Bank debt: the end of an era?

Surely by now it must be evident to the readers of Real Business that the high-street banks would prefer to turn their back on the small business world. If you can ever get them to be candid they will admit they no longer have the internal infrastructure to cope with lending £0.5m here, £1m there to thousands and thousands of little customers. Unless, of course you want a mortgage and even then, with valuations heading downhill again, I wouldn’t count on it.

At the risk of making myself deeply unpopular, I think turning the debt trap sorry, tap, off is a healthy development. It may feel like cold turkey but businesses will be better for it.

The goal for every small business should be to finance long-term capital through equity. By all means use trade debtor finance but stop at that. How can you access equity? Start by writing a coherent business plan. If you can’t do that why on earth should anyone believe you are competent to build a business?

Of course in your early days it is highly unlikely you will be able to access equity from the public markets such as AIM and PLUS or indeed from the private equity houses. But there are other avenues. For example, did you know that Luke Johnson, the well-known small cap investor, ex of Pizza Express, and weekly FT columnist on entrepreneurship, recently bought a 27 per cent stake in Beer & Partners, one of our biggest business angel networks? His logic is that, “angel investment is the only realistic option for early-stage companies. Currently banks are barely open for business or tend to offer loans on unattractive terms, so the need for equity capital (for early-stage businesses) is greater than ever. Since current low interest rates give savers such poor returns, more and more angel investors are emerging that have a strong appetite for direct investment in small companies”.

Then, of course, don’t forget friends and family. If you feel confident enough that your business will be a success but you need capital, why not raise some equity from these sources? If you are not confident, scared of putting together a plan, or simply fearful of asking, why should anyone bother with you?

Ask any addict and he/she will tell you that you need discipline to kick the habit. Wean yourself off the bank and enjoy a long life with equity.

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