SMEs are the backbone of the UK, making up 99% of British companies. Of the 5.7 million small and medium sized companies, research concluded that over 60% of small UK businesses said they required funding to develop and grow.
Funding for SMEs has been notoriously tricky in the past and the 2019 Global Business Monitor Report indicated that 29% of SMEs in the UK are concerned that current economic performance is poor. With strict controls on trading conditions, legislations and credit histories, some SMEs are struggling. Smaller businesses have often been shunned by traditional investors as they are privy to cash flow issues, often lack assets and can be subject to failure. This makes lending to SMEs high-risk.
However, times have changed, and alternative finance companies are offering products that allow investors to back SMEs. We have entered a golden age of business investment many investors are choosing to diversify their portfolios and increase their income with the attractive returns back SMEs presents.
The advantages of SME investment
Investing in smaller companies in the UK means you are putting your money into a homegrown business. With everything taking place inside the UK, investments are safe from any trade disputes. Furthermore, this also means that SMEs have a superior exposure to domestic economies.
Typically, smaller companies have the potential for fast development compared to larger businesses, which have already seen their growth spurt. With such scope, SMEs tend to be more dynamic and interested in innovation, meaning they tend to be easier to expand and diversify. In a similar light, small and medium sized companies are often more open to mergers or acquisition by larger corporations.
However, there are some other key benefits of SME investment…
Your money is at risk with any investment and SMEs are no different. However, there is potential to earn impressive returns with the right small business investment.
Over the past few years the tax system has been moulded in several ways to encourage investors to back smaller companies. For example, the Enterprise Investment Scheme (EIS) was launched in 1994 to raise finance for SMEs via investors. As an investor, you would benefit from income tax and capital gains relief.
Having a portfolio that relies on a particular asset can be detrimental. The more varying assets added to your portfolio the stronger your potential return in the long run. Therefore, an SME investment could be the way for you to diversify your portfolio further.
Whilst you will undoubtedly benefit from financial returns, many investors are happy to support smaller businesses for the feelgood factor. As an investor you may not only have the money, but the skills and the network to help nurture fledgling businesses.
Do you want to invest in SMEs?
With the development of alternative finance platforms there are a number of ways to invest in SMEs. It has never been easier to invest in a smaller business and you are free to decide what type of investor you want to be and what opportunity would best suit you.