BQ Breakfast Live

The aim of BQ Breakfast Live is to further contribute to the success and prosperity of our economy through the debate, discussion and feedback of a range of key business topics and issues. These events debate the views of our most senior business leaders and policy shapers with a view to passing on their opinions and sharing them with others to motive, inspire and influence change. The aim of BQ Breakfast Live is to further contribute to the success “FINDING FUNDING and prosperity of our economy. The FOR ENTREPRENEURS� aim of BQ Breakfast Live is to further contribute to the success and prosperity of our economy through the debate, discussion and feedback of a range of key business topics and issues. These events debate the views of our most

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in association with

EUROPEAN UNION Investing in Your Future

European Regional Development Fund 2007-13

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FINDING FUNDING FOR ENTREPRENEURS BQ Breakfast has launched a series of BQ Breakfast Live forums to bring together entrepreneurial people of North East business, in convenient and friendly surroundings, to discuss and receive expert advice on major issues vitally affecting them. The first BQ Breakfast Live centred on Finding Funding For Entrepreneurs.

Ninety people attended this joint presentation by the BQ Breakfast team, North East Finance, and South Tyneside, Sunderland City and Durham County Councils.

The morning’s findings can be summed up as follows...

PROSPECTS RISE FOR SMES A brighter funding horizon for aspiring entrepreneurs of the North East is forecast.

At the BQ Breakfast Live forum dedicated to finding funding, they were told how banks are likely to become more supportive, how the support of a major North East fund is likely to be extended, and how more office and manufacturing space is becoming available.

Craig Iley, managing director of business banking at the soon to be launched new Atom Bank, based in Durham City, said that often only a figurative inch stands between winning or losing a pitch to a bank for support.

He recommended: “Entrepreneurs, once having made a close and objective study of their bank, should sell their idea as if it was to a sales customer they wanted to win.”

They have to be totally transparent about the business and its key participants and explain its workings in detail. They should ensure that

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they, and their business are correctly positioned in credit agency data by working with the agencies behind it to ensure it is upto date and accurate.

He says the British Business Bank, currently run by the Department for Business, Innovation and Skills, will be especially important for SMEs over the next 20 or 30 years. Many more banks besides the Big Four will feature, and switching from one bank to another more amenable to supporting a proposal should become easier.

Applications from new banks to operate, already being considered, may result in a broad move towards the German tiered model ensuring small players are not squeezed out in the bids for support and funding.

He said one problem for the banks in lending now is that regulation is driving a lot of capital into the housing market – both abroad as well as in Britain – and the playing field for small business and start-ups needs to be levelled.

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LOCAL ENTERPRISE EQUALS PROSPERITY Andrew Mitchell, chief executive of North East Finance, which administers the £125m Finance for Business North East programme to drive growth in the region’s economy, says the region has many new businesses emerging, and funds may now be able to continue to 2020 and beyond.

The £125m fund (JEREMIE) has already supported 600 companies with more than £100m of backing over four years. This has drawn £125m of private sector co-investment.

JEREMIE doesn’t deal with all the needs of small business. Many small businesses have specialised needs in financing – loans, overdraft facilities and so on. “But we’re not badly positioned here,” Mitchell says. “However, we do need to do a lot more towards helping firms to access finance, and help them to make the most of that funding once it’s on board.”

He says small companies, if they need capital to develop, will go where the money is. The assumption has always been it will be down to London or the South East. “Reality today, however,” he says, “is that we are going to have a strong independent-ish neighbour up the road with money to spend and it will be very pro-active in trying to attract small and large businesses. So access to finance today is crucial in terms of keeping small businesses in the North East and South Tyneside.

“The way to do that is by making them feel at home by providing facilities such as location, funding, advice and support, whether through financial service firms or mentoring or whatever it might be. There’s a huge commitment in South Tyneside, Sunderland and County Durham towards supporting small businesses.

The start-up of Atom Bank in Durham shows

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that the region can deliver in financial services.

We’ve invested more than £5m in South Tyneside, for example, and attracted about £4m more of private investment.”

These businesses form an interesting variety, and many different types are starting to emerge. “They’re important because small businesses, as they grow, tend to stay put.

One of the region’s past problems has been that large companies attracted, with very honourable exceptions, tend to be mobile.

So whatever advantage the North East had, whether in labour cost or land prices, ceases to be advantageous since it’s relatively easy for large multinationals and even UK based companies to move their operations elsewhere.”

Small business owners, on the other hand, tend to buy locally, tend to work with local professional service firms, pay taxes locally, send their children to school locally and as they get bigger – Sage being a classic example – the owners and those who made money out of those businesses tend to re-invest money into the community. The multiplier effect is incalculable over a long period. That is where the wealth and jobs will come for this region.”

