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ALTERNATIVE FINANCE
December 2013 | business-reporter.co.uk
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Avril Lavigne
Spike Lee
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Business Reporter · December 2013
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an independent report from lyonsdown, distributed with the sunday telegraph
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Opening shots René Carayol The Royal Bank of Scotland has been the subject of recent lurid headlines claiming it found it more beneficial to “kill off small to medium enterprises (SMEs) rather than continue to lend them much-needed capital”. For many, this begins to endorse the argument that SMEs should no longer be entirely reliant on banks as their major source of finance. At a time when the regulators are “beating up” the high street banks to have much larger capital reserves to ensure we do not have a repeat of the credit crunch, the banks consequently feel it is very difficult to find the capacity to lend while bulking up their balance sheets. Some SMEs say the banks are not as relevant as they once were. The SME sector’s demand for credit has fallen in recent years. During the first quarter of 2013, 61 per cent used no external finance. Less than a third used any form of finance from a bank. Only 4 per cent of the sector actually applied for any bank finance at all in the year to March. It is also noteworthy that the SME sector currently “lends” more money to the banks than they actually borrow. The government’s recent move to refocus bank subsidies on credit to companies in order to help spur lending has been well received but, in recent years, the top short-term credit providers to SMEs were not the banks, but their own suppliers! Whatever the real truth is, it is time to take a different look at funding for SMEs. In October lending to SMEs by banks fell by £383million, net of repayments, and figures show that £1.1billion was advanced to the big firms. We have seen for the first time in a generation a number of new retail banks with a focus on disrupting and changing the game enter the market - Metro Bank and Virgin Money to name but two - and if I’d written this a few weeks ago
In a dynamic, competitive environment, everyone benefits – including the banks I would have added the Co-operative Bank, along with a number of mutuals but, as has been well documented, this is also a tough old sector to be reliant on at the moment. A number of fast-moving and agile crowdfunding outfits have joined the fray. Crowdfunding is compellingly straightforward: investors can simply browse a selection of businesses seeking cash on a website. This approach raised more than £1billion for SMEs last year, totally independent of the banks. Even payday lender Wonga has started a short-term lending facility to businesses, with peerto-peer business lenders also gathering pace. Therefore, realistic championing of challenger banks, encouraging insurance companies and pension funds to enter this space, treating peer-to-peer and crowdfunding more sympathetically, and even welcoming private equity investment and invigorating the return of venture capital funds must be the way forward. Progressive initiatives like the Enterprise
Investment Scheme, the Seed Enterprise Investment Scheme and regional venture capital are all necessary to help stimulate the SME marketplace to prosper. We must always remember that 99.9 per cent of private-sector businesses are SMEs and that more than 70 per cent of our workforce are employed by SMEs. And if they don’t have the confidence to fund growth we will end up with the stuttering recovery we deserve. There is room and strong desire for new sources of funding, but we must remember that not all that is new is good, and that only a few of the traditional methods are bad. A dynamic, competitive environment is what’s needed. Everyone benefits – including the banks.
Business Reporter · December 2013
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Alt-finance to the rescue in a post-crash world
Emilie Holmes, who raised £14,000 through Kickstarter last year to fund her mobile tea bar business
FCA crowdfunding regulations cautiously welcomed by industry By Dave Baxter Proposed regulations for crowdfunding and peer-to-peer lending platforms have mainly been welcomed by industry insiders. The Financial Conduct Authority (FCA) watchdog has been consulting on proposals to tighten up practice in both crowdfunding, where “campaigns” often receive many small donations, and peer-to-peer lending, where individuals or companies can lend each other money directly. The proposals focus on making deal conditions clear for those raising money and those either lending or investing, as well as making users aware of the financial risks involved. The FCA also makes a distinction between lending and investment, with restrictions on investors. It proposes that only high-net worth individuals or those who receive officially approved advice should be allowed to invest. Julia Groves, who chairs industry body the UK Crowdfunding Association, believes regulation could give a growing sector greater legitimacy.
She says: “I think people want the reassurance that somebody external is keeping their eye on the industry and making sure it’s going to do what it’s going to do. “Investors want to know what they are dealing with, and that it’s not just someone with a PowerPoint in Shoreditch.” But she also fears the FCA may have made a mistake in including peer-to-peer lending under the term “crowdfunding”, and in splitting the regulations into two simplified tiers based on risk. “I understand the attachment to the peer-to-peer name, because they have been around far longer than the crowdfunding industry,” she says. “They operate in the space which is in the lower-risk end of the spectrum. “We are also worried about a one-sizefits-all solution. The FCA has put two tiers of regulation in, for loan-based c rowd f u nd i ng a nd e qu it y-ba se d crowdfunding. “We agree with the decision to have two levels of regulation. The FCA recognises loan activity is lower risk than equity, but the idea of splitting it up as peer-to-peer
lending versus crowdfunding, or as lower versus higher risk, is wrong.” Christine Farnish, who chairs the Peerto-Peer Finance Association, says: “We are pleased that the FCA is consulting on the regulations. We have been lobbying for regulations for some time, because this is a new sector that not so many consumers have heard about. “We think people doing business here should have confidence that what we are doing is reputable. “We do t hink t hey need to be making sure that people doing business are doing it properly, because it only takes one bad apple to taint the barrel. It’s quite important that consumer confidence is allowed to build.” Farnish also says that though she understands peer-to-peer lending and crowdfunding being grouped together, it may cause problems. “Peer-to-peer hasn’t been called crowdfunding by anyone else,” she says. “You suppose to the FCA it’s quite comfortable to tidy it all up. But peer-to-peer lending is different to crowdfunding, and actually worth more as an industry.”
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Nothing beats good people, good products and a smattering of luck to help a business on its way to profit. But without cash flow, none of this equals success. For firms, much of this comes down to some form of financing, whether to expand or simply to keep going in difficult times. Having the money to keep going, or to fund that essential expansion, can be the difference between failure and success. Recent years have been difficult. Money has been short, consumers have tightened their belts and caution has set back trade. In the banking sector, where much of the blame for the financial crisis has been directed, the situation has been equally dire. Wary of easy credit and weighed down by regulations on capital requirements, many banks have been unable or unwilling to lend to businesses. This has an upside. In the absence of bank loans, other forms of finance have flourished. This could
mean borrowing linked to invoices, peer-to-peer lending or even appealing to Kickstarter for funds. If each option only suits certain needs, there are plenty of alternatives to choose from. But Mike Cherry (below), policy chairman at campaign group the Federation of Small Businesses, says firms are still not meeting their financing needs, often because of a lack of awareness. “Many of our members can’t or don’t get the access to the finance they need,” he says. “We are amazed with the alternative finance coming out. There’s a lot of stuff going on. “But the problem is we still need to make businesses aware that high street banks are risk-averse and to go looking for the alternative. We also need banks to make their customers aware of what they need to be asking for. The banks should be quite open and honest. The problem is, making businesses aware about this is a drip-drip process.” The finance for companies is there. But they do need to look for it.
