with larger or smaller turnover. These companies are typically small, but skilled teams and are less likely than other-sized firms to run apprenticeship schemes. Threshold businesses that have tried to raise finance SMEs that have tried to raise finance One of the most difficult stages of development for any organisation is the breakthrough from start-up to established company. Threshold businesses 68% 41% SME average Likelihood to seek additional staff 55% 33% Threshold businesses Willingness to give up equity for hands-on support SME average 22% 6% Threshold companies are slightly more likely than others to target new markets, though they do not report higher rates of success. Generally, they face fewer issues than larger businesses in terms of competition and demand, though they are three times more likely to have a lack of understanding about local business conditions and practices. The picture that emerges is of a category of companies that want to move to the next stage of growth and recognise that they need investment to take their business to the next level. These companies are more likely to identify a skills shortage in almost all areas of their business, with the exception of financial management, though they also appear to be acting on this information and seeking investment. For this reason, threshold businesses are much more likely to be willing to give up equity in their companies in return for hands-on support from investors, such as private equity or venture capital groups (22% versus an average 6%). Threshold businesses SME average 12 The Albion Growth Report 2014

15 ALBION VENTURES LLP is one of the largest independent venture capital investors in the UK, managing approximately 250 million across six Venture Capital Trusts. Albion Ventures was established to generate long term investment returns for shareholders through making venture capital investments in smaller companies. Contact: Patrick Reeve Managing Partner t: +44 (0) Victoria Scott Head of Marketing t: +44 (0) Designed by Lazzari Design

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