How can businesses best position themselves to attract private sector finance in today’s economic climate, and what must be done to achieve this?
The issue: How can businesses best position themselves to attract private sector finance and investment in today’s economic climate, and what must be done to achieve this.
Who's who around the table
Andrew Mitchell, chief executive, North East Finance, Joe McLean, partner, Grant Thornton, Angus Allan, partner, Clive Owen & Co, Andrew Burton, managing director, Viking Fund, Grahame Maddison, area commercial director, HSBC, David Land, commercial director, Tallent Automotive, Nicki Clark, chiefoperating officer, Business & Enterprise Group, Lucy Tarleton, business development manager, London Stock Exchange, John Flynn, executive partner, DWF Newcastle, Alastair Waite, director, Onyx Group, Bill Scott, chief executive, Wilton Group, Nigel Williams, partner, Dickinson Dees, Mark Simpson, group executive director, Nigel Wright Recruitment, Brian Nicholls, editor, BQ Magazine.
In the chair: Caroline Theobald, BQ Live
Venue: Rockliffe Hall Hotel, Darlington
Banks are lending where a company shows a robust business plan demonstrating viability and good management. The Governor of the Bank of England in November told banks to prepare for things worsening because of the increasing risk of sovereign debt failure. There are banks owed by governments which are not going to be able to pay. The banks are being warned to get their capital ratios up. The day before there had been a debate about getting money into the economy. But the banks will have less to give out because they’re fearful of any sovereign debt failure.
Andrew Mitchell: In past recessions many problems arose in the small business sector. Since 2008 people have seen the problem arising from investment banking. There’s a concept that small businesses are being punished. People see other profits announced, and high remunerations, and conclude banks are tightening only the belts of small businesses. There’s a mismatch of communication, a message that it’s business as usual and if you can’t get a loan it’s because you’re a bad business. That can’t be right, any more than that bad businesses given money five years ago were good businesses.
Grahame Maddison: It’s generally known businesses aren’t as well structured now. Businesses that have a good business plan, are well managed, well structured and have assets can still get money.
David Land: Finance people are risk-averse. You don’t want your money in any manufacturing that has a marginal element of doubt. Our whole business carries risk whatever we do; every day we walk in and something may break down. We may not be able to supply, creating a big financial burden. There’s a layer between us. How is that gap bridged? It’s difficult. Our company has no problem getting money because we’re a global conglomerate, and absorb cash quite quickly. We’ve a six-year turnover of product and probably invest £10m or £15m yearly. But supply chain firms struggle. Where’s the commitment, the push, the incentive?
Joe McLean: Isn’t the challenge about how businesses are to position themselves to attract capital? Businesses have to gear up, ready with a business plan that’s irresistible.
David Land: I think we’re getting progressively better at doing the right things. We’ve never been busier over the past two or two-and-a-half years. I’m working six days a week – long may that continue.
Alastair Waite: I have had no great problem with banks. We’ve a good business, good assets, contracts and revenue, and we’ve generally found it not difficult to raise funds. If you’re successful, funding finds you – and not only from banks. There are all the other types of funding. It’s getting the mix right. The challenge for many firms is understanding the stage of the development cycle their business is at, and what type of funding is therefore most appropriate for that stage. I just wish there was a decision tree to help businesses get through that myriad of where are you now, what business are you in, what are you looking to invest in, why do you need the money? You should be able to go onto something like Northeastfundingsupermarket.com and find the most appropriate funding, so you can go directly to the money and aren’t wasting time.
Andrew Mitchell: People often think things are government-funded and the Government should provide a central access. Different people want different kinds of funds. If you’re a company involved in a £20m buyout the source of fund managers we have, or even the local bank, may not be the right people. There are private equity houses possibly in London, Leeds or Edinburgh, and I don’t know to what extent you can ever make it easy for knowing how to access money. A company clued up, will find it.
Alastair Waite: A clearing house would be a start. I’ve come across a fund or two I didn’t know about. If we’re trying to help businesses along, having them appoint an adviser or consultant to spend a couple of hours explaining what they must do, and querying whether they’re actually ready to get funding, would help. Many don’t have a well developed plan. They waste time talking with people who were never going to invest in the first place.
Andrew Mitchell: Barclays research has shown that historically in business start-ups about 70% were opportunity entrepreneurs, 30% were necessity entrepreneurs. Over the next three to five years the figures will reverse. The 70% will have lost their job, probably in the public sector, and are starting business not necessarily seeing an opportunity but because they’ve got to earn a living. They may be well educated, skilled and with specific knowledge. How does the region help some of those? They may be able to grow their lifestyle business into something that might develop.