Business Reporter · December 2013
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ExpertInsight
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Europe’s middle market looks outside traditional bank relationships for funds New types of funding need an independent benchmark INDUSTRY VIEW
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sea change is underway in European credit markets. Mid-market companies – which we define as companies with revenues between €100 million and €1.5 billion – need to diversify their funding sources as new capital adequacy requirements lead banks to deleverage. As such, many are turning to debt issuance for the first time. Meanwhile investors in search for yields show strong appetite for exposure to this emerging asset class. But, despite their corresponding ambitions, willing parties have yet to create an efficient, pan-European funding market for mid-market companies. This is because of a number of obstacles. For a start, expanding outside of a long-term banking relationship can require a significant cultural shift for potential issuers – not least due to greater disclosure requirements. And, in many cases, companies find the interest rates demanded by institutional investors still too expensive. For investors, we believe that better access to timely financial information could go some way toward helping them to invest more funds into this new asset class. The need for such time-intensive analysis provides a compelling case for third parties with expertise in credit risk analysis – such as Standard & Poor’s Ratings Services
– to provide investors with independent, timely research into the creditworthiness of mid-market companies. Indeed, this kind of research will be ever more important as private placements and direct lending from non-traditional sources continue to increase in Europe against a backdrop of bank deleveraging. Launched in June, Standard & Poor’s Mid-Market Evaluation (MME) is an assessment of mid-sized companies’ creditworthiness represented on a scale from MM1 (highest) to MM8 (lowest), with a higher evaluation indicating that, in Standard & Poor’s view, a mid-market company has a higher capacity to meet its financial commitments. MME leverages on Standard & Poor’s strong expertise with more than 5,600 corporates analysed globally and 30 years of robust corporate ratings’ performance. When assigned to a specific debt instrument, MME also incorporates a consideration of the expected recovery level reflected by the symbol “+” or “-”. Unlike credit ratings, MMEs are only shared with a limited number of third parties, selected by the company, and are not distributed to the public. While progress is needed across the board to create an efficient funding market for mid-market companies, Standard & Poor’s MME is designed to help investors better navigate the complex and opaque marketplace while providing intermediaries with an independent benchmark and facilitating companies’ access to alternative sources of funding. 020 7176 7068 www.standardandpoors.com/ midmarket
Business Reporter · December 2013
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Crowdfunding: finance for everyone, not just the indie kids… By Dave Baxter
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iewers may have been taken in by a recent MTV clip in which film star Daniel Radcliffe requested funds to create Snowy River, a film he hoped would be given “authenticity” through its many sex scenes. For some fans, this may have seemed like a dramatic farewell to the innocent days of Harry Potter. But from Radcliffe, a man who has already enjoyed a highly lucrative acting career, this was in reality a parody campaign lampooning wealthy celebrities, after a number of big names from the arts took to crowdfunding their projects. In recent years, life has changed dramatically for the starving artist. Rather than wait to be discovered by a publisher or record label, the budding directors, musicians and writers of tomorrow are turning to strangers to finance their ambitions. Crowdfunding platforms such as Kickstarter are being used to fund creative works as well as other projects, from social ventures to technology start-ups. People can give small amounts of money to back projects. In some cases, this promises set perks or returns. In other cases, people will finance ventures out of good will, or to back a cause. It is a funding model that has been praised for bringing fans in on projects and helping artists create new work without stifling corporate pressure to produce a blockbuster, a musical hit or a bestselling novel. And it has duly attracted a number of big names from Hollywood and other industries, including action star Sylvester Stallone, the outspoken director Spike Lee, and Zach Braff, who starred in the comedy hit Scrubs. In the world of music, Avril Lavigne used her 29th birthday this year to launch a Prizeo campaign raising money to support children with serious illnesses or disabilities. In return, she entered donors into a draw to join her at an album release party. But celebrities have been attacked for eating up the attention and donations which could go to independent artists who lack the same level of backing, connections and personal wealth. But while some worry about the future of independent ventures, others believe small artists have no need to fear the influx of celebrities. John Trigonis, a film-maker and campaign specialist for the platform Indiegogo, says: “Crowdfunding was invented to give the power back to the people, to have a say in the kinds of movies and other content that gets created. For a while, this was limited to independent artists like myself. Now everyone’s doing it, and that’s how it should be. “Most indie film-makers for some reason feel threatened by all the celebrities ‘saturating’ the crowdfunding pool, when in reality they should feel even more empowered to succeed, because independent artists have a lot more to offer. “A celebrity has a name, but indie film makers are
Above: Avril Lavigne’s 29th birthday was the venue for a Prizeo charity fundraiser; Below: Kickstarter’s film program director Elizabeth Holm
often more authentically driven. Celebrities have access to PR, while indies are more grassroots and not afraid to dive in, roll up their sleeves and do the work necessary to run a great campaign.” He adds that while celebrities should not be discouraged from using alternative forms of finance,
“Celebrities should be entitled to use crowdfunding, since it’s truly a democratisation of fund raising” – John Trigonis, Indiegogo their success shows the importance of building up a profile on social media and within online communities when trying to attract donations. “The quick answer to whether or not celebrities should use crowdfunding at all is simple: yes,” he says. “They are entitled to, since crowdfunding is truly a democratisation of fundraising, and a democracy is rule by the people. “In this case, it’s funding by the crowd, and if the crowd wants to fund James Franco’s next arthouse cinematic experience, so be it. “But we have to do our part, and that part is simple too. Indie creators need to learn to build their own brands, much in the way celebrities have already done, because at the end of the day celebrities are no different than we are. Crowdfunding, by its very nature, gives power not
to the campaigners but to the crowd, to fund the projects that they themselves want to see get made.” Others from the crowdfunding world have come to the defence of celebrities and their fundraising moves. After director Spike Lee was lambasted for using Kickstarter in the summer, the platform defended his involvement, claiming it brought tangible benefits. “Spike Lee brought three decades of fans to Kickstarter when he launched his project,” reads a post from the platform’s official blog. “He introduced many of them to this new way of funding creative works, and to the thousands of other projects that are funding on Kickstarter. Of Spike’s backers, 47 per cent had never backed a Kickstarter project before. “Almost five million people have backed a project on Kickstarter, and more than a million have backed two or more projects. These repeat backers are responsible for 59 per cent of the total money pledged to Kickstarter projects – a whopping $444million. “Future creators will benefit from more and more people using Kickstarter.” As celebrities continue to use crowdfunding, it could deter donors who want to back up-and-coming artists rather than established names. But as Kickstarter has shown, celebrities may be bringing in more people willing to back projects, including those from independents. Small films, albums and other projects are likely to benefit – Radcliffe’s pretend film may have to wait a little longer, though…
USE YOUR CURRENT OR FROZEN PENSION TO INVEST IN YOUR BUSINESS Craig Parrington, director at Pension Services Online, tells us why, if you have a business and a private pension, you should have a SSAS… The option to avail a SSAS product has been available since 1971, so why aren’t you aware of this? Two reasons: firstly, because the companies that are offering this charge extortionate fees - up to as much as £10,000 on a £100,000 pension fund; secondly, its not in your current providers interests to move you into a SSAS. Why, you ask? Firstly, your current provider will be charging you an annual management fee of circa 1-2% to manage your fund. Having a SSAS would enable to the member to access up to 50% of the fund for business use - so that would mean companies, like Aviva, who have circa £240 billion under management, risking £120 billion from their pot - money that they wouldn’t be receiving annual fees on. Recently in the news there has been reports on annuity rates, which have outlined further reasons why most IFA’s will defer from
Tel: +44 (0) 203 059 7951
explaining your full options in your retirement years. With a SSAS pension, you are in control of your money, therefore should you wish to not purchase an annuity, on which the IFA would receive an extortionate fee for advising (in some cases up to 6% of the fund value) you are able to drawdown your money yourself. Current annuity rates are currently at circa 5%, which means that on £100,000, you’ll see a lifetime income of circa £5,000 per year. Sometimes we have seen them as low as 3%! So, you would have to live for a minimum of 20 years in order for you to reach the full potential of your pension value, which sounds ridiculous doesn’t it? We promote income drawdown, keeping your principle intact and simply drawing from the interest your fund is making.
current market, therefore doubling their income in retirement. The idea is that you are only ever drawing from the interest your fund makes, whilst keeping the principle value in tact for your loved ones when you pass away, rather than giving it to an insurance company and writing it off for a fixed income. You must understand these insurance firms work like a bookmaker, as nobody gives you a fixed income for life to pay you back more than what you initially give them - it has to be stacked in their favor for them to have a viable business. A recent survey showed on an average £100,000 pension used to buy an annuity, the insurance company would make £25,000 over the course of the 20 years they had to supply the member with an income.
Our clients have managed to see returns of double the current annuity rates in the
What we are trying to do is to enable people to use their current or frozen pension,
www.pensionservicesonline.com
to start life again, to invest into their business, or simply to make their money work harder for them. In a market where cash is king and where the banks wont lend (and even when they do, it will be at an interest rate of circa 15% to a new business) this could be the difference between you starting that business you’ve always dreamed of or even your current business staying afloat. I challenge anybody that owns a business to tell me that they cannot get a better return from cash in their business, as opposed to the return an insurance company could offer. Quite frankly if that is the case, you shouldn’t be in business. We would be more than happy to offer a consultation to avail of all the options available to you within a SSAS product.
info@pensionservicesonline.com
Business Reporter · December 2013
an independent report from lyonsdown, distributed with the sunday telegraph
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Alternative finance
Online marketplace puts start-ups in touch with angels An online marketplace for business angels hopes to close deals faster by sharing information between its members. JustInvesting, a site which moves the investment process online, has launched the Angel Deal Sharing Platform, which will allow users to interact and share information on partly completed investment deals. The platform, which is open to members of the UK Business Angels Association (UKBAA), a trade body, aims to encourage investors to come in on incomplete deals and allow them to close faster. In a statement,
UKBAA boss Jenny Tooth said: “This will support better connectivity for the community and improve the potential to bring quality investors on board to effectively close angel deals.” Angel activity, where wealthy individuals invest in companies often in their early stages, is being encouraged in other ways. The Seed Enterprise Investment Scheme (SEIS), which launched in 2012, aims to create a more attractive environment for angels by giving significant tax breaks for investments in early-stage companies.
It offers 50 per cent income tax relief on up to £100,000 in total investments for a tax year. But these investments must be in small companies which are not more than two years old and have no more than £200,000 in assets. The company must trade in an approved sector, such as property. Those working in finance or investment tend to be excluded from the scheme. Angel investment is being encouraged elsewhere in the world. In Mumbai, the Indian Angel Network recently announced
a competition connecting start-ups and young firms with investors. The Cross-Border Business Plan Competition covers both India and Pakistan. Companies must submit their plans, and the best five will be able to pitch to a panel of Indian and Pakistani investors. Around the world, business angels could be the answer for young companies needing capital. Providing them with the confidence to invest, and putting them in touch with the right companies, may be the issue.
