A decline in bank lending means small and medium-sized enterprises are struggling to secure the finance they need to start up and grow. But there are alternatives out there.
"Small businesses and entrepreneurs are the lifeblood of the British economy and I am determined that we, working with the private sector, do everything we can to help them to start up and to grow in 2012.” Some pretty big promises there from prime minister David Cameron at the beginning of this year. But if he was hoping for support from the banks, he can think again. He is right on at least one score: small businesses are crucial to the UK economy. Data from the Office for National Statistics has shown that small and medium-sized enterprises (SMEs) make up 99.9% of the total number of businesses in the UK, and collectively they employ nearly 60% of all private-sector workers. This equates to 48.7% of total private sector turnover in the whole of Blighty – a statistic not to be sniffed at, especially in these dicey economic times.
But for these businesses to begin in the first place, and then to thrive, they need some start-up capital. And that financial support certainly doesn’t seem to be forthcoming from the banks: the latest figures show that lending has fallen again. Statistics released on July 30 2012 showed that bank lending to corporations has slumped to £489bn - more than 25% below a peak at the end of 2008. And lending to small businesses is similarly in decline.
The credit headache doesn’t end there. For businesses that are lucky enough to secure a bank loan, interest is soaring: the rate paid by firms on bank loans has risen 0.16% – to 3.12% – since June of last year. This is, of course, well above the Bank of England’s benchmark interest rate of 0.5%. The rate on overdrafts has escalated too, rising to 3.79%.
It’s not much of a surprise that small firms are struggling in this climate. Entrepreneur networking events are bulging at the seams with people telling their finance horror stories. Meanwhile, the start-up community is littered with the skeletons of unfortunate companies that have not managed to pull themselves back from the brink.
One business currently fighting for its survival is Adam House, better known as Adam St private members’ club. Adam Street is an institution. Operating since the dot com boom in 1999, the club was formally set up to support entrepreneurs and freelancers in 2001. Along with its serviced offices, the company houses 30 different businesses and the club boasts in excess of 1,000 members.
Adam House has gone into receivership and the businesses and properties are on the market. Despite James Minter, who runs the club, finding a £600m fund that is ready to buy the building at a market price, the agents chosen by the bank are focusing on trying to find a residential developer. This means a business that employs 40 people, contributes £700,000 a year to HMRC and, most importantly, is a hot-bed of entrepreneurial talent, may be turned into flats. It will be a dark day when Adam Street closes its doors for good, not just for entrepreneurship in London, but for enterprise in the whole of the UK.
So what role are the banks playing in this saga? The bank in question has a duty to sell the assets for the maximum price, and has been advised (wrongly, says Minter) that residential development is the best way to guarantee this. But Minter says that banks should be thinking more strategically about the long-term future of the UK economy – not just reacting to immediate pressures. “Should the banks have a more intelligent view and think about the good of the economy, or just their short-term goals?” he asks. “The banks are now so big that it is pointless for them to say that they are just reacting to market forces ... they have been bailed out by us, the taxpayer – surely they have a duty to think more strategically.”
Minter is not alone in his despair. But his situation, and hearing similar tales of woe from his members, inspired him to launch a series of lunches entitled Bypassing the Banks, at the end of last year. These introduce members to the concept of peer-to-peer lending, which Minter first came across eight years ago when a proponent gave a talk at Adam Street. Since launch, the lunches have been attended by some of the biggest crowdfunding companies in the UK: Zopa, Crowd Fund, Funding Circle and Funding Knight. The sector is thriving – but isn’t without a few teething problems of its own, according to Minter.
“The big challenge for all these guys is to grow to a profitable scale,” he explains. “They have a massive boost from the visceral hatred everyone has for banks, but they also have to confront issues of trust. The other big barrier to growth for the peer-to-peer lenders is that they can only lend to people with high credit ratings - and people with high credit ratings don’t need to borrow much money,” says Minter. Indeed, competition in the crowdfunding marketplace is hotting up. The phenomenon really came to the fore after Kickstarter was founded in the US in 2008 to fund a range of creative endeavours, such as indie flicks, music and video game development. And it didn’t take the UK long to follow suit. One of the biggest crowdfunders for small businesses in the UK is now Funding Circle, founded by Oxford graduates James Meekings, Samir Desai and Andrew Mullinger.
“Every day we were reading in the papers about good businesses not being able to access finance. Then you’d look at individuals with money saying I want a return on it. We knew there must be a better way of connecting them,” recalls Meekings.
The former consultant also has a few choice words to say about the banks as they currently operate. “I think the current model of bank finance is broken,” he says. Businesses will go to them because they always have done, but if we really want to improve the way companies access finance we really need to look at innovation to do that. And I don’t think banks are the answer to that.” But perhaps offerings like Funding Circle are? The Venture Capital community certainly seems to think so: Meekings and co have already raised £13.2m for their venture. And the figures speak for themselves – Funding Circle has already lent more than £37m to small businesses in the UK. One of the advantages Funding Circle and its peers in the crowdfunding market have is that they are small businesses themselves. They get it. As Meekings himself puts it: “We share the same vision – giving small businesses a better deal.”
The bank won’t give you a loan? There are other options...
These differ according to geography, your age and sector. Visit www.ukbusinessgrants.org and use the handy funding finder for an idea of what’s available to you.
Some crowdfunders, like Funding Circle and Funding Knight, currently only lend to established small businesses. Look out for Kickstarter coming to the UK shortly.
Challenger banks are springing up as alternatives to the traditional, staid financial services companies. One is Shawbrook Bank: it doesn’t operate a branch network, instead distributing lending products through brokers, leaving more room for agility. Seed funds. There are lots of these about, usually with a specific interest in tech businesses. The biggest is Seedcamp, a European micro seed fund for internet technology companies, with newbies including #1 seed.
A type of start-up incubator, but where investment is involved as well as (often) workspace and mentoring. Examples in the UK include Springboard and IP bootstrap.
Going it alone
When Chris Bishop founded digital media agency 7thingsmedia in April 2009, a few months after the collapse of Lehman Brothers, he knew getting his hands on some initial capital was going to be tricky. But he had a good relationship with his bank and a solid business plan - surely they’d be willing to give him a small business loan?
“I saw my local branch manager at my bank and he basically said ‘good luck’ and that was that,” says Bishop. “I was passed upwards and the message was the same: ‘We wish you the best of luck.’ The best they could offer was a £5,000 overdraft,” he recalls.
Bishop used his £10,000 savings to fund the business as he was reluctant to get investors on board and lose equity. In the first year, the company turned over £500,000; three years later revenue will reach £3m. But it hasn’t been straightforward achieving growth without a cash safety net. “I wanted to bring income into the business to guarantee employment, an office, that kind of thing,” says Bishop. “There’s a certain comfort and security of having money put aside for growth.”
Bishop’s time and attention were also diverted. “In our second year, I spent my time micro-managing the pounds and pence rather than generating more revenue for the business. There’s no doubt that our inability to borrow money impeded our growth,” he explains.
But the business has still grown impressively, with or without the support of his bank, and Bishop opened a New York office this year. There are benefits too of having started on a shoestring. “We are very frugal as a business,” he says. “We’ll never waste money. We are the business that has grown up in a recession.”