Alastair Waite: I’ve been involved with engineering companies that have had problems not necessarily of their making. Their only place to go to is banks. But they didn’t want that type of business.
Joe McLean: The region will have to distinguish between winners and losers. Everyone will say: “I’ve a right to have a business, I’ve a right to get capital.” They haven’t a right to capital if their business is flawed.
Nicki Clark: I feel there’s plenty of supply out there. Is that true? Do you need to be more busy as business angels or whatever?
Andrew Burton: There is money out there. But people look for money for different reasons. Bringing the two together has traditionally happened through banks. They’ve lent out customers’ money. I think the internet, social media and suchlike are putting power back with the money’s owners. You see funding circles and individuals in the US now making loans to business directly, from a web platform. So a direct investor can get up to 14% and all done in 36 hours. No lawyers, no accountants, no banks. I think there’s a future in this. It won’t affect banks in the next five or 10 years, but it’s going to take root.
Grahame Maddison: You’re borrowing from a bank at 3 or 4% over base rate. A private investor will want maybe 25%.
Andrew Mitchell: Investing normally now you get zero return on cash, zero from the stock exchange currently, and most unit trusts offer no value. Many investors think: “Where do we get a return?” We can’t all invest in gold.
Grahame Maddison: Business Angels are different. They are prepared to take risks, unlike the average person using a bank.
Andrew Burton: Many who have been in business themselves are prepared to take risks, understanding the nature of risk, and would rather control it themselves than put the money into a large pot paying 3% a year and handled by someone else.
Mark Simpson: We had an interesting experience about 15 months ago. Previously we had no debt in the business at all. We’d come from recession beating the market significantly. Private equity firms did all they could to get their hands on us. Bank funding was the problem. All the results we had were positive, but there seemed to be a red light in London saying we were in the wrong sector. Despite all the positives, including the due diligence, we were still considered too high a risk for banks. A private equity firm came forward and we got the funding.
Lucy Tarleton: The market has been volatile for two or three years and there has been a red light, but not necessarily because there’s one piece missing. Maybe the company hasn’t been as ready as it thought it was. Maybe it came to market at the wrong time, thinking the window was open and it would be ready by the time due diligence was done, but the market wasn’t necessarily ready for it to come forward because of the volatility. The stock exchange has seen it is difficult for SMEs to come to the AIM just now. We’re making companies aware an exit strategy could be an IPO of the future, and advising them to plan for long term growth, and work with alternative sources of funds such as business angels, VC funds and private equity firms – right across the whole spectrum – to get finance. Legal fees were mentioned as a factor in costs of joining the Alternative Investment Market.
Nigel Williams: Everybody in the room charges for what they produce.
Andrew Mitchell: I’m told the Entrepreneurs’ Forum hadn’t allowed accountants or lawyers to be members. I thought, if you were in London someone might say that lawyers and accountants are as big a generator of cash and capital as any manufacturing. If anyone thinks law or accountancy firms are necessarily bad, we’re probably a million miles from where we want to be.
John Flynn: I agree with Nigel largely, but I think that at the bottom end of venture capital when a business wants financial input, and goes to a lawyer, the average lawyer can’t distinguish between a £10m deal and one of £100,000. They apply the same rules.
Andrew Mitchell: On the AIM, is there any difference between a £2m and a £20m float in terms of what needs to be produced?
Lucy Tarleton: The rules are the same, whatever a firm’s size. Costs probably won’t be the same. It’s difficult to give a precise figure on the costs of bringing a company to the AIM. The more money raised, the less the percentage. If you come to float on AIM or the main market, the cost of the IPO is a one-off. Once on the market, you must think of the benefits of being a public company, which will probably outweigh that one-off cost.
Angus Allan: Many companies in the region have succeeded in raising venture capital. It’s about the right business getting investor ready, getting the fundamentals in place. Still too many people in the region work in a business rather than on it. Over 20 years past there have been so many quangos and other bodies around that nobody knew where to go.
Andrew Burton: Entrepreneurs are opportunistic and optimistic. They’ll seek to drive an opportunity regardless of access to resources or capital. We’ve some very successful and largish companies in the region. All started as one, two, three or four person businesses. We’ve got to nourish the young companies that’ll become tomorrow’s large companies. When you start a business you don’t normally take a year off to learn about invoice accounting, performance bonds and all that. You start your business. Then a time comes when you realise you must learn about finance. You can’t expect to learn everything about finance without actually diving into the pool, so a problem will always exist. People will start a business without adequate capital, without adequate knowledge. That’s why we have a business advice community. There are people out there who potentially will be very successful. But they’re making poor decisions because they lack the experience.