‘WE CAN PROVIDE YOUR SPACE’ Councillor Iain Malcolm, leader of South Tyneside Council, stresses that South Tyneside is open for business despite a £100m cut in the funds it has had available since 2010. It has been losing businesses through lack of office space but hopes to promote officed businesses, manufacturing and tourism, and has riverside space for both offices and manufacturing which council officers and developers are now considering. He has invited expressions of

interest. “We don’t have enough SMEs and start-ups,” he said. “Plenty of people want to start their own businesses but a lot fall at the first hurdle because in this area families have tended to come from traditional industries like coalmining and shipbuilding. There wasn’t an entrepreneurial spirit. But I do see it coming on South Tyneside.”

Working with Sunderland also, it expects firms emerging along the A19 corridor to become eventually as significant as Nissan has been - through development of the international advanced manufacturing business park north of Nissan’s plant. The councils have the support of both the Government and the North East LEP on this. Work on the infrastructure will start soon. The immediate aim is to accommodate 5,000 jobs, growing to anything up to 20,000 ultimately.

The audience at the BQ Breakfast Live forum heard first hand at the Quality Hotel, Boldon, how four local entrepreneurs in sectors as varied as dentistry and offshore health and safety, overcame any difficulties of funding. Scott Hopkinson (Moneygate Group), Craig Huntingdon (Dentist Direct), Stephen Lovely (For Sale Sign Analysis) and Richard

Pargeter (Green Marine Solutions) were interviewed for BQ by Caroline Theobald and also answered delegates’ questions…

FINDING THE CASH Stephen Lovely, 25 years an entrepreneur, has raised £20m and organised jobs for around 1,000 people in various SMES. His most recent businesses are For Sale Sign Analysis and Beyond Digital. He has used business Angel Jeremy Middleton for 10 years, who has been involved in both the businesses.

Craig Huntingdon spotted a gap in the dentistry market, doing there what Spec Savers and Vision Express do for the eyes, and Vets for Pets have done in the veterinary sector. He has raised £400,000 with NEL for dentistry across the UK by franchise. Talking to banks didn’t prove fruitful at first. The NEL helped raise other significant capital which helped get access to more than £2m from Yorkshire Bank for acquisition of practices and expansion of the business. The key USP is that most of the dentistry can be done without a drill or anaesthesia. As the franchisees appeared to get a better deal his firm raised further finance to reverse franchise. “We have used other people’s money to prove the concept then have gone out and raised our own finance,”

Plenty of people want to start their own businesses but a lot fall at the first hurdle because in this area families have tended to come from traditional industries like coalmining and shipbuilding

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DEBATE he explains. “The aim now is to move forward with our own acquisitions.

Stephen Lovely got £10.25m in equity from a bank early on. “Those were the days,” he recalls. A low point of his property business came when entrepreneur Jeremy Middleton walked away from it at one point. A fund manager insisted the business be put into liquidation the same day. “We went instead through a company voluntary arrangement where we could park the debts and be protected from them while continuing to run the business. The business survived and prospered.” Jeremy came back six months later and said: “You’re still here. That’s surprising.” And he rejoined, happily. “Being stubborn is a key business attribute. The biggest learning curve in that situation is just to address it. Don’t put your head in the sand.

Talk to professionals who can help you. Deal with the things you can deal with. I don’t feel guilty. Some get into trouble along the way but still succeed while others fail completely.

That’s the nature of being an entrepreneur.”

Jeremy despite his temporary departure helped fantastically, and has funded various other ventures at different times.

Richard Pargeter’s company maintains wind turbines. It was funded a year ago by the Accelerator fund of North Star Ventures. The company was formed by a group of five in a rising market, the offshore industry on the rise. “We were at the right place at the right time. We were training other businesses and decided we could do it ourselves. We weren’t businessmen so it was a vertical learning curve.

We wanted to go from the operational side of windfarms to building software. We didn’t know how to do it and obviously needed a

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lot of investment to build the systems we wanted.” Having access to funds meant they could recruit a team, implement designs and push forward with clients already on board.

“Funders definitely look for the return but the final decision for us was the support, the guidance and the mentor that came with the funding. We got a non-executive director and he has been invaluable in guiding an entrepreneur who hasn’t done that kind of thing before. He told us of strategies and how to implement them, and how to work with other businesses in supply chains and manage risks as well that may arise when you’re setting up with a supply chain as a new company… not putting all your eggs in one basket, for example. Learning from the mistakes of others was really important to us.”

Scott Hopkinson is a non-financier in a national finance advisory firm set up in 2007.

It received funding last year from North Star and NEL. “I had come from a very big business and had money from the start. We have three non-executive directors on our board who came on as part of an investment, helping to oversee and to help us run the business. They have been invaluable in helping us to grow, and very supportive in terms of follow-on money. So not only have they invested but also continued to support and re-invest in the business, which I think is key when you’re looking for your money.” The first money came from America, family money from Switzerland, and now the two regional funds are involved also. “Having people who are local backing you makes it a bit more personal. Other investors may investing for money, whereas North East funders are helping you grow the business within the local environment. All investors want

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to do due diligence, want to crawl over the books, see the model, meet the management team, and understand what they do, what they contribute. The management team and the business model are the two key things for investors. Is the business sustainable? Can it Grow? You need those things lined up before you go looking for money.”

