Funding for New Ventures: Banks v Crowds
This morning’s announcement by Lancashire Council of its peer-to-peer lending scheme for business is to be applauded. It is the Council’s response to the need for business to gain access to funding, which is critical to stimulate economic growth and help the UK climb out of its economic difficulties. The Council will invest £100K into local businesses using Funding Circle, a ‘crowd funding’ marketplace where people lend directly to small businesses, in essence bypassing the banking system. Lancashire Council will fund about 20% of a loan to a local business. Funding Circle assesses the credit worthiness of the business and then posts the loan on its marketplace [website]. Investors then choose which type of businesses to lend to, and bid the amount of money they wish to lend from as little as £20. The risk is spread across many investors, each investing relatively small amounts.
To illustrate why we need innovative schemes like this one in Lancashire, consider a recent client of mine who had developed a highly innovative engineering product and needed finance to get the product to market. Despite it’s great potential and the backing of the Technology Strategy Board, the banks all said 'no’ - to be honest it was more a case of 'the computer says no’.
After researching how he could protect his intellectual property, I investigated the myriad of schemes on offer for raising finance by equity, debt and grants. Once I’d checked the small print for each scheme and consulted various experts such as bank corporate finance managers, angel investors, numerous websites and the Better Business Finance for You helpline, there were only 3 options with any realistic probability of success. These were: partnering with an established company using the Corporate Venturing Scheme, which provides tax incentives for established companies to nurture an unquoted company; Enterprise Capital Funds, whose raison d'etre is to address the 'equity gap’ that exists when viable business propositions are unable to attract investment; and borrowing from family and friends.
You will have noticed that the above options do not include a bank business loan. I’m no apologist for the behaviour of the banks and their contribution to our economic woes, however we do need to understand their role in financing business. We would not expect to get a mortgage without having a regular income, so why would we expect banks to lend to a new venture with no cash flow? The role of the banks is to provide working capital to established businesses, not to provide risk capital. It is for shareholders and investors to finance the higher risks associated with new ventures. Regrettably this does leave the economy with an 'equity gap’, and Lancashire’s initiative is an example of some of the innovative ways that are being developed to close this gap.
At a recent business breakfast I attended, the need to open up credit lines and investment funding for SMEs was put to Vince Cable again and again by entrepreneurs. He acknowledged the importance of this and it remains to be seen whether this Government is doing enough to close the gap. It is therefore heartening that Lancashire Council has taken the initiative with its new scheme,the first by a County Council in the UK, and I hope others follow its lead.
If you know of an innovative business funding solution, I’d love to hear about it.
Ross Nichols
Business Mentor and Coach
www.businessmentoringservices.co.uk
@Biz Mentoring Ltd