Andrew Mitchell: Who’d have predicted that Wilton or Onyx were winners 10, even five years ago? If you want to encourage people to try their entrepreneurial hand – perhaps we’re excluding corner shops, hairdressers, window cleaners etc – but if we want to start businesses that will go on to be notably successful, spotting is easy with hindsight.
Bill Scott: When I started I was 26 and had a flat. I took my business plan to three banks. All three rejected, saying it was too positive... told me to go away and reduce my optimism. I went to the Yorkshire Bank. I had always thought of it as a penny bank. The manager said exactly the same but added: “You’ve got that glint in your eye. You really want to do this, don’t you?” I said Yes. He called in my wife and asked for our flat as security. That was the traditional bank manager.
Nigel Williams: There aren’t as many MBOs or start-ups in this area as in some areas and I wonder if it’s because, for generations here, you left school at 16, served an apprenticeship then worked till you were 65 and retired. I think there are echoes of that. But in the last 10 years there have been more businesses and a friendlier business community.
Bill Scott: If you have potential, an idea and are young enough, and if you can be identified early enough, you’ll be given opportunity.
John Flynn: A hundred years ago you’d have gone to the local rich bloke and explained properly to him. When the railways started on Tyneside it was agreed Gateshead would have to be bridged. At a meeting in Newcastle, everyone just chipped in. This summer, a girl who was getting £3,000 for something to do with digitising a book wanted to talk to me about a service agreement she was being asked to sign. People lending her the £3,000 wanted her to sign a 25-page service agreement. Why should she have to do that?
Andrew Mitchell: Most money is lent or invested through the stock exchange and institutions. We need in this region 100 or 200 people who are prepared to lend and invest to a lot of entrepreneurs without the 20 pages or 50 pages. You can do it in two pages. In the old days lawyers would make a two-page document. We’re never going to get major capital funds in this region unless publicly financed. We’re never going to get banks lending to high growth, high tech companies with zero assets. If you want to do something in a region like this, far from London – places where an entrepreneur goes into a bar and three people listen to their story and offer fifty grand – how are we to do that here? Maybe we just don’t have a critical mass of wealthy people. Previously, when a good idea surfaced everyone looked to One North East for funding. As part of living in a healthy business community where businesses are growing and good for everybody, how do you gather together that informal need of advisory stuff to make a difference? It still takes some doing to put money that would have gone to a unit trust now losing money into clubbing instead with other people, to see if it’s possible to lend money to local business – even where this guy could be the guy.
Andrew Burton: People make the biggest difference in investment. The idea, great. Compelling marketing opportunities, fantastic. Strong intellectual property, even better. But money doesn’t move by itself. We’ve had presentations from companies where everything looked fantastic but the people didn’t have it. If you can sell your business opportunity to an investor, your track record to a mean-spirited business person and make him part with a cheque for fifty grand, you’ve got a start in life. Unfortunately in the banks’ credit scoring that counts for nothing.
Andrew Mitchell: In Silicon Valley most of the best investments were made not by private equity funds but by entrepreneurs who put some of their own profits back into other businesses. Agents don’t make good investment decisions; they make prudent investment decisions. We need people who can make intelligent investment decisions. How do we create informal networks?
John Flynn: Bring a group of people together and you spread the investment risk.
Joe McLean: In the agrarian and industrial revolutions that made Britain great, people not only ploughed back profits but formed capital unions, family circles – and we hear that phrase coming back about circles. There was then a largely uneducated class who wanted to better themselves. We’ve now had 250 years’ economic progress. We’ve also got millions of young people leaving schools and universities and in some cases unable to take their place in the workplace. They haven’t been educated properly.
Nicki Clark: I think your average business is intimidated by the mystique and black art of the finance world – the language, presentations, networks, clubs. The average person who might be competent to run a business with a great future nevertheless finds it intimidating. They may have confidence individually and be well educated, but haven’t a clue how to talk to a business angel. They suspect clandestine rings. I think many people are realising they should stick to weathering the storm even before they think about growing. But they’ll have to look at different ways of financing. There’s money out there but it’s how to remove the mystique and the black art and make it just a regular process.