Challenger banks to offer 95 per cent mortgages By Dave Baxter Two of the new so-called “challenger” ba n k s w i l l of fe r 95 p e r c e nt mortgages as part of the second phase of the government’s Help to Buy scheme in what comes as a boost to the sector. The second phase of the scheme covers home loans of less than £600,000 a nd i nvolve s t he gove r n me nt promising to compensate lenders for their losses if a property is repossessed and its value falls. Large banks including Royal Bank of Scotland and Lloyds are already committed to the scheme. But, as Chancellor George Osborne announced in his autumn statement in early December, Aldermore Bank and Virgin Money are also joining up. Aldermore was set to begin selling the Help to Buy products on December 16, with Virgin Money expected to follow suit later on. The move is part of the ongoing rise of the “challenger” banks. These s m a l le r, r e c e nt l y e s t abl i s h e d organisations have been attempting to take on the traditional lenders using a combination of good customer service and clever marketing. Some are growing aggressively in the hope of taking on the big banks. Aldermore Bank is just four years old, but wants to massively expand its balance sheet each year to increase its market share. Metro Bank has only existed since 2010 but is in a phase of rapid expansion. In summer the bank announced it had created more than 1,000 jobs since its launch. Over 2013 alone, it claims it has grown its store footprint by 60 per cent. Metro has also lost more than £100million since its launch, but hopes to overcome these losses and move into profit. It recently began a fundraising drive, with investors expected to put around £385million into the business. Other challenger banks could
Metro Bank is one of a number of “challenger” banks to emerge from the financial crisis
emerge. A manager at the Financial Conduct Authority (FCA) recently revealed the watchdog was holding talks with 21 different groups seeking to launch new banks. T h is may be good news for consumers. As the banking industry broadens out, consumers will have greater choice. And if competition increases, banks may start offering better conditions in order to entice or retain customers. But the effect of challenger banks on the large incumbents is still unknown. Banks such as Aldermore and Metro are popular and looking to grow, but without even more expansion a small number of branches and limited customer access may put people off.
SME concern over festive cash flow A lack of available funding means most businesses will worry about cash flow this Christmas, according to recent research. In a survey of 1,100 British SMEs and intermediaries, 89 per cent said their main worry was working out how to grow in 2014. But the second-biggest concern, mentioned by 70 per cent of respondents, was the issue of cash flow shortages over the Christmas period. At the same time, 56 per cent of those surveyed said they would be worried about how to get enough cash flow to finance their operations for the coming year. The research has been commissioned by
Platform Black, an online auction system which helps with invoice financing. Hugh Barker, CEO of icomply, a firm which provides CCTV and security software, says his company would have not survived if it hadn’t used alternative sources of finance. “We have been trading since 2007 and have a good customer base with local authorities and large corporates,” he says. “We have also now expanded in multiple overseas jurisdictions. There was no meaningful help available from the government to assist us in doing this. “The retail banks were unable to help as they couldn’t understand our technology and weren’t prepared to take any risk. “If it wasn’t for alternative finance providers, we’d be dead in the water.”
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Keeping up with the in-crowd INDUSTRY VIEW Do you want more control over how your money is invested? Do you trust a bank to reflect your personal values in how it manages and invests your money? Or are you a business frustrated that traditional lenders have either shut up shop or can only say yes with excessive strings attached? Crowdfunding is a simple, scaleable solution for a range of UK businesses, organisations and projects to raise money direct from the public to fund a film, a book, a new enterprise or technology – even a full-blown wind turbine. The UK Crowdfunding Association represents 33 platforms across the crowdfunding spectrum; donation, reward, debt (via loans and bonds) and equity, from Just Giving’s Yimby, Indiegogo, Crowdfunder, Buzzbnk, Sponsorcraft, Trillion Fund and Abundance Generation to Crowdcube, Seedrs, Angel’s Den and Syndicate Room. Our uniting objective is to promote crowdfunding as a viable way for UK projects, businesses and ventures to raise money. We want to keep the “crowd” in crowdfunding, recognising that wealth is not a skillset. People can understand the risks of investing in real things. Where they can understand the risks, they shouldn’t be restricted from contributing; certainly not based on how much they own or earn. The UK public has already crowdfunded £2.5billion, money which has gone directly into projects and ventures to get them off the ground with the backing of the crowd.
Visit www.ukcfa.org.uk to sign up to our newsletter or follow us on Twitter at @UKCrowdfunding to find out more info@ukcfa.org.uk
Business Reporter · December 2013
an independent report from lyonsdown, distributed with the sunday telegraph
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Is state funding the alternative alternative finance?
By Dave Baxter
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“long-term structural failure” in British finance is preventing the UK from competing on the inter nat iona l stage, according to the head of an influential business network. With capital still hard to come by, the government is trying to reinvigorate business lending in the wake of the financial crisis through a number of initiatives. It has lent to firms through peer-topeer marketplace Funding Circle, tried to incentivise bank finance using the Funding for Lending scheme, and launched the Business Growth Fund, which aims to provide profitable small and medium firms with long-term capital. It is also developing the British Business Bank to support small companies struggling to borrow from traditional lenders. But John Longworth, director general at the British Chambers of Commerce, claims that a lack of long-term, government-backed capital for cash-strapped medium firms means they are failing to develop into global brands. “In the UK we have a well-developed
private equity and enterprise capital market which has a role which is very important. We also have angel investors who are increasingly patient,” he says. “But we do have a long-term failure, which is the reason why we don’t develop mediumsized businesses. It’s why we don’t have a Samsung like Korea has. “If we look as far back as 1870, investment in UK business has been underperforming. Later on, from 1950 to 1979, the UK was
“I’m concerned it’s a theological issue in the Treasury that they won’t touch anything with any association with the state” – John Longworth, BCC doing fine but everyone else was doing better. “During that period, countries like Germany set up business banks, like [German development bank] KFW. It happened in South Korea, and in the USA. But Britain doesn’t have one. It did have one in the 1950s, but that morphed into [investment company] 3i.” Longworth believes that because of a historic lack of long-term, governmentbacked capital, promising medium firms
are either failing to reach their full potential or being eaten up by foreign entities once they become successful. “I’m talking about the need for access to long-term, patient capital and working capital to fill orders or for companies that are relatively new and probably fast-growing,” he says. “That’s the gap, and it’s existed for a very long time. “There’s no evidence that anything the government has done so far has filled that gap. But if we don’t want companies to get eaten up by South Korea five years on, we need to do that.” Longworth says the government-backed Business Bank needs to have a direct link to businesses and keep lending going in times of crisis. “I think that Business Bank is a bit of a shame,” he says. “We need a bank which has a direct relationship to businesses. There are ways that could be created, but it will take time. “We need to be ready for when the next recession comes.” He claims that British governments need to be more proactive – but there is a crippling stigma around market intervention. He says: “I’m concerned it’s a theological issue in the Treasury that they won’t touch anything that has any association with the state. “My view is that the state shouldn’t intervene ever, unless there is market failure. If we went back 20 years, I would be even
Government incentives for SMEs need to be more accessible, says the BCC’s John Longworth
more tooth and claw in favour of the free market. “But most of the competitor countries in the modern world are doing this. Singapore, South Korea and Hong Kong actually have an interventionist approach, and they are very successful economies. “And there has clearly been a market failure here, so it’s perfectly legitimate to do something about it.” Luke Johnson, chairman of private equity house Risk Capital Partners known for successfully growing restaurant chain Pizza Express from the 1990s, believes government schemes should be used to back early-stage ventures with big growth potential. He has been a staunch critic of the Business Growth Fund, which invests in profitable, small and medium-sized companies in return for capital, arguing that it has moved into a space already occupied by other investors. “W hat the government should have done [when launching the Business Growth Fund] was found deals for smaller firms – not investing £2million to £10million, but less than £1million,” he says. “There are many private equity and other investors that are occupying the space the Business Growth Fund has moved into. They should be focusing on early-stage capital. “But some of the other government schemes are promising. The Seed Enterprise Investment Scheme (which offers tax breaks for early-stage investors) is a very good scheme. The tax breaks are very attractive – that’s the sort of thing there could be more of.”
