Raising Finance

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Where to go if the bank says no

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Traditionally, more than 90 per cent of small and mid-sized (SME) financing in the UK has been focused in the hands of just five high street banks. For those banks, of course, unrelenting systemic de-risking means SME lending has just got a whole lot less fun.

For you, the small and mid-sized business community, this is clearly bad news. The bank funding required to fuel growth is costly and hard to come by. For the non-bank, equity-based funders of the mid-sized business community (sub-£10m), they’ve just seen their biggest competitor run out of town. A debt drought clearly means equity opportunities.

New equity-based funders are popping up with regularity. In addition to the £330m that VCTs amassed in the last financial year, there are a plethora of small buyout and regional players active in the sub-£10m pool and Westbridge Capital’s debut fund close earlier this month suggests their numbers are continually swelling.

And the financial markets are nothing if not innovative. Gaping holes seldom stay unfilled for long. Indeed, we are already seeing a more plural financing market than ever before.

Our 2012 Entrepreneurs’ Summit, taking place on June 13 in association with Investec and the CBI, will bring together some of these rising competitive forces to discuss “the Finance Challenge”.

The first participant on the finance challenge panel is Will King, founder of “challenger” shaving products business King of Shaves. In June 2009, King announced a “shaving bond”, an issue of 5,000, £1,000 non transferrable and non-convertible bonds, offering six per cent interest per annum over three years.

Creating a whirlwind of publicity, and taking advantage of brand loyalty and rock bottom savings rates, King pioneered a fundraising mechanism that has since been emulated by many, including retail giant John Lewis. In addition, of course, there is growing momentum behind the creation of a government SuperBond, akin to the old DTI Loan Guarantee Scheme; indeed, akin in many ways, as King says himself, to a student loan, offering simple and cost-effective financing – crucially with no need to cede control.

Joining King on the panel will be Andrew Mullinger, co-founder and director of Funding Circle, a collaborative lending business that’s invested more than £30m in more than 700 companies since launch in 2010. Once again, taking advantage of miserly savings returns, Mullinger’s model means it can undercut what he calls “laughable bank rates”. A recent government commitment to back peer-to-peer financing initiatives, meanwhile, means Mullinger is the only one laughing now.

Third on “the Finance Challenge” panel is Neil Murray, CEO of Liverpool-based pharmaceutical business Redx Pharma, which received close to £6m from the Regional Growth Fund last year, one of a growing number of government initiatives designed to stimulate growth and, in particular jobs.

Next up is Ed Cottrell of Investec, representing a fresh and innovative alternative to the traditional banking sector – operating across the capital structure including mezzanine, minority equity and ABL.

Last, but not least, we have Stephen Welton, chief executive of the contentious Business Growth Fund – a mechanism by which those high-street banks – which were hitherto providing more than 90 per cent of SME financing – are still backing small and mid-sized enterprises – just in pursuit of an altogether higher return.

While the Business Growth Fund sets a minimum threshold of £10m in revenues, this is an equity juggernaut that may ride roughshod over lower mid-market equity providers.

It could be argued that the sub-£10m financing market is becoming more complex and highly populated than ever.

In the US, there are more than 15,000 financial institutions lending to companies, of which only around half are banks. A similar model in the UK seems inevitable. For any entrepreneur, ceding equity, let alone control, is a mighty big step. Any alternatives will be taken very seriously indeed.

“The Finance Challenge” is just one session at the 2012 Entrepreneurs’ Summit, held in association with Investec and supported by the CBI, Land Rover and Spring Law, on June 13 at the London InterContinental, Park Lane. This will be the most high-density gathering of high-growth businesses in the UK this year.

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