Craig Huntingdon: “We had one model, then tried another. Franchising for us seemed the most obvious way to roll out our programme as we looked to get practices of around £400,000. Doing that quickly by traditional methods would have been very difficult. So we moved to a franchise model. We had looked also at a joint venture model. Ultimately we used proof of concept to attract additional finance through the banks. It’s critical to have good advisers. Getting that with the funds from the North East too seemed a bit of a mix in heaven. We had wasted a lot of time speaking to people who weren’t really interested in taking the concept forward. It’s important with professional teams to test that enthusiasm quite early. We did that by using means of contingency. Ultimately we paid something like 25% up front with the rest on completion. That was the test of various advisers we spoke to as we sought to find out who was really enthusiastic.”

Richard Pargeter found that getting the company established can take longer than expected. “We didn’t know where to access.

We came across North Star by networking and introduction. We looked around Sunderland, Tyneside, Durham, starting off on the small investment for growth just to get a website built and some flyers and go to trade shows.

Engaging with one group that led to the next, and it took a year or so of following the breadcrumbs down the path and speaking to people. It wasn’t easy to identify the different groups. We didn’t come from a business background. We were seafarers entering a whole new discipline. It was difficult to identify the different groups, and who was available, and the different types of investment out there.”

Stephen Lovely: “The market for raising funds has developed and is a lot clearer now than when I began. I had been a corporate finance director for a big firm. You can get

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One of the most difficult things to manage is that balance of continuing to run the business to keep profit and sales moving in the right direction to the route of the right funding for you, but different funders do very different things. It’s important you find the right one and it’s clearly signposted now.”

Scott Hopkinson’s firm had a data room ready and a 10 year business model prepared when it looked for funds and had all the documents needed to go out and raise money. “So we were well prepared for speaking to North Star and NEL. But they still want to come and do due diligence. They still want to kick the tyres, speak to the management team and see you able to demonstrate the growth model you are providing so that it’s actually deliverable.”

ON COVERING BOTH FRONTS Richard Pargeter says three partners actually set up his company. “The biggest difficulty has always been delivering the job at the same time as running the company. You’re off on site and working offshore. Sometimes you’re overseas for long periods. I’ve just come back from three months in Uruguay for example.

Developing the company and putting its strategy in place cannot be done while you’re doing the job. It was a test for us. We were

working on the Teesside offshore wind farm at the time. All our resource was going into a team that was doing a great job for Siemens.

So it was important we pulled one of the guys out while we put together the business plan, market identification, the business case, and it took us a lot of time because we were regularly dropping in and out of the process.”

They pulled in favours from friends and people who were going to be involved and who had experience in doing this previously, people with a financial background, “We got private finance and help with putting documents together. North Star were very patient with us. Instead of us having to put a document case together they visited us on site. We could then explain the market and the area we were working in.”

Andrew Mitchell (North East Finance): “That’s a very important point, I can confirm having been on the investor’s side but also having been on the other side raising money as owner of a small business. One of the most difficult things to manage is that balance of continuing to run the business to keep profit and sales moving in the right direction, and finding time

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to go through all the inevitable hoops and due diligence and legal considerations. I have seen so many companies that didn’t manage that balance and within six months they were off negotiating with venture capitalists or business angels or banks and the business started to slide. Of course you were then on the back foot in terms of valuation and all that kind of stuff.” He advises, before finding the money to get venture capitalists, try to find a good nonexecutive to give you that good advice. “ A lot of people in the region retire early or may have sold a business and can add value to yours, and would be keen to do so – if I may say, probably a little cheaper than some advisors. That’s not to say avoid advisors altogether because you get them in eventually anyway. But the other people can help you during that critical period when you are spending time in Uruguay while at the same time there’s a huge commitment to the investment process.”

Stephen Lovely: “You can spend too much time involved in running the business at the expense of the financial side, and vice versa.

Neither works well. You must be willing to do both and it’s a continuous process. You must always be preparing your next business plan and be sure at the same time that you are fulfilling the promises of the last one.

You must keep that relationship going all the time and run the business. It’s difficult. We overcommunicate and send more information than people ask for. We tell them when things are going wrong and we tell them when things are going right. They probably ignore half of it but they can never say then that you didn’t tell them.”

Communication is important, it is suggested.

Stephen Lovely: It’s very important to understand just what is required. In terms of due diligence process, it was a lot more intense than we envisaged. Every claim we have made, every figure produced and every document potentially signed has been inspected. So you need to be absolutely mindful of that.

Transparency, too. I think we’ve been very prudent about business planning. We’ve been as accurate as possible, extremely cautious and that made the due diligence quite simple and straightforward. If you can minimise that aspect you’ll save a lot of time.

Scott Hopkinson: “You’ll probably take twice

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DEBATE as long as you think you will. From start to finish the process should usually take three to four months in terms of doing that and running the business at the same time. It’s hard work. Between 30% and 50% of my time in the last two years has been spent on fundraising. Management credibility is essential too. People buy management, not product.

We are businessmen running an IFA business.