Business Reporter · December 2013
10
an independent report from lyonsdown, distributed with the sunday telegraph
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Scottish independent brewery BrewDog has gone from strength to strength in recent years, partly thanks to its innovative “Equity for Punks” finance model. Dave Baxter talks to co-founder James Watt
W
hen I ask James Watt if he ever toured pubs, making geeky notes about different ales, he roars with laughter but doesn’t quite deny it. “I didn’t take notes, but it was reasonably geeky,” he says. “I stopped taking notes. A good beer’s about context. It’s whatever you are doing, or what you are listening to at the time. “Sometimes I want the hoppy taste of an IPA. Sometimes I want a Belgian beer that’s so acidic that my face screws up.” It began with “a £20,000 bank loan, two humans and one dog” in 2007, followed by six months spent selling beer from the back of a van. Six long years later BrewDog, which Watt and partner Martin Dickie set up together, has a growing presence in the UK drinks industry. The Scottish brewer has made its name among punters and hipster beer aficionados across Britain, as well as trading blows with some major names, from Diageo to the Advertising Standards Authority, which took offence at some fruity language on BrewDog’s website. In this vein, the company has become known as much for its outlandish marketing stunts involving props, ranging from penguin costumes to tanks, as for its heavily flavoured, hoppy beer. And on a Monday evening, sitting in BrewDog’s trendy Shoreditch bar, Watt, the company’s “captain”, really comes into his own. It’s not long after we meet that he’s explaining, at length, why our current tipple, Dogma, is the right choice for the chilly autumn evening. Soon he’s getting evangelical about good beer and telling me, repeatedly, about the “faceless” corporates ruining British beer. It’s hard to tell whether it’s a polished PR line, an obsession, or both. “We set up in 2007, but we knew each other for 20 years,” Watt says. “Our hobby was making beers. We couldn’t find any beers we liked and spent time making beers in the garden. “We were frustrated by the UK beer back then. It was damaged by the faceless, monolithic companies. There was real ale,
Main image: James Watt (right) with cofounder Martin Dickie; Below: Watt sampling his wares at BrewDog’s facility near Aberdeen
but that was quite a narrow spectrum and quite conservative. We want to be making beers we want to drink ourselves.” BrewDog has an ambitious future mapped out, including new bars, equipment, foreign expansion and even a beer academy. But all this growth costs money, and with banks reluctant to lend, the company has been forced to seek an alternative source of funds. The Equity for Punks scheme, which first launched in 2009 and is now on its third round, gives people the opportunity to buy equity, with perks including product discounts and an invitation to the company’s Annual General Meeting (AGM). The scheme has financed much of the company’s expansion. But Watt says it stems from problems with traditional lenders more than anything else. “It was born out of frustration,” he says. “Our business is quite capital intensive. We need tanks and bottling machines and other equipment. “How can we expand? When we first used Equity for Punks in 2009, there was so much demand for our brands. How do you expand when the banks are refusing to lend? We were looking to borrow reasonable amounts of money but had no security and no track record of running a business.” For many entrepreneurs, going around the banks becomes a case of haggling with investors hungry for a chunk of the company. But BrewDog’s founders were unwilling to risk losing control of the business they had built. “We think the Equity for Punks model is better for a smaller business than venture finance or other investment,” Watt says. “We spoke to private equity and other investors but we didn’t like their conditions. “We wanted to be masters of our destiny, not puppets in a set. We thought, why not involve the beers we make with the people who enjoy them? “The AGM is an epic party. We do the legitimate things, but after that we have 10 hours of beer tastings, live music and awesome food. We have 2,500 people
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Curaçao, where a start-up stock exchange has been running since summer
The Caribbean start-up exchange that could give SMEs a boost
attending, which I think is more than most FTSE companies.” The process of ensuring the share issue met high transparency standards was almost cripplingly expensive, and turned into a make-or-break moment for the company. “I think a danger with crowd funding was a lack of regulation,” Watt says. “A lot of crowd funding schemes are still in a grey area. “We gambled our future on this work and spent £150,000 (on regulation). An audit costs about £35,000 and then there is a legal review of the documents (for the share issue). The burden should be lighter. “People investing in our company have the same protections and regulations as investing in a FTSE company. We think that’s powerful, that the statements have been verified.” The company’s third phase of funding aims to raise £4million. But Watt believes that, beyond commercial success, BrewDog’s mission is to put pressure on the bigger companies who have “bastardised” his favourite beverage. He says: “The UK has got a really good beer scene, but it’s not that dynamic. It has got a heritage tradition, but they haven’t felt brave enough to push the boundaries. It’s very conservative and a tight spectrum. “Beer has been bastardised by the big companies for far too long. They have turned it into a lowest common denominator. We want to elevate the status of beer. “If you look at the guys advertising, it’s not about a beer. It feels like traditional advertising for beer companies is about how much you can spend. They’re not just selling beer any more. They are selling a lifestyle.” BrewDog has previously been criticised for releasing beers nearly as strong as some spirits, such as its 32 per cent ABV Tactical Nuclear Penguin. But Watt believes the UK’s attitude to the drink, and to alcohol in general, is the bigger issue. “With us, it’s about educating and informing,” he says. “The more you appreciate something, the more you respect it. “The UK has a horrible relationship with alcohol. We want to elevate the status of our favourite drink and have people drinking better, responsibly, and not being such a toll on society. “You should drink beer because you like it – not because you hate your job and want to get drunk.”
For well-known firms, it has always been a possibility: float your shares as a way to raise capital without losing control of the business. It’s an option that can neatly avoid the risk of giving up too much power to a handful of investors, while raising large sums of money for a business hungry for expansion. Recently, both Twitter and Royal Mail held popular, and successful, Initial Public Offerings (IPOs). Going public may be back in fashion. But because stock exchange investors expect reliable earnings and a certain resilience to changes in market conditions, this has long been an unattainable dream for smaller firms without a proven track record or a set roadmap for the future. That may be changing. As investors warm to newer, less conventional methods of financing, the idea of floating shares in business minnows has begun to gather momentum. In Germany, rumours abound of government and industry plans to set up a stock exchange floating the shares of new firms, possibly by the middle of 2014. And on the Caribbean island of Curaçao, a start-up stock exchange has been running since summer, inspired by the frustrations of its co-founder Ian Haet as an entrepreneur seeking investors. Like FTSE or AIM, it has a group of investors who can choose to buy or sell shares floated on the exchange. Haet (inset), one of the founders of The Startup Stock Exchange, which has hosted two IPOs so far, says he wants to help meet the needs of smaller companies outside the better-known start-up hubs. “There’s a tremendous gap in the funding of smaller businesses,” he says. “That’s especially true outside the area of Silicon Valley or New York. “We built a system for smaller businesses worth between $100,000 and $5million. If you are looking for investment, that’s a full-time job. You have to build up a network of
people and go through a tiring process of meetings. And on the other side, you are trying to run your business. “Often, the investor knows they have you somewhat under their control, because you are desperate for that money, and you can’t really set terms more specific to your needs.” Haet says that while the companies floating on the exchange are young, they are beyond the earliest, embryonic stages of business, such as being in business incubator programmes or the threadbare times when some founders rely on friends and family for support. “We would say that we are post-accelerator, postincubator and post-friends and family,” Haet says. “We want to be at that stage when you have built a product and got a bit of traction.” Like other exchanges, it requires companies wanting to float shares to undergo due diligence checks and make reports on their progress to investors. And Haet is not set against the world of more mainstream finance. He believes successful companies could eventually move to bigger, high-profile exchanges. “People have to understand we are focusing on start-ups. This is somewhat like crowdfunding, but with the regulation and the controls.” Boot Camp Foods, which makes a nutritional shake aimed at stemming hunger to help people lose weight, plans to become the first UK firm to float on the exchange, in 2014. David Cox, one of the founders, says: “Crowdfunding appeals to me, and this is quite similar. There has been a lot of opportunity for wealthy individuals to invest in a profitable start-up, but there’s also a big opportunity for people to come in at lower levels. It also brings a level of disclosure because it’s publicly traded.” Like the firms they service, start-up stock exchanges are in their early stages. But the miniFTSE could be here to stay.
