Small Talk: Other sources of money for young businesses don’t mean banks can’t – or shouldn’t – help


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The Independent Online

The retailers Sir Philip Green and Mike Ashley top an intriguing ranking just published by Start-Up Loans, the government scheme set up to offer new businesses finance, advice and mentoring. The “Rags to Rich” list features entrepreneurs who started with a relatively small cash sum and turned the companies into large and successful enterprises.

Sir Philip’s fashion empire, for example, began with a £20,000 loan that enabled him to begin importing jeans from the Far East. Mike Ashley got Sports Direct off the ground by borrowing £10,000. Both businesses are now worth close to £4bn.

Other names on the Start-Up Loans list include Sir Richard Branson, the telecoms tycoons John Caudwell and Charles Dunstone, and more recent success stories such as the food business founder Charlie Bigham.

The list struck a chord with me after two conversations I had last week. The first was with the head of small-business banking at one of the UK’s biggest retail banks who was talking about its partnership with School for Startups, a similar scheme to Start-Up Loans. The partnership was necessary, this executive explained, because the bank itself did not feel able to lend a single penny to businesses that did not have a trading record of at least a year. Nor do any of its rivals, by the way.

The second conversation was with a successful entrepreneur running a multimillion-pound business that is hoping to grow over the next 12 months. This company, the founder explained, had never again approached the banks for funding having been turned down for finance when starting out a few years ago. The entrepreneur’s exact words were: “We were laughed out of the branch.”

Now, it would be foolish to argue that banks should be throwing money at brand new businesses that are completely untried. And we’re fortunate that schemes such as Start-Up Loans and School for Startups are available as alternative providers of finance for businesses that exist currently only as a twinkle in their founders’ eyes.

Still, there was a time not so long ago when our banks would have been prepared to support some start-up businesses. And today, all the leading banks make a great deal of noise about the advisory services they can offer small businesses – everything from help with an initial business plan to intensive restructuring work. If that level of expertise exists within these organisations, could it not be harnessed to provide a view on whether an entrepreneur’s business idea is viable and worth financing?

In fact, isn’t part of a bank’s job in these cases to provide something of a reality check, unpopular though that may be? Not all business ideas are good ones, or even well thought through, and a frank exchange of views early on might save a would-be entrepreneur a great deal of heartache later – or, even better, persuade them to do a bit more work on the idea first.

It is fashionable these days to talk about “funding ecosystems” in which finance is available for different types of enterprise at different stages from a diverse range of sources. This diversity – everything from crowdfunding and peer-to-peer finance to government-backed grant and loan schemes – is to be welcomed, and can work alongside the traditional banking system.

Nevertheless, it would be unfortunate if the banks became ever more conservative, safe in the knowledge that there are other funding mechanisms available. All the more so since the banks very much want these businesses once they’ve proved themselves.

Start-up companies do get some  support from their banks already. Many benefit from free banking in their earliest years and are offered all sorts of potentially valuable advice and help. But they shouldn’t automatically have to look elsewhere for finance. After all, as the Start-Up Loans ranking proves, some of these small enterprises will one day turn into global business enterprises. The banks may live to regret not supporting them sooner.

‘Black Flash’ looks to crowd for support

As the crowdfunding sector goes from strength to strength, the actors Ashley Walters and James Corden are being lined up for roles in a project that would be the largest film fundraising conducted in the sector.

Roker37 Films is aiming to raise £3m on CrowdBnk in order to make Black Flash, which will tell the story of Laurie Cunningham, the first black footballer to play for England.

The producers say Walters has already expressed an interest in playing Cunningham, while Corden is in line for the role of Ron Atkinson, under whom the footballer played at club level.

CrowdBnk is a relatively new equity-based platform that has so far raised £7.2m of investment for 12 companies. Unlike other platforms, it also takes a stake in every business that successfully raises money.

Leasing lends freedom to small firms

Businesses raised more money from leasing finance last year than at any time since the financial crisis, data from the Finance & Leasing Association reveals. British businesses took out £23.9bn worth of asset finance during the 2013-14 financial year, a 10 per cent increase on the £21.7bn raised this way in 2012-13.

Asset finance, available from specialists, enables a business to borrow the cost of a capital investment upfront, with the payments spread across the lifetime of the asset. Often the loan is secured against the asset, which leaves the business able to conduct normal borrowing elsewhere, and there is generally an option to update the asset at the end of the agreement.

Peter Alderson, managing director of LDF, one specialist leasing finance provider, said that while conventional bank lending to small businesses was falling, the increase in this sort of finance suggested businesses were expanding in order to take advantage of growth opportunities. “More businesses are using leasing to invest in assets to drive growth,” he said.

Small business person of the week: Dawn McDaid, Co-founder, Hot House

“We launched in 2007 just as the recession hit – we knew we were taking a risk but we also figured that if we could make the business work then, it would succeed anytime.

“Our idea was to be a champion for British brands, focusing on the beauty industry, and selling our products at home and abroad – to this day, we control every stage of the process.

“Our first brand was Brown & Harris, a range of toiletries. It was a real struggle getting it up and running because even when we had our first order, we didn’t have the cash to pay for it to be produced – we called in a favour from a manufacturer we’d worked with earlier in our careers.

“The idea from the beginning was to go multi-brand and we now have eight different brands in different niches – the idea is to diversify so that if one area of the market slips into the doldrums, we’ve got protection.

“We’ve also been an exporter right from the start and we’re now selling in 22 different countries. We’ve worked very closely with UK Trade & Investment, which has often been able to introduce us to potential local distributors.

“We’ve always taken baby steps, but what started out as a genuine kitchen table enterprise is on target to turn over £6m this year. We’ve never borrowed any money and we’re still completely self-funded, so most of that money has to go back into the business.”