How do we ensure that entrepreneurial companies with the potential to grow do so? Does a lack of finance prevent firms from growing and benefiting the wider economy? When it comes to economic growth, these are important questions. In my personal experience of building and selling two global businesses, I was excited by our organic growth but frustrated by the inability to raise debt finance to buy-and-build.

Access to capital has been notoriously difficult for SME founders yet ‘high growth firms’ are responsible, according to estimates, for the majority of new job creation. So not only does access to finance allow entrepreneurs to seize buy-and-build opportunities, it also drives economic growth for the country. Thankfully now the right financial mechanisms are opening up to SMEs. But what are they and why should founders take advantage of them?

Why acquire? Years worth of growth…in months

M&A is simply a quick route to building and extending capability, geographic coverage, and achieving greater scale. Many entrepreneurs and SMEs I know could use funds productively if they were available.

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Acquisition considerably reduces time to grow to the point when you might be ready to go public or sell – or attractive enough to buy. Creating a larger entity in a short span of time can quickly reduce your competition and increase your market share. It can also get you better economies of scale, resulting in improved profitability. Additionally, there’s also the rise of aqui-hires, or using M&A to access talent that might otherwise be closed off.

And data show that returns on SME-level acquisitions are strong. The Harvard Business Review estimates that small acquisitions typically boost annual shareholder value by between 8.2% and 9.3% over a sustained period, compared with the 4.4% average increase produced by so-called “big-bet” deals. Funding M&A hasn’t been easy, however, until quite recently when alternative finance options have begun to open up.

A new wave of M&A finance

Whether it’s postponing investment and expansion plans, or simply resigning themselves to organic growth, finance for M&A simply hasn’t been easily available in the past decade from traditional banks.

A new wave of lenders is plugging the yawning gap in small and medium enterprise growth finance, however. There are now a few such providers on the market, meaning a choice of good options for entrepreneurs. One of them is SME Capital. Full disclosure, along with others, I’m an investor in the business because I’m so passionate about helping founder-driven businesses grow.

James Kaberry is the entrepreneur behind the company and he explained his company’s approach to supporting growth businesses.

“There are so many brilliant SME businesses regionally, but their struggle to get traditional growth finance is well documented,” said Kaberry. “A relationship-led approach, offering flexible funding, can overcome the barriers that they face.”

SME growth powers greater economic growth

SMEs are the lifeblood of all advanced economies. They account for over 99% of all enterprises, and employ more than half of the labour force in the private sector (some say as much as 60%). Key drivers of innovation and growth, they are absolutely essential for the economic recovery. Isn’t it odd, then, that financial support for them has been in decline for many years?

Many SMEs are innovators and a large majority (more than 70%) are on a growth trajectory this year. But financing that growth is a thorny issue; SME lending has long been in decline, due to the retrenchment of traditional banks.

As I’ve found in my experience, and in talks with the 30-plus businesses that I’ve invested in, the few schemes aimed at increasing the supply of equity capital to SMEs had a bias towards London businesses. So we had this huge funding gap for SMEs with the regular banks backing off, and if you were outside London, you felt that even more poignantly due to the absence of any alternatives. Thanks to this new breed of alternative finance options, changing that, ambitious founders can grow their businesses faster through M&A. That’s not only great for them and their companies, but for the economy and workforce as a whole.

By David Newns, serial entrepreneur and investor.

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