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Alternative finance – Industry view
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Better capital builds better businesses
Access GE: smart financing
The GE Capital Access GE programme aims to turn the traditional business-lending model on its head. Through access to GE’s broader industrial experience and expertise, the programme provides practical advice, insight and guidance in order to help businesses solve challenges and grow. The initiative focuses on four areas: leadership development, operational effectiveness, finance best practice, and growth and innovation. Businesses have complimentary access to a range of services, from one-on-one strategy sessions with GE experts to practical workshops, events and an online information portal. Popular elements of the programme include:
GE Capital brings insight, knowledge and expertise to all its customers
A
t GE Capital we provide smart financing. We are a leading provider of specialised finance with a clear focus on SMEs and midmarket businesses. Here in the UK we’ve helped fund and build businesses over the last 40 years. Annually, we supply more than £10billion in working capital to more than 40,000 UK businesses. Where a business is in its life cycle will play a key part in which solution is most suited. Financing for working capital can be very different to that for growth. And, with such a wide range of financing available, a key challenge facing businesses is an understanding of what the right financing solution is to fit their current needs. As the green shoots of confidence emerge, ambitious businesses are looking for ways to grow. For many senior managers, this means funding. But with
some lenders still risk-averse, bosses are looking beyond standard-term loans from high-street players. Smart financing options such as invoice finance and asset-based lending are growing in popularity because they offer a flexible, reliable and tailored solution. Asset-based lending is a business loan secured by assets. The line of credit is secured against inventory, accounts receivable or other balance-sheet assets. It can be used to fund mergers and acquisitions, turnarounds or to refinance. The alternative finance decision tree that we have developed in conjunction with the CBI, below, can help you decide which option is right for you and your business. In the UK our proprietary research* found that invoice financing – loans secured against issued invoices – is big business,
Below: GE Capital CEO Ilaria del Beato
• Gaining practical insight on exploring new markets • G uidance on how to implement an effective succession planning strategy • How to increase productivity via lean strategies • Guidance on managing energy costs and hedging strategies • Adopting GE leadership development best practice to build a winning culture As part of GE, which makes everything from airplanes to light bulbs, GE Capital is in the unique position of being a business lender with access to more than 130 years of industrial heritage and more than 1,000 registered experts on matters from HR to sourcing to manufacturing. Working closely with mid-market businesses, GE Capital has seen increasing demand for finance and a push for growth it is well positioned to facilitate. However, research has highlighted access to finance is not the only challenge facing businesses. Through Access GE, customers can benefit from more than money – practical help to solve real business problems such as how to keep business costs down or hang onto talented employees.
alternative finance
decision tree Asset-based lending
Do you need working or growth capital? GROWTH CAPITAL To buy new equipment, to purchase new premises
WORKING CAPITAL To fund a contract or to pay a VAT bill
I need
growth capital
I need
working capital
self-issued retail bonds private placements
corporate venturing
retail bonds
peer-to-peer lending
Do you have security? i.e. equipment, building
Are you willing to use equity in your business to secure investment?
Do you deal in business to business sales?
Do you have security? i.e. equipment, building
Supply chain finance trade finance
Asset-based lending
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Case study: AFI Uplift Group
Access GE gives your business access to more than 130 years of industrial heritage with a potential to drive £17.7billion of growth and more than 750,000 jobs by 2020. Whether invoice financing or asset-based lending, GE Capital’s aim is to help business achieve short-term funding needs, such as improving cash flow or achieving growth targets, with greater flexibility and clarity than standard finance packages. There is also a wider requirement to continue helping UK businesses to identify and access opportunities overseas, particularly outside the EU, and provide a clear support framework
within which businesses can feel confident about obtaining organic growth. The onus for this extends to business advisers and finance providers such as ourselves, particularly those with the international knowledge and insights to offer their customers. At GE Capital we are focusing heavily on providing this level of expertise and value-added support to our customers in the UK, through our newly launched Access GE initiative. Thanks to our rich heritage of building and supporting growth,
we understand that there is a need to provide more than just financing. This is why we bring insight, knowledge and expertise to every one of our customers, helping them reach their individual goals. We know that better capital builds better businesses. 0870 8500315 businessfinance@ge.com * The ‘AR Factor’. The economic value of accounts receivable finance to Europe’s leading economies, October 2011
In May 2013, GE Capital provided a £50million ABL facility in support of Rutland Partners for its acquisition of AFI Uplift Group and the bolton acquisition of the Hi-Reach business. AFI is the second-largest powered access equipment rental business in the UK. Based in Wakefield, the new group employs around 400 people and owns a fleet of more than 5,500 units. Working with Rutland Private Equity and Deloitte (advisers to AFI), this was an opportunity in which Rutland required an early line of sight of financing deliverability, deal experience in the sector and jurisdictional presence in UK and the Middle East. The opportunity involved GE Capital structuring an ABL financing solution, alongside a new private equity investor for the acquisition of AFI and a smaller complementary business, Hi-Reach.
“The differentiators for GE Capital have been consistency of message, a willingness, without being prompted, to spend time with us to understand the deal and our perspective, and a real sense of engagement. The Middle East angle was also important as it could bring some extra flexibility that isn’t in the plan. The work the team put in building relationships has also helped,” explains Oliver Jones, partner, Rutland.
private equity peer-to-peer lending
business growth fund
public equity markets
corporate venturing
Would you benefit from investment coupled with advice and support?
peer-to-peer lending
Is your business at the start-up stage?
business angeL venture capital
CBI Ripe for the picking alternative finance guide 2013.
Business Reporter · December 2013
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Invoice finance: from alternative to mainstream INDUSTRY VIEW
D
espite the introduction of flagship schemes such as Funding for Lending, the Government and the Bank of England continue to struggle to stimulate bank lending to businesses. In an effort to address this issue, which lies at the heart of Government agenda, Funding for Lending was launched towards the end of 2012 offering banks loans at lower rates in return for lending to UK businesses and house buyers. However, since that time the scheme has failed to improve access to bank finance for SMEs. The latest figures from the BoE show business lending fell in October, retracting by £940million. The ICAEW – the body representing English and Welsh accountants – described the UK as the “fastest-growing Western economy”. With this in mind, many economists hoped bank lending would start to recover towards the end of 2013, but those predictions don’t appear to be forthcoming. It is for this reason that the Bank of England and Treasury have announced that they are to refocus the FLS on business lending, by scaling back the scheme in the mortgage market. The encouraging sign for the many businesses in the UK seeking an injection of working capital is that funding by alternative lenders, including invoice financiers, has grown significantly in 2013. The Asset Based Finance Association (ABFA), which represents the industry, revealed that in the third quarter of 2013 members advanced £17.4billion to businesses – an increase of six per cent on the same period in 2012. Furthermore, total sales from businesses supported by asset-based finance broke £71billion for Q3, the strongest-ever quarterly performance and evidence that alternative lenders are driving business and wider economic growth. More than 43,000 businesses now use forms of finance such as factoring and invoice discounting, 4,000 of which we support at Bibby Financial Services. Every day we process in excess of 15,000 invoices, providing upwards of £370million in vital funding to businesses each year. Clearly there is a marked contrast between alternative lenders and the high street banks in their attitude to business lending. Here at Bibby Financial Services we like to think we epitomise the flexible approach of an alternative funding provider, offering bespoke solutions to businesses operating across a wide range of industry sectors. Invoice finance supports cash flow at every stage in the business cycle, from startup through to mergers and acquisitions, and regardless of whether a business owner is looking to grow or simply stabilise their operation and operate more efficiently. Perceptions that invoice finance is used only to provide a short-term fix – or as a last resort – are unfounded. On average, our clients stay with us for three years, with the vast majority of them growing sustainably to the position where they no longer require funding. Even when funding is no longer a primary concern, many of them continue to use our support services, such as credit control management facilities or multilingual and multicurrency capabilities offered as part of our Export Finance proposition. Unlike a bank loan or overdraft, it provides a sustainable form of finance which grows in line with a business’s sales ledger and, as a result, it is increasingly being recognised as the first choice
funding option for many businesses. We have worked with many of our clients for more than a decade. Prime Staff, a UK recruitment firm based in Glasgow, this year celebrated its 20th anniversary and 13 of these have been spent working alongside the UK’s leading invoice finance provider. This relationship has been built on our ability to provide a specialist and tailored facility, and investing time in learning about the business and its people. Since partnering with Bibby Financial Services, Prime Staff has seen its annual turnover increase from £1.5million to more than £10million, and permanent staff numbers have gone from five to 24. In addition to providing funding to support cash flow, Bibby Financial Services worked alongside the company’s founder Danny McIntyre to help support the business during 2008, when the effects of the impending recession hit the company hard. The business has seen significant growth over the last decade and now deals with about 100 clients a week and about 700 to 900 temporary staff. The expertise and knowledge housed within Bibby Financial Services, built up over a long history of developing the best solutions to fit our ever-growing client base, means we are able to service SMEs across a wide range of sectors. From our specialist construction finance product, developed by industry professionals including quantity surveyors, to our recruitment finance facility which combines invoicing, funding, collections and a payroll solution, designed to ease the cash flow and time pressures that many UK recruitment agencies face, we have specialist products which support the individual needs of businesses. With the Government working towards doubling UK exports to £1trillion by 2020 and calling on SMEs to drive this effort, more firms are opening up to the prospect of trading internationally. Clearly there is an advantage to be had from joining the global market, but still the barriers to exporting prevent many businesses
from making the leap. Simply securing the necessary finance to underpin an export operation is a real challenge for a lot of businesses. However, a facility such as Export Finance boosts cash flow by providing an immediate injection of cash into the business, against the value of their outstanding invoices overseas. This provides both an immediate and ongoing supply of cash linked to sales, allowing the business to extended credit to their customers, where necessary. We will also help to provide clients with peace of mind by carrying out a stringent credit check on end buyers and also offering bad debt protection. Another concern for SMEs looking to trade overseas can be exchange rate fluctuations. If a UK exporter is being paid in a currency other than sterling, they need to be aware of the potential erosion of profit margins if the exchange rate works against them. Bibby Financial Services can offer some protection through operating currency bank accounts and Foreign Exchange services. We also have multilingual credit controllers who can provide the necessary language support to chase the debtors abroad and improve collections. The growth of invoice finance and the growth of businesses using this form of alternative funding is proof of its importance to the UK economy. Our latest quarterly Business Factors Index – which tracks the activity of our 4,000 clients – reveals increasing levels of activity and business confidence over the past 12 months, particularly in the construction and manufacturing sectors. Encouragingly, Bibby Financial Services and the wider asset-based finance sector is in a position to increase its funding support to businesses even further to help nurture economic recovery, which we have started to witness over the past two quarters of 2013. David Postings (left) is UK CEO, Bibby Financial Services 0800 91 95 92 www.bibbyfinancialservices.com
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Inspector Dogberry N
ew sources of finance are attracting publicity, but not all of this is positive. Payday lenders have come in for heavy scrutiny this year. The industry has been warned to clean up its act by the Office of Fair Trading and is being investigated by the Competition Commission.