We’re not run by egos which is very relevant in the financial services market. We approach it differently, as a business. We looked at where others did things well and couldn’t do things well. What they couldn’t do, we did and took it on. We generated leads for advisors, leaving them to sell which is what they do. We did everything else and got profit out of it. As the business grows, more financial advisors are going to come and work with us. The more success we get, the easier it is to attract firms.”

THE TRICKY STEP Richard Pargeter: “Sometimes you need to take that step that’s just a bit tricky. The offshore industry has a comfortable lifestyle.

It’s warm and fuzzy. Then you jump into the cold and prickly. It’s a constant battle. You think you can step across then you come into this competitive world. It’s been a full turnaround for us. The offshore industry is very risk averse.

Nobody wants pollution, sinking ships or turbines falling over. It’s all very expensive assets. So for them to engage with a SME with very little money backing it represents a high liability. So we have to ensure we put the right processes and management systems in place – insurances and so on. We must show how we will mitigate risk on behalf of our clients. Not easy when you’re dealing with £1.5bn wind farms and you’re a small minnow. You have to turn their risk assessment on its head and show how you’ll mitigate all their problems and all their concerns. Supply chain. Personnel and recruitment. Plan for growth. Demonstrating how you do your job is the easy part. But we knew that from the start and implemented it accordingly. Now we’re clawing our way up the ladder. The cold and prickly place is lonely. I remember when we sat down in the pub knowing we were going to form Green Marine and we started discussing structure of the company and who was going to deal with

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You can plan to your heart’s content but things may not always work out the way you want what. I could run a business by myself but I was never going to do that. It was great having a team round you to share the workload and give other skillsets as well. That again is where you get the mentor in and the support from North Star and the non exec. It’s brilliant for us.

Even on the most sleepless nights and even if you have 26 years of experience just being able to pick up the phone to say ‘this is the plan, what do you think?’ is good.”

Craig Huntingdon: “Leaving the warm and cosy corporate world of Aldi, a multi-million pound cash rich company, to a self-finance start-up is incredibly difficult to do. It was a leap of faith going into dentistry and we did generally believe we could make a difference in the dental sector. We started asking patients and friends and people in the pub: ‘What is it you want with a dental practice?’ We thought we’d built it from the ground up. We compiled a list of 10 things that people disliked or would like to see more of in dental practice. Number one was that bills should reflect the NHS a bit more. We looked at strategies in other European countries. Number two was that people hate the drill and the needle. That set us travelling the world trying to find a solution to that problem. Then it was a case of using

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my retail experience in dentistry. Weekends is when people have time available to visit the dentist. So we opened on a Saturday, and on Sundays in some cases. We opened at eight in the morning and closed at eight at night. So it was bringing aspects of my retail background to a dentistry arena which really is unconsolidated, and still reflects some practices of 100 years ago. You can go to Beamish Museum and see that some things set up in 1912 haven’t changed in a lot of practices.

They are two ups, two downs. Sometimes the practice is upstairs, sometimes down. We decided it could be much more retail orientated in delivering a service, and if you can remove the pain and the discomfort it’s hopefully a win-win, though it’s still a leap of faith. We have three franchises to date and it’s working.”

Stephen Lovely: “Among the four of us Craig is not a dentist, Scott is not an IFA and I know sod all about digital signage but we all four know something about what we do.

You surround yourself with people who have skills you don’t have. I’m particularly poor with people. I make sure I surround myself with people who have people skills. Whatever skills you lack, you have to surround yourself with those who have what you need.”

BAD EXPERIENCES Craig Huntingdon: “One of the worst things that happened to me since starting Dentist Direct, the most embarrassing and most difficult, was probably around finance raising, in terms of the default position from a lot of people we spoke to was over-politeness.

‘Yes, it’s fantastic, it’s great, in a sweet spot, in the green sector…’ Yet even though the model didn’t change over the course of the fundraising a lot of people unbelievably enthusiastic at the outset didn’t invest. I learned from that to drill down very quickly and say to an investor: ‘Come on, are you really interested in this?’ You tend to be very impatient and want to get things done very quickly and effectively. But you waste a lot of time speaking to people who really aren’t all that interested. That was probably the most frustrating part of the whole process. I’d certainly advise anyone to think hard and long about it before going into fundraising.”

Scott Hopkinson: “You have to kiss a lot

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of frogs to get where you want to in raising finance. One of the most frustrating things is where you have gone through everything and discussed right down the line only to find conditions changed at the very last hour.

Having enough runners in the race and having enough connections to make sure you have enough potential funders is valuable. It’s disappointing to have put in a lot of work to find at the end the tables turned. Is that the worst thing that happened to us? Well, the business started in 2007 and the market crashed in 2008… At that time Moneygate concentrated wholly on mortgages. That’s when we transformed into a full IFA business.

The business had to roll with the punches and again change the model to adapt to change in the markets. Flexibility is all important. You’ve got to roll with the punches. You can plan to your heart’s content but things may not always work out the way you want.”

Richard Pargeter: “We got the investment to take our company from operations and marine company consultancy and had identified the market space for a product that tracks and manages people on wind farms and other projects in a remote location. We weren’t computer geeks. We don’t understand how to build technology. It was one of the things always highlighted to us as a weakness in the company. It was considered a great idea, the functions brilliant. The energy companies told us they wanted it. We just had to build it.