Andrew Mitchell: It is a two way process. If you’re keen to invest in exciting young businesses you can’t just wait for envelopes through your door. You must go out, meet them, try to understand them. Too often venture capitalists have had thousands of business plans dropping through the door and it has been very much a buyer’s market. This is where informal local networks can come in. Perhaps investors could get closer to the businesses they want to invest in. I’m put off when anyone suggests they can’t find someone who makes an impressive presentation. Are they investing in a presentation?
Nicki Clark: How much effort goes into taking money to a potential customer and presenting it in a way the customer can understand, and feel they can access and use it? Part of the key to removing intimidation lies with the investor and how they present themselves.
Andrew Mitchell: Lots of people with 4% inflation can’t get any return on cash, either on the stock market or from most conventional investments. If you don’t want your money disappearing at 3 to 4% a year you’d better go out and find things that will give you a return. There aren’t many. But put it in a bank or a unit trust and you make yourself poorer by 2 or 3% a year.
Andrew Burton: The wealth in this country is largely institutionalised – pension funds, pension schemes, bonds, trusts and offshore. We expect some sort of return and don’t necessarily bother with it ourselves. Look at economies now growing, with young populations – places like Turkey and Mexico. People getting wealthy there don’t put their money into institutional funds; they put them into business run by friends and family. Investors like these are entrepreneurial with their money. We’ve lost some of that here, as governments have recognised. So they give tax breaks. You’ve had the Enterprise Investment Scheme giving 20% tax relief. From this April you’re going to get 50% on the small amounts going in up to £100,000. I can put £100,000 into companies and suffer only a £25,000 loss if it all goes wrong. I’m really only investing a quarter of the money myself. The rest is the Government’s loss.
Andrew Mitchell: Most people don’t understand. They’d still give it to a money manager in London or put it into a hedge fund. They returned last year an average of -5%. If you want to throw your money down the drain, give it to institutional managers. IFA financial advisers don’t get commission on private sector deals. Investing comes with 57 pages of FSA warnings and you must sign up to all sorts of things. When the government set up the FSA it put up a very fine mesh. On an investment of £100,000 people had to go through a whole bunch of hoops because someone had screwed £2m out of some widows about 20 years ago. The system now bucks against risk at every level. It was suggested up to 3,000 entrepreneurs in the region may have potential to create big businesses. Some need educating as to how to get money.
Joe McLean: Every month the Bank of England allows banks to borrow by auction. European Central Bank does it on an even larger scale. In the last six months the ECB told banks in Europe they could borrow from them at extraordinarily low interest rates, to try to kick-start economies. For an option six weeks ago 420 banks in Europe all queued. They all borrowed and they’re being challenged by the authorities now to lend it. They’ve all kept the money, frightened to lend. They’re paying interest but not using it out of concern for their own capital position.
Andrew Mitchell: This is unnerving to many people, this remoteness. They don’t understand how it works. There’s a big argument here for a return to localism. Would I feel safer investing in half-a-dozen smaller local companies? One might go bust, sure. But what are the other options now? You still have to be intelligent about tax breaks. But if you could develop a cadre of 200 to 400 people, all in this region, prepared to put some money into business, you could transform the picture.
Joe McLean: I think it’s less a question of how should funders do more than of how should people wanting funding do more? Businesses must do more to wean themselves off debt, engage in profitable activity. If not, drill down to reasons why they’re not making as much profit, and change the whole mentality that says you have a hole in your cash flow and you want to borrow more money. If you’ve a hole in your cash flow you correct it rather than borrowing more.
Angus Allan: It’s a lot about educating clients, ensuring they’ve a proper strategy, and the right people in place. Many business people don’t do it. Perhaps because they don’t know.
Grahame Maddison: Negative press stops people approaching banks now. Every one of my managers, and probably the same for the other banks, runs with maybe 100 clients of £2m to £15m turnover business. Out of that 100 there may be 80 you’d readily lend to, maybe 20 not. We’re sending out letters to those 80 clients saying we’ve funds available. They don’t have to come straight in and borrow – they may not have need.
David Land: A lot of small and medium suppliers are good at what they do, but how the business is structured they’re not there yet. Sometimes what you’re good at is not what you have to do to move your business on.
Andrew Mitchell: A banker told me recently his bank has stripped out a lot of regional ability to tell good businesses from bad businesses. Things become subject to a formula. Twenty sectors that might have been green light are suddenly red light.