Wonga, the largest payday loan company, has been criticised for using “cute and cuddly” pensioner puppets Betty, Joyce and Earl in adverts. Some payday lenders have also been attacked for advertising at children. But payday loan adverts are unlikely to go away, if research is anything to go by. A report by broadcast regulator Ofcom found the number of payday loan TV spots had reached 397,000 in 2012, compared with 243,000 for 2011 and just 17,000 back in 2008.
What’s in a name? Perhaps nothing. Some readers may view terms, descriptions and titles as an entirely trivial matter. The inspector would beg to differ. So, it seems, would many British entrepreneurs. Around half of the UK’s medium-sized businesses believe the term SME (Small to Medium Enterprise) is causing them difficulties by lumping them together with smaller firms, according to research released by the Bank of London and the Middle East. The research defined “medium” firms as those with a debt requirement between £1million and £25million, and comes at a time when SMEs still find it tough to get bank finance. Some of these would argue they have different requirements to minnow firms, and should be differently represented and perceived. Perhaps bigger is better. Has the plucky start-up finally gone out of fashion?
Ofcom calculates that each UK adult saw an average of 152 payday loan adverts on TV in 2012. From the Archbishop of Canterbury to the government, various parties are taking actions to tackle payday lending and protect potentially vulnerable consumers. But the industry is now valued at more than £2billion, and meeting clear demand. Without any real alternatives, it looks as if Betty, Joyce and Earl are here to stay.
The original crowdfund… Crowdfunding may not be the highest-value alternative finance industry but, thanks to its business potential, some quirky projects and a general community appeal, it has already seized countless column inches in coverage. With all this hype, people may be looking for the crowdfunding pioneers. Happily, Dogberry has found one of the industry’s original trailblazers: the Statue of Liberty. When, in the late 1800s, the statue was shipped from France to New York, fundraising efforts suddenly stalled. But an early form of crowdfunding saved the day,
Twitter: @dogberryTweets
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From manufacturing to healthcare technology, it never hurts a sector to have a few people banging its drum. With this in mind, alternative finance fans will be glad to hear about the crowdfunding and non-banking finance all-party parliamentary group, which formed in October. The group of various MPs aims to look at “new ways of funding community and social and private sector startups through the use of new financial systems” through Westminster debates. Group chairman Barry Sheerman MP acknowledged recent progress made by the industry, particularly on regulation, but added: “There remains a huge amount to be done to raise awareness and deliver a level playing field with mainstream banks.
after a newspaper campaign led to hundreds of small donations from residents. Since then, crowdfunding has financed all sorts of exciting ventures but, as far as examples go, New York’s most iconic lady is hard to beat.
By Matt Smith, web editor
u Editor’s pick Kickstarter Blog www.kickstarter.com/blog Probably the most famous crowdfunding platform, Kickstarter offers those looking for product funding a chance to raise money from internet users. Its blog offers an insight into the running of the website, along with profiles of highlight projects – from magazines to satellites – that have raised their funding this way.
Angels Den blog.angelsden.com Calling itself ‘the world’s first integrated angel and crowdfunding platform’, Angels Den has raised £16 million of investment from 6,000 investors. On its blog you can meet the team behind the project, keep up with their events, and read up on tips to deliver a business plan that investors will love.
M
any SMEs, having lived through the worst financial crisis in living memory, read with understandable cynicism the headlines telling us that banks are lending again. Indeed they are, but only to those with the cleanest of credits, supported in the main with property-backed personal guarantees with equity. What about the SME businesses that have survived the storm and want nothing other than to restore the business they once had? What will happen if they approach the bank for credit? It should surprise no one that the bank computer is likely to say “no”. It just wants and needs perfect credits on its balance sheets. Do these business people have an alternative? Many businesses are now turning to true independent asset-based lenders, lenders who adopt the old-fashioned concepts of talking to their customers and, more importantly, understand the true value of a SME’s balance sheet and related assets.
P2P Money Blog blog.p2pmoney.co.uk For updates on the latest peer-to-peer lending news and the organisations involved, take a look at the P2P Money Blog. Here you’ll find articles covering all aspects of this kind of funding, which recently reached a level of £50million lent each month.
Start Up Blog startupblog.wordpress.com
Crowdfunding Options (Free, Android)
Interested in crowdfunding but not sure where your options lie? Answer Crowdfunding Options’ questions and it will recommend the right route for you.
Funding & Fundraising Ideas (65p, Android)
This highly rated US app offers articles and tips to help you find funding for your new business or project – good for tips on how to do the same in the UK.
Battle-weary but not forgotten INDUSTRY VIEW
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Lending against these assets – debtors, plant and machinery and trade/stock transactions – rather than rejecting applications because of historical credit scores, which reflect the impact of the deepest recession for decades, is essential for SMEs. Many businesses have tens of thousands of pounds invested in plant and machinery which they could use as security to raise the funds they need. When is the government going to provide extra help to such alternative entrepreneurial funding institutions, who in their own way are SMEs, rather than dealing directly with the larger banking institutions who feel unable to help many SMEs? The banking system should be for the benefit of all providers of business finance, not the preserve of a few large institutions, thus enabling likeminded business people to work together. Paul Burke is managing director at Davenham Asset Finance www.davaf.co.uk paulburke@davenham.co.uk
Steve Sammartino’s Start Up blog covers all aspects of launching your own business, including the options available when seeking funding. If you look through the archives you’ll also find advice on elements of the funding process that you may not have considered – such as how best to pitch your idea to potential investors.
16 | Business Reporter · December 2013
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NEWS...VIEWS...INSIGHTS...OPINION...REPORTS...NEWS...VIEWS...INSIGHTS...OPINION...REPORTS...NEWS...VIEWS Video bonus
Alternative Finance vs Traditional Finance http://youtu.be/VAH1-VIpkkI BankToTheFuture.com takes a look at the differences between traditional finance and alternative finance platforms.
Alternative finance
Africa
Sberbank’s Moscow headquarters
Croatia
ExpertInsight
A state-controlled Russian bank wants to increase corporate lending in Croatia as the country struggles to get its economy going following the financial crisis. Sberbank launched its flagship branch in Zagreb earlier this year, and has been focusing both on retail and corporate clients. At the time of the launch, in January, the bank’s deputy chairman Sergey Gorkov said: “The
development of the operations in central and Eastern Europe is one of Sberbank’s main priorities. I hope that Russians set to spend their holidays in Croatia this summer will appreciate the opportunity to use the services of Sberbank.” The bank wants to extend lending in the country, particularly to corporates. The Croatian economy has failed to grow in five years, with problems including stubborn unemployment. But some, including the governor of Croatia’s central bank, expect it to grow next year.
Mountain gorillas in Uganda, Rwanda and the Democratic Republic of Congo could be pr ote c te d t h a n k s to a f u nd ra i si ng c a mpa ig n launched by Sir David Attenborough. The broadcaster and conservationist launched a crowdfunding charity campaign earlier this year, with the hope of raising £110,000 by December 11. Sir David wants to support work carried out by Fauna & Flora International to ensure the survival of the gorillas, who face “a lethal cocktail of threats”, including poaching and habitat loss. The cash would be spent on rations for overnight patrols, training and equipment for a volunteer protecting the animals, a pair of binoculars to monitor the gorillas, and a rainwater harvesting tank to keep them hydrated. A message from Sir David reads: “I first went to film mountain gorillas
in Rwanda in 1978 for the BBC’s Life On Earth television series. Spending time with these gentle creatures in their natural habitat was a profoundly moving experience. “It was abundantly clear, however, that a lethal cocktail of threats i nc lud i ng p oac h i ng, hu ma n encroachment and habitat loss were
dr iv ing t hese mag nif icent creatures to the very brink of extinction. “I was so deeply concerned by the plight of the mountain gorillas that I came to Fauna & Flora International for urgent discussions about how we could prevent them from disappearing forever.” Sir David claims that when conservation work began there were only 250 of the animals in Africa’s Virungas Massif area, but work still needs to be done. His message continues: “Thanks to this collaborative approach, their population is steadily rising and today there are around 880 mountain gorillas in the wild. But these extraordinary animals are still critically endangered, and there is much left to do if we are to ensure their long-term survival.”
