The equity dilemma for small and medium-size businesses

Written by: Dominic Buch | Published:
A lack of access to genuinely unsecured lending is a critical barrier to growth

Increasing volumes of waste and increasing capacity to recycle it should provide huge opportunities for the many small and medium-sized businesses in the sector.

But too often, despite the opportunities this situation presents, many firms struggle to get the finance they need to make the most of them.

UK waste is on the rise. The UK generated 222.9 million tonnes of waste in 2016 – up from 214 million tonnes in 2014 – according to government figures. Construction, demolition and excavation generated around three-fifths (61%) of the total. Commercial and industrial waste accounted for nearly a fifth (19%) while household waste was 12%.

Many innovative small and medium-sized businesses in the waste and recycling sector are helping to tackle the issue. Yet most find it difficult to get the funding they need to grow.

What’s the issue?

While banks can fund an amount that reflects the tangible assets in a business they cannot help if a business has no further tangible assets. As a result waste and recycling firms can reach a limit. They cannot raise further bank financing to develop their business if they do not have additional assets to offer to lenders as security.

In addition many traditional lenders are reluctant to lend to waste and recycling firms as they do not understand the nature of their operations and customers. This makes it harder for them to assess the risks they would take providing finance.

As a result, many waste and recycling business owners have had to consider giving up equity to raise funds, or they have had to agree to personal guarantees.

But our research of 300 SME business owners shows 76% do not want to issue equity and dilute ownership to fund growth. Instead more than three-quarters would prefer to raise money through long-term debt, if they could.

We call this the ‘equity dilemma’ because business owners are forced to choose between growth or ownership. Many waste and recycling business owners face it.

The lack of access to genuinely unsecured lending is a critical barrier to growth. It affects the sector and the ability to tackle waste in the UK.

What’s the solution?

Many growing SMEs need unsecured lending of between £500,000 and £5 million. Often the businesses looking for loans of this size are too big for peer-to-peer platforms but too small for banks and debt funds.

Caple is one of few companies in the UK offering long-term unsecured lending, based on the future cash flows of the SME. We do not require collateral or personal guarantees as security.

Accountants and business advisors are an integral part of how we support SMEs to access unsecured finance. Any waste and recycling business looking for funding should first speak to its accountant or corporate finance advisor.

Accountants assess the eligibility of their clients for funding, supported by our technology platform. They then prepare business plans and financial forecasts that make the case for funding.

Case study

Proving the appetite for unsecured lending in the waste and recycling sector, we have recently completed a £1.7 million eight-year unsecured loan with Dunton Environmental. This will enable it to gear up for significant growth over the next four years. The firm now expects revenues to grow by 15% and create 10 to 15 new jobs per year.

West Midlands-based Dunton Environmental specialises in the design and implementation of innovative soil, ground and water remediation services.

It employs 90 people, operates two waste treatment facilities in the Midlands, and treats and recycles contaminated waste for recovery back into the construction sector.

Unsecured lending is an ideal fit for the company as it helps it to grow while developing sustainable solutions for the reuse of landfill waste in the UK.

Caple has completed more than £20 million in deals with 10 UK SMEs. In all of our deals the SME business owners were keen to access funding to drive the growth of their business. But they wanted to do so in way that meant they retained control and that it supported the funding they already had in place.

Waste and recycling firms are such an important part of tackling the waste problem in the UK. We want to help them secure the finance they need to grow. And we can do this without pushing them towards diluting equity and losing control.

Dominic Buch is co-founded and managing partner at financial institution Caple


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