John Flynn: Go Ahead, an incredibly successful bus company, went into rail. They went to their bank and were told, to their horror, the bank didn’t “do” rail. They ended up with someone else and were flabbergasted.
Andrew Mitchell: It’s guys in London who don’t do rail.
David Land: How many today will invest in pubs?
Andrew Mitchell: A few years ago, the easiest way to get money was to say you were in property. Now every Irish billionaire worth his salt is bankrupt. Equipping advisers to make good decisions is as important as making businesses ready for investment.
Nicki Clark: When you approach a finance house you don’t feel like a customer. Often you don’t feel like a customer of your bank. You feel like you’re having to seek approvals. Should there be a meeting of minds about acknowledging that the person seeking the investment is to some extent a customer, in which case effort has to go into educating that customer to make them ready, rather than expecting them to be the polished article?
Andrew Burton: Until you’ve sold your company to me I’m not going to sell my investment to you. That’s how it works.
Nicki Clark: In the current climate it’s not working. Not enough businesses are borrowing. You can still say No. But if it’s for the greater good for more businesses to be borrowing why can’t that rule change?
Andrew Mitchell: I think it’s down to legality. You’re not a customer until I’ve agreed you’re signed up. I’m talking primarily as a business angel. It probably takes only three minutes to sell me the investment..
Mark Simpson: If you’ve a small business and want to grow, you need someone to help, perhaps a mentor. Organisations must spend to get the right people. There are many experienced people in the region who once ran good businesses but aren’t now asked to help. Attitudes must change. People must take advice.
POSITIVE OUTCOME: BQ brought together an excellent group of local business leaders, financiers, professional advisers and others in a superb setting, where we are able to discuss some of the most significant issues facing businesses in the North East today.
I feel extremely positive that the outcomes of the meeting will result in some tangible practical solutions for SMEs, coupled with pledges of support and advice from the business leaders present.
The discussion generated a great deal of enthusiasm from everyone present, and we have committed to maintain a momentum, to ensure that the both the north and south of this region continue to provide an excellent base in which to start and grow a business.
Andrew Mitchell, chief executive, North East Finance
BANKING ON NEW WAYS OF ACCESSING FINANCE: Grant Thornton is delighted to support the latest BQ live debate around accessing finance. As advisors to businesses across the region we know what challenges our clients are going through during these difficult conditions.
The round table discussion concerned how businesses should position themselves in the light of the current well documented macroeconomic difficulties. Some delegates still felt that some Banks were not being as supportive as the community would like, but the majority were of the view that in the current climate no one should expect banks to lend to businesses other than those that demonstrated the following: demand for their product, demonstrably viable businesses, sound business plans and strong management teams.
The group agreed that Banks had been criticised for lending too freely in recent years, and given that some of these Banks were now partially owned by the UK tax payer, the view was that Banks needed to guard their precious capital and lend only to businesses who were able to present irresistible business plans.
Concern was expressed that UK Banks may still have to deal with the effects of possible sovereign debt failures in the future. Many Banks were owed significant sums by foreign governments and in the event of sovereign debt failure, those Banks would face further write offs, thus ensuring that there would be even less capital available for lending in the future. Against this gloomy background, businesses had to brace themselves for Banks becoming even less able to support businesses in the UK. Some of those present suggested that we take our cue from history, and from the experiences of the successful entrepreneurs in the last 200 years.
These were often individuals who made great personal sacrifices in building businesses and then ploughing back into those business recently made profits, supported by loyal colleagues and employees who demonstrated a very deep rooted work ethic. Perhaps this may be the way forward in today’s difficult times. Individual shareholders may have to accept less in dividends from business ventures, and be prepared to sell some of their shareholdings (perhaps to private equity houses) for much needed capital to be invested into the business entities.
As a result, there was a consensus that the old model of going to the Bank and asking for additional loans was perhaps being replaced (to a degree) by a new paradigm, involving individuals obtaining capital from friends, funding circles and perhaps by the use of the internet whereby investors may be put directly in touch with businesses seeking equity. What was clear from the debate and from our experience is that businesses do need to take a step back and consider whether there are different ways of working which will help a struggling business, before approaching the banks for finance.
The days of just asking for more money without a robust plan are long gone, but business leaders who are able to adapt and change, reigniting the entrepreneurial spirit which made Britain great, will reap the rewards.
Joe McLean, Partner, Grant Thornton
BQ Live is a series of informative debates designed to further contribute to the success and prosperity of our regional economy through the debate, discussion and feedback of a range of key business topics and issues.