Funding dilemma for entrepreneurs presents opportunity for private equity

More than half of the UK’s entrepreneurs are relying on working capital to stay afloat, according to a survey by business advisory firm Deloitte.Fifty-three per cent of entrepreneurs believe funding for major business projects during the next 12 months is most likely to come from their operational cash flow, compared to 36 per cent last year.

The survey also shows that, despite tougher lending conditions, entrepreneurs continue to rely on banks as a major source of funding (18.5 per cent), followed by existing shareholders (10.4 per cent). 

Just 12 per cent said external investment from private equity (4.6 per cent), venture capital (3.8 per cent) and angel investors (3.8 per cent) would be the most likely source of cash over the next 12 months, down from 28 per cent in 2008. 

Ashley Hollinshead, who heads up the entrepreneurial business practice at Deloitte in Birmingham, said: “Just two years ago, the overarching theme for many entrepreneurs was growth and planning for an exit to private equity or corporate buyers, or planning for flotation on the stock markets.

“But this survey reveals that current business conditions have created an alarming reliance on working capital at a time when more than a quarter of entrepreneurs say they are having to monitor their cash position daily.

“With entrepreneurial businesses looking to strengthen their balance sheets, the market is ripe for investment from cash rich private equity groups looking for businesses that are certain to see renewed growth.

“Given the fall off in the mergers and acquisitions market and the drop in valuation multiples, many entrepreneurs have shelved their M&A plans.

“Instead their prime focus is on strengthening the operational performance of their business to emerge as ‘winners’ from the recession and this requires investment. 

“For many businesses this investment will come from internal resources but for some, external capital will be required.  The survey shows nearly a third of entrepreneurs say banks have reduced their lending facilities, a dramatic change from two years ago.  This represents an opportunity for private equity to invest in ambitious entrepreneurs.”

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