Access to Finance Readiness Member State: The London Objective 2 Access to Finance Programme is the product of an innovative strategy that was adopted by the London Objective 2 Programme: Programme Monitoring Committee, to tackle the barriers faced by small and medium size enterprises (SMEs) in accessing finance. The proposal for the Programme was developed out of research into why small to Total budget: medium sized businesses often fail to obtain appropriate funding for their Structural Fund business. The research, which was conducted during the development of (ERDF) co-financing: the Programme, showed that the London Objective 2 area has the same National public SME finance problems as London as a whole but the intensity of these co-financing: problems is greater. Historically, public policy has tended to focus on the National private unavailability of appropriate finance in addressing these problems. co-financing: However, the London Objective 2 Access to Finance Programme adopted a more innovative, balanced approach targeted at addressing both demand–side and supply-side issues that prevent businesses accessing finance by:

United Kingdom London Objective 2 Programme 2000-2006 EUR 14.7 m EUR 7.35 m EUR 5.3 m EUR 2.05 m

1. providing information and advice on the different types and sources of financing available to SMEs and the requirements of finance providers; 2. providing a subsidy to help SMEs obtain the professional advice they require to get them “finance ready”; for example, helping them produce a comprehensive business plan, finance plan, sourcing appropriate types of finance or coaching in presentation skills. It is also designed to provide post investment coaching and mentoring in appropriate cases to help the business meet its vision and objectives once they have achieved the funding they require; and 3. increasing the supply of debt and equity financing to bridge the gaps identified by the audit study. The Access to Finance programme consist of a portfolio of five projects (including one funded by ESF) which all complement each other. The Access to Finance Readiness project, which delivers the first two objectives (see above) of the Access to Finance Programme, will be the main subject of the presentation. However, many of the issues outlined in the following sectors also relate to the Access to Finance Programme as a whole. The other projects, which are only now just becoming established, are geared towards delivering the third objective. They are: (i) a EUR 14.6 m ERDF loan fund providing loans between EUR 7,000 and EUR 366,000 for established businesses (including social enterprises) (ii) a EUR 5 m ESF loan fund providing loans between EUR 7,000 and EUR 36,600 for new businesses (iii) a EUR 7 m pan-London equity fund (with EUR 3.5 m ringfenced for the Objective 2 area) providing early stage capital for businesses in the creative and cultural industry and an (iv) a EUR 22 m pan-London equity fund (with EUR 4.4 m ring-fenced for the Objective 2 area) providing seed capital for technology businesses. Both the equity funds are public co-investment funds (i.e. the entire initial investment into the funds is by the public sector and the private sector investment will come in on a deal by deal basis). The total funding for the Access to Finance Programme is associated with ERDF IS EUR 42.3 m of which ERDF is EUR 17.8 m; national public co-financing is EUR 11 m; and national private co-financing is EUR 13.5 m. The funding package for the Access to Finance Readiness project is shown separately in the pervious section.

Context and Reason why the programme was set up The aim of the Business Development and Competitiveness Priority of the London Objective 2 Programme 200006 is to enhance business performance in the Objective 2 area, create employment opportunities and build a robust business base. This was based on the widely held view – at EU, national and regional level – that SMEs

are expected to be the main source of future jobs and wealth creation. However, access to finance was identified as one of the key constraints to business development in the London Objective 2 area. London is one of the most competitive financial markets in the world. Despite this, many would-be entrepreneurs and SMEs are not able to access the money they need to start and grow their businesses. This means that huge areas of potential in both the local and the wider economic markets goes untapped, or is wasted, and in some cases lost forever to the London economy. This fact was recognised by London Partners and EUR 21 m ERDF was consequently set aside, under the London Objective 2 Programme, to tackle the acute issues faced in accessing the finance needed to start or grow a business. The problem of accessing finance is more acute for enterprises in deprived areas such as the London Objective 2 area, as they are perceived to represent a greater credit risk than those in other areas; they lacked a track record in business and banking history; lacked security; and required significant time and resource to help them progress. This issue was highlighted in studies conducted by the Bank of England. This phenomenon was obvious in the results of baseline research undertaken during the development of the Access to Finance Programme. Over 800 SMEs and more than 30 business support organisations and enterprise agencies took part. They indicated that over 86% of those SMEs that had sought to raise finance in the previous three years had been unsuccessful. Of those companies that had been successful in raising finance, 13% did so via the use of Credit Cards; 27% by overdraft and 16% by fixed term loans. Of these, 100% of SMEs had failed to raise the full amount they had been seeking.