So we went to some contractors to start the modules of our build. The result was a less than

satisfactory product. We bridged the gaps but spent a lot of time plugging the holes in that product and a lot of time, money and effort and we’ve now brought in the internal skill.

We have that trust now within the company.

You need the team, the trust, the special skills to match your requirements. Identifying the weaknesses in your supply chain and how you are going to build it has been the worst thing we had – about six months lost, really.”

Stephen Lovely: “I’ve had plenty of bad experiences. We had done all the business of losing a bit then ramping it up. Then we bought a business and that went wrong. We pretty much went bust. We started again and got that business flying. We were making half a million quid in year two with only about 30 people in the business – a lovely little business with everything working fine. Then recession hit and our business was about property volumes so suddenly we had to take the business down to about a quarter of its size and get rid of a lot of our people. That business hasn’t paid us anything since about 2009 until currently. We’ve just about kept it warm. That’s a pretty bad experience. It made £50,000 last year – not a lot, but at least it has now made some money. We’ll stick with it.”

WHICH INVESTOR? Craig Huntingdon: “Find the right investor after you have various offers on the table – the link where you can forge a relationship. If you feel you are continually pushing water up a hill that’s probably not the right investor for

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you. When we found the right investor in NEL we felt on the same side and the whole thing just flew. It’s worth the extra time to do your research and get to know the people. The investor looks for credibility, good management and ability to move a business forward, and I think the reverse is also true. Make sure there is a management team within the investor that you can work with. Believe in who you are?

Absolutely. It also depends what stage your business is at. You may be under cashflow pressures and need to complete more quickly, going through the due diligence processes and just want to get things completed so you can focus on the business rather than the finance raising. But it’s a really important time and a difficult thing to do. But I think you have to just take a step back and make a check to be confident you have the right investor.”

Stephen Lovely: “If you go to a funder with a proposition you have put your heart and soul into, and you think it fantastic but can’t raise any money from them you should be quite worried about that. As an entrepreneur you are going cap in hand and asking: ‘Please can we have some of your nice money?’ The guys with the money are trying to grow their business and get that money out there. You don’t have to be the best business in the world to raise money but you have to be credible to fund. If you can’t get your business up to a level where someone wishes to fund you, and all you have is the bank listening to your business proposition then saying, ‘how much is your house worth?’ you should start to think whether that business is credible and whether perhaps you should just start to do something else. Entrepreneurs put their heart and soul into things. You put in a load of effort. You work harder than anyone else and get paid less than anyone else for a long time, so it’s perfectly reasonable that financiers will go over every day and see you for an hour or two or whenever they put the money in. They put the money in. That’s what they do.”

Scott Hopkinson: “If you have the time prepare yourself thoroughly before going into the funding round. Make sure your collateral is done and that you are ready for what lies ahead. Be prepared for the hard work and the time it is going to take out of your day to day working activities. Be prepared to manage your

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cashflow. If you’re expecting money to come in to you in three months time it will more likely six to nine months.”

Richard Pargeter: “We hadn’t a reputation in the business world when we started. So the funders had to believe in us. They had to believe in the team. So be transparent. Be open. Be organised and ready to say ‘this is what we’re going to do and this is how we’re going to do it.’ Have belief in the team and be able to inject that enthusiasm and the stubbornness that you’re going to make this work. That for us was what we were able to sell on. We had knowledge and experience of our industry that we could pass on, though we were not as yet businessmen. Be organised in selling yourself and your team. How to find funding in engineering? It’s hard to find people in funding who know about engineering.

They’re great at saying ‘sign this debenture, how much is your house worth?’ and give us a personal guarantee.”

Stephen Lovely: “I have run engineering businesses. In raising finance, don’t blame the funders if they don’t understand. You have to tell your story in the same way as you tell your story to a customer. If you find people to talk to, and they aren’t understanding your story, either you are not telling the story properly or – and this is the one to worry about - maybe the story’s not that great.”

Richard Pargeter: “When we’re speaking with our mentor it’s a matter of identifying your market, what its size is and what your strategy is for getting part of that market, then presenting that story to the financier, explaining clearly how you’re going to do it. We found we had to build a package up every single time we wanted something from

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a financier. They don’t know your idea and you have to make it clear to them. Nobody projected the story for us. You have to do it yourself. You must bring out your unique selling point and explain how you’re different to everybody else.”

FIGHTING REJECTION Question: What has been the main reason you have found for being pushed back in seeking finance, and how have you overcome that?

Craig Huntingdon: “It may be the wrong set of advisors, the wrong set of banks, the wrong set of financiers and not asking us difficult questions early enough. We’d look to get the right investor on board, and talk with them right up to completion. It’s a lot of kicking tyres and really understanding the market place when you’re new to it. It takes a lot of time, and you just have to be investor ready. And you have to realise that what’s required may slow the process as well. Being investor ready depends on your investment and on what you’re trying to raise. There’s a long tick list to be put in place before you start speaking to people. If you do things piecemeal it’s just a very long and drawn out procedure. What the list is may vary, investment to investment, or from a bank to an investor. Find out what the list is and have it ready before you enter the process.” Scott Hopkinson: “Find good investors who understand your category of business. Some will only invest if you’re generating a million pounds’ worth of profit.”