Asset-based finance taking off in Britain Flexibility offers businesses the choice they really need INDUSTRY VIEW
E
ven as the UK economy starts to recover, businesses will find it hard to forget the financial crash. In recent years economic activity has been notably subdued. At the same time, struggling businesses have sometimes found it difficult to get the finance they need from traditional lenders. But, as the country begins to shake off the effects of the crash, one area of finance is continuing to perform strongly and helping to drive the recovery. The Asset Based Finance Association (ABFA) released cheering news in November, with figures showing that in the third quarter of 2013 the industry had its strongest-ever performance. Total sales from firms using asset-based finance passed the £71billion mark for the quarter. During the same period, ABFA’s members had total advances out to clients of £17.4billion, a 6 per cent increase on the previous year. Supply and demand for this form of finance are both enjoying a boost. Asset-based finance may have been around for a long time but some believe it is taking off in Britain as businesses begin to realise the ways in which it can be used. Steven Chait, managing director of Burdale, a
British asset-based lending firm which was acquired by American bank Wells Fargo last year, believes companies are realising how widely it can be used. “Asset-based finance can suit all sorts of different situations. If you are in manufacturing, retail, consumer products, equipment, food and beverages or many other areas, you have assets,” he says. “It also offers great flexibility. Through the downturn we have helped with turnarounds which are now very successful. But often we help with companies that want to expand, and perhaps want to finance capital expenditure. “We are about to close a deal with a new client. The business is growing and needs to hold more stock and invest in new machinery, which we can fund. We expect to see more of this as the economy improves.” He says Burdale has seen an increasing uptake in its financing options, something which has been helped by becoming a Wells Fargo subsidiary. Since being acquired in February 2012, the firm has grown its number of customers by 44 per cent, as well as being able to help companies which have business or subsidiaries in the US. “What helps is the strength and stability that comes from Wells Fargo, and you also have our experience in providing for our customers,” he says. “Customers don’t have to wonder if their bank will still be there in a year. Wells Fargo is one of the most well-regarded
financial institutions globally, but has also always continued to be in the asset-based finance sector, despite any market changes.” Chait is now confident the finance will help to provide flexible working capital to businesses looking to move on to the next level. “It’s just a really good success story,” he says. “We are doing our little bit to help UK PLC and the businesses here.” Steven Chait (left) is managing director and head of Burdale 020 7664 5665 www.burdale.co.uk
December 2013 · Business Reporter | 17
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Cities are competing to become a global hub for the rapidly growing Islamic finance sector. Dubai announced a move into the area this year, putting it at loggerheads with London and Kuala Lumpur. In January Sheikh Mohammed bin Rashid Al Maktoum, prime minister of the United Arab Emirates, announced plans to turn Dubai into a centre for Islamic finance. The UK responded with a publicity campaign talking up its openness to the sector. In October, David Cameron announced the UK would become the first non-Muslim country to issue an Islamic bond. Malaysia has made efforts to better regulate the sector this year, and already attracts global Islamic finance activity. Other cities, including Hong Kong, also want to corner the market. Islamic finance focuses on sharing risk between financial institutions and clients through longer-term links. With Islamic bonds, both parties own the debt rather than one promising to pay it back. And with shariacompliant mortgages, no interest is charged. Ethical factors play a part. Investment in areas such as tobacco, pork, pornography and gambling is forbidden. Even non-Muslims can use Islamic finance, making it more likely to have global reach. Consultants Ernst & Young claim the sector has good potential for growth.
Its 2013 report reads: “The Islamic banking growth story continues to be positive, growing 50 per cent faster than the overall banking sector. “High potential international markets – each in different stages of development and therefore requiring different penetration strategies – include Saudi Arabia, Malaysia, Qatar, Turkey and Indonesia.” But, the report adds, Islamic finance compares badly to conventional banking for profitability. It reads: “It is a different story when it comes to profitability. The industry’s average return on investment was 12 per cent compared to 15 per cent for conventional in 2011. Islamic banks continue to grapple with multiple challenges relating to sub-scale operation, asset quality, negative operating income from core activities and a weak risk culture.”
South Korea South Korea is increasingly important as a source of investment for the embattled mining industry, according to a recent report. The global mining industry has become more willing to embrace alternative sources of finance because of recent slumps in share prices and a drop in conventional bank lending. The sector has been under significant financial pressure this year, with high-profile mergers and even project closures. A report released this year by PriceWaterhouseCoopers, Alternative Financing In The Mining Industry, argues South Korean organisations, from state-backed enterprises such
as sovereign wealth f unds to corporations, are investing in different parts of the industry. The report reads: “Strategic and financial investors range from corporates looking for supply security to state-backed enterprises, such as sovereign wealth funds, looking to develop mining skills and expertise. “In 2012 alone, South Korean statebacked consortia completed seven transactions taking an average shareholding of 23 per cent per transaction. “Significant strategic investment has not been seen from corporates in the exploration or development areas of the mining lifecycle, suggesting that seeking corporate investment is a means of monetising an existing mine, either for further expansion or development of new properties.”
Direction of travel is towards a more diverse financing landscape Businesses are feeling more optimistic about the economy, says CBI INDUSTRY VIEW
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hriving small and medium-sized businesses are critical to maximising the UK’s growth potential. These firms are optimistic about the next 12 months – the SME Finance Monitor reports that 51 per cent are planning to grow. Access to the right type of finance will be crucial for helping businesses to realise their goals, but for some this is a real challenge. The good news is that the strain on lending, following the financial crisis, is easing and the availability of finance is increasing. Lenders also report that businesses are now more confident about applying for finance. Nevertheless, the financial crisis has created a “new normal”, with the nature of lending changed for the long term. Traditional forms of credit will still be important in the future but the crisis has forced firms to address their historical over-reliance on bank debt, which accounts for 80 per cent of all finance. The UK market is changing to meet this need. The choice of lenders is increasing, with new challenger banks, such as Aldermore and
Shawbrook, entering the market. There are also more alternative finance options. Not only from the emergence of new, innovative options such as peer-to-peer lending – but also the increased prevalence of existing but underused options, notably asset-based lending. Using Funding Circle, a UK peer-to-peer business lender, Dreamgenii’s loan of £75,000 was fully funded within two weeks, with 1,400 people from across the country lending from £20. The government has taken a number of steps in recent months to speed up the diversification of the finance market, including co-investing alongside providers, and the state-backed Business Bank will help support finance availability for growing businesses. So the direction of travel is towards a much more diverse financing landscape. Small and medium-sized businesses are feeling more optimistic about the economy and now need to capitalise on these opportunities and go for growth. The CBI has published a guide to alternative finance options for growing businesses, which can be read at http://www.cbi.org.uk/alternativefinance/. Katja Hall (left) is CBI chief policy director 020 7395 8137 katja.hall@cbi.org.uk
Business Reporter · December 2013
Alternative finance
Business Zone
18
Justin Welby, Archbishop of Canterbury
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The longer I go on, the more I am aware of the power of finance
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Alternatives to a bank loan There are many types of finance – the key is to match requirements to the most appropriate option
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ecent statistics from the Bank of England show that banks’ lending to non-financial businesses continues to fall. Businesses are either not seeking bank finance or going elsewhere. So what are the alternatives to a bank loan or overdraft? Before considering the alternatives to bank finance it is always a good idea for a business to ask whether it is maximising the cash resources it has available. For example, does it have effective credit management, or are its debtors taking too long to pay their invoices? It might help to have a conversation with an accountant to review the current financial management of the business.
Some issues to consider If the business still believes it will need to raise finance, there are some key questions to consider, including: • How much does it need? • How long is the finance required for? • Why is the finance required? • Does the business have security or personal guarantees to offer? • Can the business repay the finance? A business plan should be prepared showing the forecast profit and loss, balance sheet and cash flow for at least the next two years. Finance providers will also require the previous years’ financial reports and any current-year management accounts. Business risk profile matters. Finance providers will use a variety of information to assess risk apart from the business plans and financial reports. They will be accessing credit reference data such as any court judgments or late filings at Companies House. For new limited companies, finance providers will look behind the company at the directors’ credit history.
Possible types of finance There are a many alternatives to bank loans and overdrafts. The following are the major alternatives covering both debt and equity finance.
Own personal savings, friends and family Recent research suggests that over the last year many owners/directors of smaller businesses have had to inject personal finance to keep their
business afloat. Friends and family can also be a source of finance.
