So we signed over our home to the bank

As orders flooded in, two knitwear entrepreneurs chose the wrong way to raise funds; My biggest mistake
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The Independent Online
Patrick and Jane Gottelier, both 45, are partners in the Artwork knitwear brand, with outlets such as Harvey Nichols, Fenwick, Liberty and Whistles. They met as post-graduates at the Central School of Art in 1975. Their knitwear is now sold in 15 countries including the US and Japan, and as design consultants their clients include Marks & Spencer, Shanghai Tang and Dewhirst Lorien.

"Jane and I started our own business largely because we were unemployable. Neither of us were corporation people, though we did try having proper jobs. After college, Jane joined the BBC's costume department while I went to work for Marks & Spencer, but within 18 months we realised that we'd only be happy working for ourselves.

Our big break came in 1977 when one of our customers asked if we could turn our hands to producing original sweaters by updating the traditional Fair Isle design. That led to orders from the fledgling fashion chain Whistles and from Macy's in New York.

The only problem was that we didn't have any money; we were living from hand to mouth. We could afford to buy the yarn for couple of dozen sweaters, but with serious orders coming in we had a cash-flow crisis.

By this time we were living in a house in London's East End which we had managed to acquire for the princely sum of pounds 8,250. It needed a lot of renovation, but we managed to get a grant to do it up. Around the same time we exhibited at our first trade fair, which was in New York. We were realistic about what we could take on in terms of production, and by lunchtime on the first day we had so many orders that we were forced to close our books. We felt that we'd already bitten off more than we could chew; somehow we had to find a way of raising enough money to buy the yarn and pay the knitters.

Our bank manager, we thought at the time, was great. He said words to the effect of: `You've got a house ... property's doing really well ... sign this bit of paper and we'll give you an overdraft.' But in reality, that overdraft was not based on the size of our order book, the quality of our customers, our ability to manage the business or to manufacture the goods. It was based solely on his belief that there was good equity in our home.

We made our first mistake at that trade fair. If we had only kept our order book open for the full three days we probably could have got enough customers to pay in advance to finance all of the production costs. We wouldn't have needed to sign our house over to the bank, which, of course, was our biggest mistake.

Our business grew rapidly throughout the Eighties, and since property prices continued to rise, we always had enough collateral to fund our increasing costs. We had great press coverage, we sold to the best shops throughout the world, our turnover was getting bigger every year and we were able to earn a living.

Profit, as a separate entity, was not something that we had ever considered to be a requirement, and nor did the bank. But in 1990, property prices plunged and our bank, like many others, panicked.

The manager responded by transferring two thirds of our overdraft to a short-term loan. `Restructuring your finances' was the euphemism used. Ironically, our order book was still booming and we appeared to be doing incredibly well. We felt he had found a way of being able to help us finance the production costs. Looking back, I don't think it's possible to be more naive.

In reality it meant that suddenly we were committed to enormous monthly repayments. We kept thinking we had the money to pay the bills, but we didn't, because it had already been deducted by the bank. And we weren't generating enough profit to finance that sort of drain on our working capital.

We didn't just owe money to the bank; we'd built a business with a turnover of pounds 1.5m which employed 1,200 knitters and we owed money to them as well. Our order book, which represented our income for the next six months, was nowhere near what we needed, and we were forced to call in the receivers with the result that we lost our home.

These days we stick to what we're good at, which is designing. We don't attempt to finance the production costs; we have a trade finance company for that, using the customers' orders as collateral. Next year our turnover will be more than pounds 1m again, and, while we still don't have our own home, at least the knitters have been paid what they were owed.

The most important lesson is you should never, under any circumstances, put your house up as equity to raise money for your business. If anyone advises you to do it, sack them, because if the business is sound, there are options that don't involve risking your home."

Patrick and Jane Gottelier were talking to Corinne Simcock.

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