Objectives of the programme The overall vision of the Objective 2 programme is “to redress the imbalance in London’s economy by tackling barriers to economic opportunity in key areas suffering industrial decline, urban deprivation, low economic activity and social exclusion so that new, sustainable opportunities are open to all people living and working in the Objective 2 area.” It was recognised that without finance for businesses this overall vision will not be fulfilled and the impact o f work carried out under the Programme would be blunted. The overall aim of the Access to Finance Programme is therefore “to ensure that all SMEs, at all sizes and stages of development, based within the Objective 2 areas are able to obtain the finance suitable and necessary to progress and implement commercially sound business growth propositions to the benefit of the local communities and economy of the Objective 2 areas. The two key objectives of the Access to Finance Readiness project are to: 1. increase the ability of SME to access finance by improving their financial proportions; and 2. increase the awareness of the type of funding options available to SMEs and the requirements of finance providers. The key success factors of the Access to Finance Readiness project are: achieving a substantial increase in the number of SMEs successfully raising appropriate finance building a strong relationship with banks and other finance providers operating in the Objective 2 area in order to have up to date information on the requirements of the major lenders and also to generate SME referrals to the project. finance providers reporting a significantly improve the quality of finance proposals being submitted by SMEs. SMEs making use of other forms of finance such as equity, leasing or factoring.

Description of the major activities and project management The ERDF grant was offered to Business Link for London, which is responsible for co-ordinating the delivery of activities for the Access to Finance Readiness project; however, implementation is being carried out mainly by enterprise agencies, accountants and other financial intermediaries. The main actions so far are: 2003: completion of the pilot project which was developed to examine some of the issues and conditions highlighted in the baseline research. The pilot project was also used to test some of the assumptions in the implementation plan. April – contracts issued to Business Link for London for the main project marketing and information campaign launched November 2004 – ERDF and ESF loan fund launched, which provides another source of funding for SMEs supported under the Access to Finance Readiness project. 2005: The two equity funds are established, which, again, provide other sources of funding for SMEs supported under the Access to Finance Readiness project.

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2006: the project is extended to March 2007. Also, the London Development Agency used the same model of Access to Finance Readiness project to provide finance readiness support for SMEs located outside the Objective 2 area.

Analysis of the outcome, results and (potential) effects of the programme Since its launch in 2003 the project has been a huge success in bringing tangible benefits to SMEs in the Objective 2 area and providing a model for public policy in this difficult aspect of economic development. To date the projects had achieve excellent results, some of which are listed below: 363 SMEs have been assisted to successfully raise EUR 31.5 m – this represents EUR 4.28 raised for every EUR 1 of ERDF committed to this project. The project has, in fact, supported 1386 businesses but some are yet to complete the funding application process. Of the 363 SMEs, 258 were new businesses raising EUR 13.8 m and 105 were established businesses raising EUR 17.7 m. 220 of the enterprises which raised finance were black and minority ethnic (BME) managed/owned businesses and they raised EUR 14.2 m. Also, 107 of the enterprises which raised finance were women managed/owned businesses and they raised EUR 5.04 m. 9% of the funds raised to date have been equity finance. This is a significant increase from the baseline research of just 2% of equity raised. This type of fund raising, by its complexity, can take considerably longer than other forms of finance. Most of the equity finance raised was by new businesses. A secondary objective of the project is to raise the level of private sector investment in deprived areas and the projects has recorded strong progress in this regard with 72% of the finance raised coming from the private sector. An integral part of the programme was the development of relationships with banks and other financial institutions operating in Objective 2 area. This was intended to provide up to date information on the requirements of the major lenders, secure the credibility of the programme and its aims and also to generate referrals. So far, the project has been well received by several major banks at both senior and branch level. Some notable successes of the project are: Brownell designs, manufactures and sells over 750 different products all dedicated to providing humidity relief. The Access to Finance Readiness project helped Brownell to raised EUR 219,000 to finance the development of a new product. Wonderland is a new and unique magazine for affluent professionals with high disposable incomes. Entrepreneur Huw Gwyther received support from the Access to Finance Readiness project to help developed his financial proposal. He also received equity grooming which enabled him to raise EUR 366,000 in private equity.

