• Albion Ventures’ second Albion Growth Report shows that two-thirds of small businesses predict growth over next two years

• New report tracks the emergence of ‘threshold’ businesses

• More SMEs looking to raise finance for growth rather than survival

• A third of SMEs are looking to recruit more staff

A new report launched by Albion Ventures, on one of the largest independent venture capital investors in the UK, reveals that 62% of small to medium sized firms have ambition to grow ‘dramatically’ or ‘moderately’ in the next two years, up from 59% in 2013. Only 3% think they will shrink or wind down.

Businesses in the North-West are most confident about the future, with 83% anticipating growth over the next two years, closely followed by London with 81% of businesses expecting their businesses to grow.  East Anglian businesses are the least optimistic with 39% anticipating growth.  On a sector basis, production businesses report the highest levels of confidence with 83% of them expecting growth, which bodes well for an industrial revival.

Emergence of ‘threshold’ businesses on the cusp of change

Business (PD)One of the key findings from the second Albion Growth Report (“the report”), which is designed to shed light on the factors that both create and impede growth among UK SMEs is the emergence of ‘threshold’ companies, with turnovers between £500,000 and £1 million. These companies are on the cusp of changing from start-ups and sole traders to established companies.  Threshold firms are more likely to seek finance for growth than other sizes of SMEs (68% compared to an average of 41%) and to do so successfully.  They are also far more willing to give up equity for hands-on support from investors such as private equity and venture capital groups compared to other firms (22% versus an average of 6%).

Threshold businesses are also more likely to grow their headcount (55% compared to 33%) but find it more difficult to secure skilled staff (30% versus an average of 18%).  This is reflected in their willingness to train skilled staff compared to other SMEs.

More SMEs looking to raise finance

Optimism about future growth is further underlined by the fact that a third of businesses plan to raise finance in the next 12 months.  Of these 27% are targeting capital for business development and 23% looking to expand their premises, both represent increases from last year.  There has been a 25% fall in the number of firms looking for finance solely to fund working capital, suggesting that ambitions are rising.

Compared to last year, the proportion of firms using borrowing or funding through bank loans and overdrafts fell significantly from 76% in 2013 to 62% so far in 2014.  Firms have also relied less on asset-based leasing, invoice discounting and credit cards.

Recruitment and apprenticeships

Stronger business confidence is also reflected in recruitment intentions with a third (33%) of firms planning to increase headcount compared to just 2% that are looking to decrease it.

According to the report, tax incentives to boost the take-up of apprenticeships in the UK’s workforce are also beginning to take effect, suggesting that the strong jobs performance underpinning this recovery is set to continue: while only a minority (12%) of firms surveyed have an apprenticeship scheme in place, 23% are considering launching one in the future.  The highest take-up of apprenticeships is in the East Midlands, where one in four firms has a scheme in place.

Optimistic versus pessimistic business owners

This years’ report reaffirm the division between optimistic and pessimistic companies, showing very different outlooks of both the UK economy and their firm’s own prospects for success.  This year, 70% of optimists anticipate growth over the next two years compared to just 37% of pessimists.  One in ten optimists (10%) had successfully raised finance compared to just 2% of pessimists.  Optimists are far 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 their management abilities.  Significantly, three times as many optimists (14%) run apprenticeship schemes as pessimists (4%), of which almost three quarters (69%) say they would not consider running a scheme in the future.

Barriers to growth

While red tape remains the largest single barrier to growth, concerns over managing cash flows is a close second.  Interestingly, this is seen as a problem of success rather than failure, with cash-hungry sectors such as production both more optimistic about the implications of growth are more concerned about the implications of growth on their short term funding than other industries.  Regulatory change and finding skilled staff were the third and fourth biggest challenges respectively. Despite the continued focus on a lack of bank lending to SMEs, access to finance is only fifth on SMEs’ list of concerns.

Patrick Reeve, Managing Partner at Albion Ventures said:

“The evidence from this year’s Albion Growth Report points to a growing sense of confidence among UK SMEs.  The next 12 months promise more jobs created, improved productivity and a stronger appetite for raising finance to support growth as opposed to survival.

“What’s particularly striking about this year’s report is the emergence of so-called threshold businesses, which are on the cusp of blossoming from start-up to established business. Threshold businesses have tremendous potential to drive forward the UK’s economy in the years ahead but face serious challenges: for them, cash is tight and they need finance for growth; they value skilled staff but find it difficult to recruit them.  Recognising their own weakness and vulnerability they are much more likely to give up equity for hands-on support.”

Emran Mian Director of Social Market Foundation said:

“While growth is back, there are some important puzzles about its character and this report provides valuable clues. For example, growth expectations are strong across many regions and sectors, belying the alarmism of those who suggest that we are in a solely consumption-led recovery focused on London and the South East.

“While the role of bank finance is diminishing it is still the largest source of capital by far and a continued focus on efficient supply and competition in this sector is vital.  The big question is how to enable these businesses to make the most of the opportunities that they see ahead of them.”

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