This project seeks to address market imperfection in the supply of investment and growth capital to SMEs, caused by the banks marked reduction in corporate lending. The project involves the creation of a loan fund for growing and exporting SMEs which will provide investment and growth capital in the form of unsecured and mezzanine debt in the range £250,000 to £2m (and in very exceptional circumstances up to £5m) on a fully commercial basis (definitions for these types of product are provided below).
The fund offers the most effective route to quickly address the gap in the supply of debt finance to SMEs in Scotland. It also provides an evergreen mechanism to recycle returns and interest earned through the operation of the national financial engineering instruments that have received support, ie, Scottish Co-investment and Venture Funds, In this way, returns from the existing and proposed funds are used for a similar purpose, ie, access to finance. Routing these realisations through a single fund will allow maximum flexibility in their future use which will be based on the access to finance needs of the Scottish economy. The Scottish Investment Bank is the recilient and delivery agent which manages and disburses these legacy funds.
The Loan Fund provides unsecured and mezzanine debt to profitable, viable SMEs which: have already demonstrated growth over the last 3 years; are making a step change in their growth ambitions; and/or export at least 50% of their goods outwith Scotland. The Loan Fund is part of the Scottish Investment Bank which also includes the Scottish Seed, Co-investment and Venture Funds. These three existing Funds target early stage, high growth companies which typically need equity support to finance their growth plans. This new Loan Fund complements these products by focusing on predominantly more established companies typically exporting and/or with growth potential where debt is a more appropriate method of finance. A significant proportion of the companies seeking loan finance are account managed by Scottish Enterprise. These companies are be referred to SE’s Investment Readiness teams who assess the companies’ access to finance needs, identify the most appropriate source of finance, then provide advice and assistance to companies in order to help them secure that finance, including referrals to the Scottish Investment Bank Loan Fund.
The Fund will provide loans to companies throughout Scotland and a separate ERDF application for the Fund was submitted in the Highland & Islands Programme area. The Fund does not overlap with the East and existing West of Scotland Loan Funds or other local loan funds delivered predominantly by Local Authorities, which lend typically up to £50,000 per company, given that it focuses on larger amounts of generally more expensive loan finance, aimed to help fill the gap between normal secured debt and equity risk capital. The Loan Fund will have a direct impact in Local Authority areas by supporting companies which are significant to the local economic infrastructure.
The private sector participates and the fund is delivered by industry recognised private sector, FSA authorised fund manager (or managers) appointed through an appropriate procurement process.