Credit cards Credit cards are a regular source of finance for start-up/small businesses for items such as travel, stationery and petrol. They are a good way of smoothing out unexpected big bills. Repayments must be managed carefully. Exceeding the credit limit or not making regular repayments will damage a business owner’s credit rating
Grants Grants now tend to be sectorspecific, such as technology and green projects. The government offers help for people with moving from benefits to work/selfemployment and the Job Centre Plus will have details.
Start-up loans Start-up loans are a recent innovation aimed at entrepreneurs looking for finance to start a business. Loans come with mentoring for the first year.
Sales invoice finance In debt factoring the business sells the debt to the factor. The factoring company pays a percentage (up to 80 per cent) of the sales invoice immediately to the business. The factor chases the customer for payment. The balance of the sales invoice is paid to the business (less the factor’s charges) once the debt is collected from the customer. Under invoice discounting the process is the same but the discounter does not own the debt and the business administers the sales ledger, meaning the customer is unaware that the debt has been discounted. There is often a minimum turnover requirement and they will vet the business’ customers to ensure they represent a satisfactory credit risk. Some factors and discounters expect all the sales invoices to be part of the process, but some will allow sales invoices to selected (high-quality credit risk) customers only.
Finance and leasing Business seeking to purchase an asset such as a car or equipment should consider deferred payment such as hire purchase or leasing. By paying by instalments they can
spread the cost of the asset over its working life. Use of tax allowances on the asset should be carefully considered.
Mortgage If a business is seeking to buy a property or to expand its existing owned promises it should consider a commercial mortgage. The finance provider will require the property be surveyed and valued. Loan-to-value ratios rarely exceed 70 per cent. There are a variety of ways of financing the purchase of a premises but the process can take a long time to complete.
Small-scale equity finance Under this heading the business sells a share in the business in return for allowing the new investors a say in how the business is run, often including a seat on the board. Business angels bring finance (up to £2million, if in a syndicate) to a business and often bring invaluable business or sector experience. Larger sums would more likely involve private equity or venture capitalists.
Online sources of finance In the last few years crowdfunding or peer-to-peer lending (P2P) has started to make a small but rapidly growing impact. Businesses seeking debt finance must complete an online application form. To be considered a business must meet certain criteria which vary from P2P lenders, such as having two years of financial reports. Once the P2P agrees to a listing the loan proposition enters an auction. Registered lenders start
bidding the amount they are prepared to lend and the interest rate they expect to be paid. If the auction fails to meet the sum specified by the applicant, the auction fails and the lenders’ money is re-credited to their P2P account. If an auction is successful an arrangement fee – either a percentage of the loan or a fixed amount – is charged on the loan. The applicant repays the loan to the P2P lender, who is then responsible for distributing the repayments to all lenders involved in the loan. There are now internet options for almost every type of business finance – debt, equity, working capital and finance against future credit card receipts. The Financial Conduct Authority recently issued a consultation document with proposals for regulation of online finance providers. For more information on all types of finance, go to http://british-business-bank. co.uk/applying-for-finance
Matching finance to your needs As can be seen there are many types of finance, the key is to match your requirements to the most appropriate finance. A conversation with an ICAEW Business Advice Service (BAS) provider offers a free consultation to discuss business issues including how to access finance. Clive Lewis is head of enterprise, ICAEW clive.lewis@icaew.com www.businessadviceservice.com
Business Reporter · December 2013
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The debate
Alternative finance – the new normal? Greg Bell Managing director Skipton Business Finance
Alexandra Dimitrijevic Managing director, Corporate Ratings, Standard & Poor’s Rating Services
Russell Gould Managing director Everline.com
Robin Rowland Hill CEO Ruffena Capital
Mario Spanicciati Executive director EMEA & EVP of Operations, BlackLine Systems
Henry Ford once said: “If I had asked people what they wanted, they would have said faster horses.” Innovation should solve a specific problem and be better than what is currently available, although I am not convinced that this is the case with all forms of alternative finance. At SBF we are busier than ever and, by actively supporting owner-managed businesses throughout the downturn, we have seen monies advanced to clients increase by 25 per cent this year. Businesses thrive when cash flow is at its strongest and profitability is increasing, but the market should also recognise those businesses that are striving to get back into profit and have real future potential if they can gain access to the funding they need. Traditional products can be provided by financial institutions who have a tangible desire to support UK SMEs; for those actively seeking an alternative, choose your horse carefully, just don’t expect a motor car anytime soon.
Following a seismic event like the 2008 crisis, it seems inconceivable that companies’ relationships with their banks could work in the same way they did 10 years ago. As new capital adequacy regimes further constrain bank lending, this is especially true for Europe’s “squeezed middle” – companies with revenues between €100million and €1.5billion. We estimate that these companies will need to finance €3.5trillion over the next five years. Meanwhile, institutional investors recognise the value that these companies represent, and their appetite for exposure to this asset class is increasing. That’s why we think that mid-sized corporates across Europe will begin to tap the bond and private placement markets in greater numbers. But for alternative finance to thrive – and become “the new normal” – investors need transparency into these private companies’ performance and creditworthiness, while potential issuers need to get used to sharing more information with a new investor base. With our mid-market evaluation, described on page four, we hope to make the process easier for everyone.
Alternative finance isn’t necessarily new, but traditional finance is no longer the norm, with increased choice meaning businesses are opening up to new ways of managing their cash flow. Traditional lenders tend to be rigid, with little flexibility to accommodate the needs of modern businesses. Research we carried out with more than 500 small businesses and sole traders showed that three quarters aren’t happy with the service provided by traditional lenders and half thought they weren’t interested in lending to them. The new players are much more agile at using a confluence of technology and big data to improve the options available to small businesses and provide them with a convenient, flexible and reliable cash flow solution to suit their needs. Going cap-in-hand to your bank manager was never the preferred option and now there are a host of modern alternatives for small businesses to explore, with many offering much better value overall.
Since Lehman’s, smaller businesses have borne the brunt of restrictions on conventional finance, such as overdrafts and loans. These are now being replaced by many forms of finance, from alternative sources to private investors. Alternative finance always existed; it has simply become centre stage. This now means that the entrepreneur has greater choice and, perhaps, greater control – but also greater complexity to appreciate. Our recommendation is: do your research! London, the dominant financial centre in Europe, has created a vast investment ecosystem. Funding opportunities for wellmanaged businesses are greatly improving, with the government’s tax concessions as an added benefit. We are finding that by combining equity investment with debt instruments, an ideal solution can be reached for many businesses, giving both the company and its backers the right balance of risk and reward. This is the reason I led the team to found Ruffena; creating greater versatility in blending capital for entrepreneurs with promising businesses.
Spreadsheets have been the de facto standard across finance departments for as long as I can remember. It’s hard to believe, but research shows that more than 90 per cent of FTSE100 companies still do their account reconciliations – a critical control for ensuring accuracy in the resulting financial statements – manually, usually in spreadsheets. But everybody knows they can be full of hidden, potentially costly errors. The new normal will be driven by companies that make smart strategic business decisions to leverage technology and automate timeconsuming, traditionally manual spreadsheet-driven processes. This will become important as companies struggle to comply with heightened reporting requirements, converging international standards and other regulatory changes. The most successful will be those that leverage cloud-based technologies to streamline and improve operating efficiencies across the entire organisation, as these technologies allow them to reduce their cost of ownership and adapt faster to the changing world in which we live.
0844 579 1086 www.ruffena.com
020 3514 5391 www.blackline.com
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020 0000 0000 russell@everline.com
Building the right support It is important to understand how the construction industry works INDUSTRY VIEW
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he construction industry has been starved of cash and largely ignored by the traditional lenders, who see the sector as too high risk. Part of the issue is that you need to understand how the industry works, how it is funded, and how it gets paid in order to devise a finance product that works. That is why we came up with Construction Finance – a dedicated cash-flow funding product developed in partnership with a team of experienced quantity surveyors who understand the intricacies of construction contracts. It uses a
fixed rather than variable fee model, thereby removing the uncertainty for construction businesses throughout the supply chain associated with the costs of more traditional lending products, which is their principal downfall. It provides pre-payments against applications, stage payments and milestones for sub-contractors in construction or other associated industries
where contracts with their customers have been a barrier to finance from traditional lenders. The new product is based on a traditional factoring approach but with the Nucleus’ Fixed Fee model to ensure transparency on costs. Cash is advanced at an agreed percentage of the outstanding invoice/application value, taking into account the longer contract terms typical within the construction sector. The suppliers and/or sub-contractors benefit by receiving 100 per cent of the value of their invoice on acceptance of their goods and services. There is no long-term contract involved so the supplier is not tied to a relationship with no flexibility to move, and the funding is guaranteed. Most importantly, however, there is a fixed, disclosed charge for the service so that the customer knows exactly what they are paying. sales@nucleus-cf.co.uk www.nucleuscommercialfinance.com