It’s no secret that, as they seek to rebuild their balance sheets, banks aren’t lending to small businesses. For them, risk is off the table. But it doesn’t have to be this way. Remove banks – and their tortuous credit committee decision-making process – from thef the loop, and things can move fast, to the advantage of all.
How do I know? In early 2009, I started working with my advisers on an innovative “shaving bond”. It was designed to appeal to everyday users of our King of Shaves brand. This initiative could be the government’s solution to help small UK businesses accelerate.
So that George Osborne doesn’t have to reinvent the scheme, here’s how it works.
First, the business must be a genuine business: one that’s trading, one that has a track record, that has a banking relationship and, ideally, has a strong customer base. Product-based businesses (especially those that export) are ideal. It won’t really work for start-ups, as advisers (and sanctioners) will need reassurance the business is REAL.
Second, and contrary to received opinion, the bonds must not be tradeable, transferrable or form any sort of financial instrument that could be traded in a “bond market”; and only redeemable under the terms of the bond. This is critical, otherwise issuance of such bonds becomes, in effect, an investment prospectus – in which case, legal costs and red tape escalates.
Here’s how we did it:
- Appointed a legal adviser (in our case, MemeryCrystal LLP) – to draw up the legal framework, terms & conditions of the bond;
- Appointed an accountancy firm (in our case, BDO Stoy Hayward) – to approve of the offer of the bond;
- Chose a bond value (in our case, we issued £1,000 bonds, members of the general public could buy up to five – ie, £5,000 worth of “Shaving Bonds”;
- Chose a “coupon” (interest rate). In our case, it was six per cent (we also supply free shaving gels & razors to bondholders, which topped up the value to an effective 12 per cent APR;
- Chose a term for repayment (three years) and interest payment schedule (every six months);
- Outsourced the management of the interest repayments (and the Shaving Bond Holder Registrar) to Equiniti (who manage this for many other companies);
- Launched the bond (June 2009) via the internet;
- Publicised the bond issue (via advertising & social media);
- Closed the bond issue (on July 31, 2009); and
- Received the money (to help King of Shaves grow in UK & International Markets) – due for repayment in August 2012 and accrued for.
And that was it. We make our interest repayments every six months. Bondholders get their money back in August 2012 (we raised £627,000 from 325 bond holders). And we put the money to good use – growing our business, investing in strategic growth opportunities, shaving the UK better, forever.
The UK SuperBond for Small Businesses & SME’s
Coming onto credit easing (what the chancellor is proposing). This should take the form of what we did. A simple ten-point process, where the only differences are:
- The government (read taxpayer) is the bondholder;
- The repayment term should be between three to five years (depending on the amount required and repayment schedule);
- The coupon of the bond (interest rate) could be lower (or higher) than six per cent depending on the type of business; and
- Use a web-based sign-up framework to administer bond applications (or work with the companies’ individual banks – two of which are majority tax payer owned anyway.
Essentially, this is a mirror image of what used to be called the DTI Loan Guarantee Scheme – a loan we successfully used in the mid nineties. With that scheme, the Government guaranteed to pay the bank 85 per cent of the loan taken out (we took out £100,000); if we defaulted, the bank would pay the remainder.
We didn’t default, and that loan helped us grow sales from £500,000 to £2m in three years. In the case of the ‘SuperBond’ – here the bank is not on the hook for anything, and indeed may be paid for providing the administrative framework and infrastructure, banking bond repayments and, on behalf of the government, receiving back the bond amount lent when the term ends.
It’s really little different to the government providing students with loans to attend university, and the students paying back the Loan post-employment. In fact, this exact framework could provide the infrastructure. Why involve the banks at all?
Finally, it’s important that it is a bond. A bond is a powerful word. It’s what you do when you get married – you enact a bond with each other, for better or worse, richer, or poorer. You don’t “loan” yourselves to each other.
This word can allow business to bond with government. It’s been done (we pioneered it). It’s simple, and cost-effective (we’ve proved that). And if you Keep It Simple, and don’t let it get complicated, it can work quickly.
One final point: I do not believe these bonds should be tradeable in any sort of aftermarket. They are for a one-off purpose, while our economy rebalances and resets. Money is available (as evidenced via the £75bn QE programme announced yesterday). Do not let financial salesmen and traders get involved with this. Leave it to small businesses, with help from legal advisers and accountants. The last thing we want is some sort of sub-prime “Bondsi” scheme being created.
Go on, George Osborne, bond with the UK taxpayers.
Will King is founder and CEO of King of Shaves.