Growth finance is always a tricky subject. It is far from unheard of that companies are financially most vulnerable during a high growth period, when their working capital needs are so acute, coupled with other large investments that are often associated with high growth.
Our new report on High Growth SMEs: understanding the leaders of the recovery sheds some light on the financing needs of these high performing entrepreneurs. The report discusses the challenges, difficulties and the successes that growth-oriented entrepreneurs have in the US, European and BRICSA (Brazil, Russia, India, China and South Africa) economies and when it comes to finance, it shows that these businesses obtain very little from external sources – between 60% and 80% of their initial finance came from self-investment, most of which from savings (75% on average) or from personal borrowings. Even of the external finance that entrepreneurs use to start their businesses, a significant amount came from family and friends (10–25%) and from ‘other’ investors. Official financial institutions are notable only by their absence.
One other clear finding of the research is that all other things being equal, those entrepreneurs who self-invest the most achieve higher growth. This begs the question, should formal sources of finance be encouraged to find and support these entrepreneurs at the start-up stage? With such phenomenal growth rates since start-up shown in our report (ranging from 170% for the UK to over 450% for China) it would certainly be a smart investment. On the other hand, it might be precisely the fact that taking increased risk with their own money and being free from focusing too much effort on repaying external debt, that makes these entrepreneurs so successful.
Then again, this could also explain finance providers’ reluctance to shoulder most of the burden for funding – they know that selecting those entrepreneurs that are most willing to put ‘skin in the game’ will give them a better chance of getting their money back or making a good return.