Why we're backing Scotland's smaller businesses with our £150m fund

Mark Sterritt, Director at the British Business Bank explores how the Investment Fund for Scotland could be a catalyst for change for smaller businesses across Scotland.

Access to finance is critical for entrepreneurs and business owners at any stage of their journey. Whether you need start-up capital, have spotted an opportunity to grow, or want to even out unpredictable trading periods, external finance is key to supporting investment, resilience, and productivity in smaller businesses – particularly in challenging economic conditions.

However, regional imbalances in access to finance have been embedded for years. The British Business Bank’s latest Nations and Regions Tracker found evidence that firms outside of London find it more difficult to attract follow-on funding after raising capital. Between 2012 and 2014, 50% of businesses based in London raised a second round of funding, compared to 42% elsewhere.

There are also disparities in the amount of funding businesses manage to raise. Although those outside of London tended to raise more funding in their first attempt, they only received about 78% as much as their counterparts in the capital in their second round. More recent data has suggested the gap has continued to widen and, during 2022, Scotland saw the steepest decline in the number of equity deals involving smaller businesses, which fell -22% to just 190.

Trends like these are why greater efforts need to be made to make finance available and accessible to businesses, wherever they may be based in the UK. To address that challenge, the British Business Bank has created a series of Nations and Regions Investment Funds, worth a combined £1.6 billion, to unlock the potential of entrepreneurs and smaller businesses across the country.

Last year, we announced the launch of our £150 million Investment Fund for Scotland. The fund has been specifically designed to drive sustainable economic growth by supporting new and growing businesses with investment strategies that best meet the needs of smaller businesses, whether they are based in Kelso, Kirkwall, or Kirkintilloch.

The fund is the first solely UK government-backed investment fund for smaller businesses in Scotland, helping to increase the supply and diversity of early-stage finance. It provides options to firms that might otherwise not receive investment, helping them with activities including expansion, product or service innovation, new processes, skills development, and capital equipment.

While the Investment Fund for Scotland is a British Business Bank investment programme, fund managers have been appointed to look after the three different areas of financing it provides. DSL Business Finance is handling loans from £25,000 to £100,000, The FSE Group is taking responsibility for loans from £100,000 to £2 million, and Maven Capital Partners is managing equity deals up to £5 million.

Carcinotech, an Edinburgh-based 3D printed micro-tumour specialist, became the first business to receive equity investment from the Investment Fund for Scotland in January, as part of a £4.2 million round that will see it expand into the USA. We are looking forward to announcing more financial support for exciting and innovative firms in the near future.

Scotland is a nation of entrepreneurs and innovators and we know that access to finance is one of the main challenges they face. There have been countless examples in recent years of successful spin-outs and early-stage businesses, underlining the pent-up potential within the economy. With this new fund, we hope to open the doors for more firms like Carcinotech to new opportunities, boosting productivity, innovation, and employment across the whole of the country.