Any difficulties experienced during implementation and how they were overcome The Project Managers, Business Link for London, recognised the continuing need for the promotion of equity as a more appropriate funding instrument for SMEs. However, the following barriers made this difficult: The SME market needed significant education to understand the benefits of equity over debt. The aversion to ownership dilution continues to be a major barrier. The maturity and sophistication of businesses in the Objective 2 area was below that required by risk finance providers. The availability of small amounts of risk finance (up to £200k) was severely constrained.

In order to overcome this, special events were held for SMEs to inform them of the benefit of and how to pitch for equity finance. This was supplemented by coach sessions. The results in the previous section indicate that good progress has been made to date. With the launch of the two Objective 2 equity funds there should be some ease in the pressure for small amounts of equity finance.

Difference made by support from the Structural Funds The support from Structural fund was immensely important for this project. Indeed, the development of a strategy by London Partners to achieve a coherent approach to tackling the barriers face by SMEs in 13 of the capital's poorest boroughs was initiated by the availability of ERDF. Without ERDF it is very unlikely that the Access to Finance Readiness project would have gone ahead at the time it did and at the scale and scope which the baseline research indicated was needed. While the Small Business Services (the Government agency responsible for creating the right business environment for enterprise to start and grow) had developed investment readiness demonstration projects, these initiatives were small pilot projects, lacking in both scale and scope to tackle the acute problems in deprived areas such as the London Objective 2 area – indeed, there were only six such projects in England. Also, they were often not designed to provide the intense and continuous support that was needed by businesses in the Objective 2 area. Furthermore, these demonstration projects were designed to provide support only to SMEs seeking to raise equity finance. This approach did not take account of that fact that some SME owner/managers will not even get close to equity or ‘risk’ capital if they have not first experienced more main-stream forms of debt finance in the form of loans and overdraft. It is through management confidence and the establishment of a track-record that SME owner-managers are able, with varying degrees of speed, to ascend the ‘ladder’ of finance from debt to equity and beyond. The Access to Finance Readiness project, with ERDF support, was able to overcome these issues and is now absolutely instrumental in helping SMEs in the Objective 2 area access finance.

Perspectives for the future: sustainability and follow up Sustainability is a key issue for this project. Implicit in its aim is the need to create the environment, through business support, that will allow businesses to grow, adopt and become sustainable. Without being able to access finance it is hard to see how businesses can effectively compete in an increasingly global market. While no evaluation has yet been carried out on the survival rate of businesses support by the project, it is expected that their ability to survive should have been enhanced because: the project also provide post-investment support in appropriate cases to help the business meet its vision and objectives once they have achieved the funding they require businesses needing other specialist support are referred to other projects, which may also be funded by Structural Funds. research has shown that the businesses receiving equity funding tend have better survival rates. One of the findings of the evaluation of the SBS demonstration projects was that “…………..this is not a short term intervention – investment readiness require long-term commitment in order to become established and embedded in networks, and to provide support to businesses at the point they are ready to seek equity……. ” and that “…………continuous awareness-raising activity is necessary in order to educate and recruit businesses at appropriate stage of development.” This is also be true for Access to Finance Readiness project and it is envisaged that public intervention will be needed to continue this momentum gain by this project so as to ensure that the success achieved to date can be sustained. There is indeed an opportunity to continue this project under the new rounds of Structural funds Programme, and thereby continue to contribute to the Lisbon goal.

