The steep cliff facing funding for SMEs


Have any of you tried to borrow money for your business recently? I have, and, for me at least, it was literally impossible!

I’d had a close look at my projected cash-flow for 2015, and even with very conservative assumptions for revenue, and even allowing for a small amount of potential EIS investment over the course of the year, there were a couple of holes in my cash-flow that I predicted would arise over the course of the year, so I thought it would be prudent to borrow some cash to smooth the ride. First stop, my bank! They had previously lent me some money when we opened the bank account back in 2012, totally unsecured, on a reasonable rate of interest, so I thought if there was more of that forthcoming, then that would be the no-brainer route. Not this time! “Well, yes, Mr. Walsh, I appreciate your assumptions are very conservative, and yes, I can see your revenues for last year were respectable, and your forecasts seem to be on target for this year, but let’s see how it goes for 6 months, and then we can take another look.” “I need it now, you numbskull, not in 6 months, and anyway by then, I probably will not need it at all”. “I know”, I thought, “how about I offer a personal guarantee? I’ve got plenty of equity in my house, and plenty of assets in my pensions, which I’ll now be able to now take out in 3 years time (I’m 52-ish), so I’m a sure thing, security-wise?” “No, Mr. Walsh, come back in six months and let’s have another look”.

Now, our business is a mixture of subscriptions for our online service, and success fees for our offline activities, so I do not issue invoices until the success fees are imminent, and given they are notoriously unpredictable, factoring or invoice financing was not a route either. “I know”, I thought, “the banks are useless anyway, how about those nice people in the online peer-to-peer lending industry?”. The nasty banks are now given to referring businesses they turn away for loans to peer-to-peer lenders anyway, so this should be a doddle! EH-ER (think the sound of the buzzer on Family Fortunes, when you get a question wrong), no joy there either. In order to be “considered”, not even guaranteed a listing, I would have to show two full years of trading accounts. Well, in our first financial year, we filed dormant accounts, as we were in tech build mode, and the success fees were yet to hit pay-dirt, but we filed respectable full year accounts for 2013-2014, but we’re not due to even create a second year of trading accounts till after July 2015.

I don’t know if we are a typical start-up, but I suspect there a few out there who will empathise with the above, which basically means we will not qualify for consideration on a peer-to-peer lending site until we are into our fourth year of existence. I can understand the peer-to-peer reluctance. They are a fledgling industry themselves, and they cannot even risk being besmirched by bad loans at this stage of their development, so in reality, although they are tech disrupters of the financial services industry, they still have a low tolerance to risk. As a side note, this feels like good news for savers, particularly in a deflationary environment, to seek out the decent yields the peer-to-peer lenders offer as a rich alternative to the paltry rates the ‘normal’ banks offer. (But don’t sue me, I’m not a financial adviser)

Now I’ve got the bit between my teeth, I am on a crusade to find out how hard is it for SMEs to raise loan finance from ANY route. So I tried and filtered the 631 different results to see if we were eligible for loans from any of the listed providers. The closest I came was something called the Fredericks Foundation which purports to offer “loans for start-up and existing businesses in south England that have been turned down for mainstream funding.” Yeah, sure they do! I got an anonymous email address declining my request, with absolutely no explanation as to why.

So, dear reader, I have tried, and I must either be a dreadful risk, or actually lending to less than “four years old, revenue generating, but admittedly cash burning, 5 person companies”, is actually not available. This is quite alarming, because in the last 2 years, 1,100,000 new companies have been registered at Companies House in the U.K. Given almost all of them are not yet in a position to file 2 full years trading accounts, the unprofitable or cash burning ones may not yet have access to bank or peer-to-peer loans, so they will predominantly have to seek equity finance. Given that eligible companies qualify for the Seed Enterprise Investment Scheme, if all 1,100,000 were eligible, and were to seek the maximum £150,000 allowable under SEIS, that’s an addressable market of £165bn! £165bn to be found from private investors (i.e. angels). Gulp!

Crowdcube, which is the largest crowd funding site in the U.K. raised £35m for small companies in 2014, which is impressive stuff, but it doesnt take a genius to see an extraordinarily large gap between the appetite of the crowd, and the financial needs of the entrepreneurial wave sweeping the country. Even adding in the figures from the British Venture Capital Association, their members poured £1.1bn into 600 venture and growth capital companies in 2013 (I haven’t been able to lay my hands yet on their stats for 2014), so we’re still talking about an overwhelming funding cliff hoving into view. In last Thursday’s City AM (19th February), there is an excellent interview with Ayan Mitra, Founder of Crowdbnk, where he quotes The Breedon Report from March 2012, which estimates the funding gap faced by small businesses “could be between £84bn and £191bn within 5 years (2017)”.

My fear, given the dearth of bank lending, the tight risk appetite of the emerging peer-to-peer lending industry, and the relatively modest amounts of angel and VC money being invested into the U.K.’s SMEs, is that the surge of entrepreneurialism experienced over the last 5 years could easily get snuffed out, just when its getting going, which would be a crying shame, as it’s so inspiring to meet so many young entrepreneurs every day in our business “giving it a go” at being the next Branson, Dyson or Dunstone.



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