Stephen Lovely: “I’ve raised £2.5m in half an hour but it’s actually all to do with the relationships you have built up with those people. Those people knew what we do before we raised money from them and know we’ve

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done all the things before that we said we would do. The finance market in general is very good now at saying how long it will take to reach their decision. They used to string you along and weren’t too sure how long it was going to take themselves. So it took longer than they said, which was worse. These days they will tell you how long it’s going to take and at least you can plan for that. The disappointment is that if they’re going to say No then they say that really fast. If they’re going to say Yes it may take six or eight weeks.

But they’ll tell you.”

Question: Are we pushy enough in the North East? Why, often, can’t innovations in a market of stress, anxiety and depression get funding even though they may have global potential?

Scott Hopkinson: “When you raise the money it’s about selling yourself, your business and your product. It’s not really rocket science. But it’s about understanding and believing in your own product and getting someone else to do the same thing.”

CROWDFUNDING – YES OR NO? Question: What are the considerations on crowdfunding?

Scott Hopkinson: “We’ve looked into it. It’s got to be for the right people. It’s not right for us. You’re just hauling yourself around a lot of individual investors where they could be putting anything in from £5m to a couple of thousand and it could up to 40 people to get to where you want to invest. It looked to us like a lot of hard work for little reward. But that’s only my personal experience.”

Craig Huntingdon: “I think it depends also on

DEBATE what your intended exit strategy is. That might sound unusual when you’re only just thinking of setting up a business. You have quite an unwieldy group of shareholders there. If you’re looking to sell in 10 or 15 years that’s quite a lot of people to get round a table and agree on how a business is to be sold or re-invested in.

There are ways around this by using nominee structures, but my advice would be to be very careful about getting into bed with a very wide range of people of different backgrounds and different interests and different over-all objectives. That’s advice we were given.”

CAN YOU WALK AWAY? Question: Is it not incredibly difficult to walk away from an idea you believe in?

Have you ever had to walk away and how important is it to do that sooner rather than later?

Stephen Lovely: “I’ve walked away from business propositions. You go to someone and say you have a great idea and they say it’s not and you go to a second one. But there comes a point where you have to get realistic and just recognise there are enough people saying it’s not a good idea. It hacks you off when you think you’re the genius and everyone else is stupid. But you have to stop and get over it and get onto something else quickly because you can lose a lot of money otherwise.”

Observation: Someone has said “get out quick” and another has said “be as stubborn as hell”.

Reply: “If you’re going to do it then do it quickly then get out before you start, but once you’re into it, stick with it.”

A BANKER’S VIEW Craig Iley, former regional director of Santander’s corporate and commercial business and now managing director of business banking, Atom Bank, with 30 years’ experience in the sector, says he is old enough to remember when banking was considered a respectable profession and hopes he is young enough to see the day when that will return.

Finance from banking is very important, he suggested, and went on…

“I could have comfortably cruised through to retirement and just ignored that there are a lot of problems in the banking industry and hived

It’s about understanding and believing in your own product and getting someone else to do the same thing

it off as someone else’s problem. I’ve jumped out of the warm and fuzzy into the cold and prickly and decided to join a start-up business that will be called Atom Bank. You will hear a lot more about us over coming months.

“Technically we’re not yet a bank because we still have to go through regulatory approval.

Many people here know how to write a business plan far better than I do but if banks can’t be bothered to engage then they don’t deserve your business.

“The difference between winning and losing, being successful or unsuccessful, in getting bank finance isn’t a mile and it isn’t a yard.

It’s usually a matter of an inch or perhaps even less. Three areas where I may be able to help are: Your relationship with the bank, the way you communicate with the bank and understanding the bank you are trying to do some business with.

“Look at your bank objectively. We’ve been so used in this country to a market dominated by four or five big players. We think of the banks as a utility. They’ve been part of the furniture and we have been comfortable until you need a new sofa then realise there’s no-one selling them. Look at your bank as you would look at any other supplier or customer of your business. Ask yourself what they really know about your business.

“Banks portray a public image. A lot of them have very good people who are very keen to help you. It’s not unreasonable for you to sit there and think: ‘Do you know what? They should know a lot about me because they’re already my bank or because I’ve taken the trouble to produce a business plan.’ The reality inside the bank is very different. If you have a relationship director or a relationship manager he or she could be responsible for up to 600 connections.

“They’re a very scarce resource. Face to face services are very difficult and expensive for

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a bank to deliver. It’s going to become even scarcer. Whoever in the bank is looking at the proposition you put to them will try to pull together whatever information they can about your business. But their systems are just not up to it. Everyone knows now how fast technology moves.

“The i-pad has been with us four years.

