Fund boss urges new ways to finance firms

The chief executive of the Business Growth Fund has lent his support to encouraging alternatives to bank funding for businesses.

The BGF was launched in May and is intended to provide Government-backed investments of between £2 million and £10 million in businesses with an annual turnover of between £10 million and £100 million, although that target has now been set at firms turning over between £5 million and £50 million.

It is being run with the support of five major high street banks: HSBC, Barclays, Lloyds, RBS and Standard Chartered.

Quoted in the Daily Telegraph, Stephen Welton, the BGF's CEO, put the case for an SME bond market as a way of reducing the traditional dependency of many smaller UK firms on bank loans.

Mr Welton said: "Over the last decade or two, the availability of bank debt has masked an unhealthy way of growing companies.

"We want to get the debate away from 'what's the highest amount of debt we can get into the business for the lowest cost' to 'what is the right way to finance my business for the longer term?'"

Mr Welton suggested that there is too great a reliance on overdrafts because they are cheap.

He added: "It's like a mortgage. You can borrow now on a tracker that costs next to nothing but the reality is when interest rates go up they'll do so fairly dramatically - sometimes you're better off taking longer term fixed rate money. For small businesses that option isn't there, either because long term fixed rate money isn't available or because by instinct they go for the cheapest money, not realising they'll trigger covenants if they underperform."

A bond market for smaller companies, on the other hand, would be a far better way to finance the debt side of small businesses, Mr Welton argued, leaving firms to free to use overdrafts for their real purpose of handling short-term fluctuations in working capital.