Contribution of the project to the fulfilment of the revised strategic orientations of the Lisbon strategy The success of the Lisbon strategy – to make the EU the most competitive and dynamic knowledge-based economy in the world – depends on the SMEs achieving their potential. Key to this is their ability to access the finance needed to compete and innovate; thereby facilitating sustainable growth and development. The Lisbon strategy emphasises the role of risk capital in enabling SMEs with high growth potential, particularly those exploiting innovative technologies, to create high quality jobs in the knowledge economy. To achieve this it is widely accepted that market failure on both the supply-side and the demand-side must be address. The Access to Finance Readiness project has been instrumental in tackling the barriers, on the demand-side, which make it very difficult for SMEs to access finance and as such contributes hugely to achieving the Lisbon goal.

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Relation of the project to the aspects of sustainable development One of the objectives of the Access to Finance Readiness project is to close the performance gaps among different businesses in the Objective 2 area. For this project the targeted groups are BME businesses and women-owned businesses. There is evidence that some BME businesses particularly those owned/managed by Black African and Caribbean businesses as well as women find it considerably more difficult to raise mainstream finance. This situation is attributed in some cases to a lack of understanding of the requirements of finance, but also to the low incidence of wealth creation and accumulation in this segment. Existing finance providers have found it difficult to meet the needs of this market, leading to a vicious circle of poor performance and exclusion from financing opportunities. The project has specifically provided resources towards improving the relationship management between BME-owned and women-owned businesses and financial intermediaries to break out of this cycle. The results above indicate the successes that have been achieved so far. Also, in line with one of the priorities of the Objective 2 programme the Access to Finance Readiness project targets social enterprises and businesses within the green economy, which will contribute to the social progress of the area, as well as the environmental protection and sustainable use of natural resources.

Reason why the project was a success and should be considered as a best practice project Aspects of the project that can be considered to be ‘best practice’: 1. Public-private partnership in the project design: Much of the criticism aimed at public sector intervention in the past has centre around two main themes: that the quality of public sector support was simply not high enough to address the problem; and that the very existence of public sector economic development initiatives created a distortion in the market, and actively competed with private sector providers. Right from the start the Steering Group of the London Access to Finance Programme which was made up of representatives from the Government Office for London, London Development Agency and Business Link for London, together with key representatives from the Private sector (Banks, Accountants, Equity providers, etc.), took this on board. The Steering group went to great lengths to engage and consult with all interested parties – major accountancy firms, banks, business angels and private equity providers, corporate finance boutique specialists, SMEs and public sector intermediaries working with particular disadvantaged groups – in agreeing the parameters for support that were required. 2. Engagement of Private Sector finance experts for delivery: It was agreed very early in the development of the project that the identification of finance packaging needs, together with the preparation of financial propositions was an area where only those that were truly qualified should be permitted to engage. This would not preclude the engagement of local Enterprise Agencies, but their involvement with the project should be consistent with the level of expertise and sophistication required to assist SMEs raise finance. 3. Engagement with Banks and other finance institutions: Another key agreement by the Steering Group was that a strategy for engagement with the Banking community and other financial institutions was essential, not only for the purpose of referrals, but also to secure the credibility of the programme and its aims. The programme has received widespread positive publicity through joint efforts of project managers and finance institutions, with Government Ministers participating in launch events. 4. Recognition of the ‘ladder of finance’ issue faces by SMEs Some SMEs owner/managers will not even get close to equity or risk capital if they have not first experienced more mainstream forms of debt finance in the form of loans and overdraft. It is through management confidence and the establishment of a track-record that SME owner-managers are able, with varying degrees of speed, to ascend the ‘ladder’ of finance from debt to equity and beyond.

The principles of the project are transferable to any ‘urban’ environment provided that sufficient time is taken to engage with finance institutions and professional advisers. However, effective transfer and replication in other cities or regions may be hampered by: 1. an insufficient concentrations of private sector professional advisers/accountants in rural areas 2. a country’s specific Banking structure or regulatory regime 3. lack of public sector infrastructure to manage the process 4. availability of expertise at the design stage 5. funding

Contact person Name: Function: Address:

Kenroy Reid Access to Finance Programme Manager Government Office for London, European Unit, 157161 Millbank, London, SW1P 4RR, United Kingdom

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Telephone: +44 207 217 3004 Fax: +44 207 217 3478 e-mail: [email protected]