Probably 50% of the market is now using tablets, 40% laptops and desktops where they are in existence probably account for 10% of the market. The banks by contrast have massive IT infrastructure, decades old and rooted in 1960s programmes. So you’d be very surprised how difficult it is for a bank to get something as simple as a single customer view.

“You have personal banking and business banking and it is very difficult for them to get a single perspective about who you are, what you do, what your strengths are from a financial perspective and why they should lend you money.

“So ask yourself two questions when you approach a bank for finance. Consider if that was a customer or potential customer you desperately wanted to attract, how would you portray to your customer that you’re going to win, that there’s a real reason why they should want to do business with you?

“And if I was going to give the biggest contract I was ever going to award to a supplier, a contract so important that it could ruin my business if I get it wrong, what would you want to know about that supplier? In 2009 during the liquidity freeze there was a serious proposal that every bank in Europe should be nationalised and you’d be surprised how close that came to happening.

“If that had been a supplier I guarantee you’d want to know who you were dealing with. Do you do that same level of due diligence with your bank? Why is it important to present your case well to the bank? There are lots of obvious

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DEBATE good reasons. A less obvious reason is that people doing business in a bank are responsible to their managers and their shareholders. They don’t own that business. Capital’s a scarce resource.

“You might not realise it but you are competing for attention within the bank as a SME. The way capital weightings are regulated means the cost of doing business with a SME is twice as much as doing it with an individual. So in terms of capital cost, to lend you £1 to build your factory is twice as expensive as it is to lend you £1 to buy your house.

“So inside the bank you’re not competing on a level playing field. This isn’t wholly the bank’s decision. Risk Weighted Capital allocations in most cases drives that. You’re effectively asking the bank: ‘Can I rent your balance sheet?’ With the tension already of how profitable this or that is, you can see tension there. It’s a problem for society as a whole.

“Capital weighting are driving a lot of bank capital into the housing market – not just here, but also in Australia, New Zealand, Canada.

People are starting to realise that’s a drag on investment in businesses around the world.

It’s a big issue. People have a hand to play in getting this on the agenda of government. A lot of people are involved in various forums and have political connections. It is something that needs to be raised as an issue – about making it a more level playing field in where bank balance sheets are invested.

“Think also about what you’re prepared to pay. There comes a point where it’s just not worth the bank doing business with you. In terms of return on capital it is more sensible for them as business people to employ that capital elsewhere. Negotiate hard by all means but just remember, you’re not on a level playing field.

“In communication the client holds an advantage in conversation with the bank. You can manage the messages they hear and what they see. You have to be honest and open. But you have to be open with each other as well.

You would be surprised how many times I have seen propositions turned down not because of a business per se, but because among the directors or the partners one of them may have something on their record that worries the bank for some reason.

“In the last nine or 10 years lots of people

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have been financially stretched. It happens. The issue is: the other directors and shareholders or other partners may not know about this. They haven’t been able to have that conversation openly with each other. So when you go to the bank it indicates there’s a lack of openness and honesty within the business.

“You could have managed that message among yourselves but you didn’t. Credit agencies are very important in the process of bank decisions and they are going to become more important. This information is privately available to you as individuals and if you don’t take control of that credit data – there is an opportunity to work actively with the credit agencies – then you’re missing a trick. You can improve your position and head off something that could become an issue.

“Finally, how much do you know about your bank? Does size matter? It seems to in banking and it seems to in the UK. Who is the world’s local bank – HSBC? It is by many measures the biggest bank in the world, and depending on which search engine you look at, there are around 200 countries in the world. HSBC, the world’s local bank, the biggest bank in the world, in 200 countries around the world has a market share exceeding 10% only in three countries - Hong Kong, the UK and Mexico.

“Now, there’s no issue with HSBC or any other bank for that matter on this. But you have to know who you’re dealing with. Do you know the bank or just the marketing messages?

Are you going to ask the right person or the right bank the right question? If you don’t, it’s unlikely you’ll get the right answer for your business. So there are three areas where maybe

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you could make a difference of 1% or 2% in what you ask for. And that might make a difference between being successful or not. So I want to encourage you to think about your banks differently.

“The banks themselves are very old. They’re a 17thC model in most cases. It doesn’t fit well with the modern world. So it shouldn’t be a surprise that they have a problem in reaching their requirements. But it always is a surprise to them. That’s partly the banks’ fault. It’s the way they promote themselves. The listening bank, friendly bank, the bank that likes to say Yes and all the rest of it… It’s not that they don’t genuinely mean it. It’s just that – you know what? – they’re just not set up that way.

“Some changes are coming that may be of interest. British Business Bank is potentially very important to the UK economy. It’s very important to financial markets and very important to the way we’ll be doing business within 20 or 30 years. The origins arose during the recent financial crisis. One of the things that became apparent was that British banks were very successful at building different income streams. It was easy for them when the crisis came to divert capital from one centre to another. They could move it from SMEs to large corporate, or elsewhere. But also it became clear that wasn’t necessarily to the good of society. “Unsurprisingly there has been public outrage over the public having to bail out large banks. On the positive side, a lot of changes are coming down the track. As we speak there’s a competition review of the SME banking market underway. That could be a major driver of change, creating more choice

DEBATE when it comes to raising finance in the future.

I don’t know yet what will come out of that.

But some areas that will probably be looked at include increased portability of business current accounts. Also the ability to move your account in the same way you might transfer your mobile phone number. Making it easier to go into things like direct debit initiation, faster payments and that sort of thing.“Sharing of credit data among banks could arise, so that if you move from bank to bank you have a file that’s portable. You won’t have to start from scratch all the time. They may consider the possibility of a referral system. When a bank turns you down very often it’s because it doesn’t fit within the credit gate I touched on earlier, or it just doesn’t fit their credit risk appetite. Because it doesn’t fit their credit risk appetite doesn’t mean it won’t fit someone else’s. So they could explore a mechanism of passing on deals they can’t do to other types of funders including crowdfunding. They could also encourage more banks to come into the market. “During the crisis one of the things the British government did was to look around Europe and the rest of the world to see who had fared better. One system looked at was the German banking system. People are very keen on the German banking system. It’s a three tier system: private banks, co-operative banks and small savings banks. The latter fund about 50% of all start-ups in Germany. They tend to be very small, regionally based or based on a particular type of business.

“So when the crisis came they couldn’t divert capital elsewhere. They couldn’t not support their customers. If they did that they would have been accepting the fact that they were out of business. So the tiered model has become something the UK Government is very interested in. “If you left everything to the market the small player would be squeezed out. That’s just the way it is. It’s easier to access capital if you’re a bigger player. You have economic advantages in terms of economic distribution and other things. So the difference between the UK and Germany was that there was a bank in place called KFW, a German state owned investment bank, which facilitates the access of capital working with the small banks. So, effectively, public money is going into German banks every day. No-one bats an

eyelid about this.

“Those who know about it understand that it’s actually for the wider public good. Structurally, the British banking market wasn’t all that dissimilar 20 years ago, but we lost a lot of players in the industry. We really need to bring those back. But we need also to provide statutory protection and support to ensure they can continue to flourish. When you lose choice you are disempowered.

“The politicians, and particularly Vince Cable the Secretary of State for Business, Innovation and Skills has been a great champion of this, I think in a few years’ time people will look back and realise what a significant change he has made for the people of Britain through the British Business Bank. It is charged with improving access to finance. It will not lend to people directly. But for every £1 put in they

You might not realise it but you are competing for attention within the bank as a SME expect to generate another £10 of lending to SMEs. The first input will be £1bn so they’re looking for about £10bn of extra funding to be made available by the banks. The range of solutions they’re looking to support include equity, venture capital, mezzanine, crowdfunding, working with banks.

“They’ve just gone through a shadow phase and are looking to work with 60 or 70 players in the UK market. Bear in mind there are only four big banks and they account for 85% of lending in the UK at the moment, the British Business Bank is looking for a lot of innovation in the sector, looking to work with a lot more people. The majority of the 60 or so either don’t exist today or are not particularly prominent. That’s something to look forward to. That will stimulate a lot of choice in the market.

“So you can do things to improve the nature of the relationship with your bank and start them thinking about you a little bit differently.

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While banks do provide the majority of finance in the UK at the moment for SMEs, there are alternatives. North East Access to Finance does produce a very good guide which details where else you can access finance.

“Also there’s a lot going on in the market you might not be aware of. But you will get more choice in terms of the people you want to bank with and how you choose to raise and access finance. The pace of change will increase during 2015 and 2016. It is reported that the Regulator may be currently looking at about 20 different licence applications. You will hopefully start to see some of those coming through to fruition.

“Five years ago there were no i-Pads. There are now a lot of tools out there available to help banks make decisions and help them engage with customers that the systems within big banks are just not able to take advantage of. We at Atom are also at an early stage of developing our strategy. I can’t say more at this stage as regulatory approval is necessary and we have to take feedback from the Regulator.

Question: How subjective are banks?

“With a centralised lending model of banks there is a tendency to take more of the financial information than the subjective information because it’s very difficult to build that into a model. In the modern world you can’t have one person looking at every single aspect of a business. It’s just not practicable.

They build models that look at the behaviour of businesses and how they expect things to work. Their models try to stress ‘look what happens if…’ It’s much easier to stress something from a numerical point of view than from a subjective point of view, such as what happens if one of the management team leaves? The answer from what I’ve seen is that they take far too much notice of the financials in some cases, and probably not enough notice of some of the softer things. But it is very difficult for them to do that, in fairness. And it does have implications for the cost.” n There are presently about 300 sources of financial support available for entrepreneurs seeking backing in the region. See NEA2F on www.nea2f.co.uk/ media-centre/reports/north-east

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BREAKFAS T

LIVE When you raise the money it’s about selling yourself, your business and your product. It’s not really rocket science. But it’s about understanding and believing in your own product and getting someone else to do the same thing SCOTT HOPKINSON, FINANCE DIRECTOR - MONEYGATE GROUP

in association with

EUROPEAN UNION Investing in Your Future

European Regional Development Fund 2007-13