BQ Breakfast has launched a series of BQ Breakfast Live forums to bring together entrepreneurial people of North East business, in convenient and friendly surroundings, to discuss and receive expert advice on major issues vitally affecting them. The first BQ Breakfast Live centred on Finding Funding For Entrepreneurs. Ninety people attended this joint presentation by the BQ Breakfast website, North East Finance, and South Tyneside, Sunderland City and Durham County Councils.
If you were unlucky and couldn’t attend the Quality Hotel, Boldon, on the day, you can catch up here and now. This website is running a series of extracts. The fourth one follows…
The audience at the BQ Breakfast Live forum heard first hand how four local entrepreneurs in sectors as varied as dentistry and offshore health and safety, overcame any difficulties of funding. Scott Hopkinson (Moneygate Group), Craig Huntingdon (Dentist Direct), Stephen Lovely (For Sale Sign Analysis) and Richard Pargeter (Green Marine Solutions) were interviewed for BQ by Caroline Theobald and also answered delegates’ questions…
Crowdfunding – yes or no?
Question: What are the considerations on crowdfunding?
Scott Hopkinson: "We’ve looked into it. It’s got to be for the right people. It’s not right for us. You’re just hauling yourself around a lot of individual investors where they could be putting anything in from £5m to a couple of thousand and it could up to 40 people to get to where you want to invest. It looked to us like a lot of hard work for little reward. But that’s only my personal experience."
Craig Huntingdon: "I think it depends also on what your intended exist strategy is. That might sound unusual when you’re only just thinking of setting up a business. You have quite an unwieldy group of shareholders there. If you’re looking to sell in 10 or 15 years that’s quite a lot of people to get round a table and agree on how a business is to be sold or re-invested in. There are ways around this by using nominee structures, but my advice would be to be very careful about getting into bed with a very wide range of people of different backgrounds and different interests and different over-all objectives. That’s advice we were given."
Can you walk away?
Question: Is it not incredibly difficult to walk away from an idea you believe in? Have you ever had to walk away and how important is it to do that sooner rather than later?
Stephen Lovely: "I’ve walked away from business propositions. You go to someone and say you have a great idea and they say it’s not and you go to a second one. But there comes a point where you have to get realistic and just recognise there are enough people saying it’s not a good idea. It hacks you off when you think you’re the genius and everyone else is stupid. But you have to stop and get over it and get onto something else quickly because you can lose a lot of money otherwise."
Observation: Someone has said "get out quick" and another has said "be as stubborn as hell".
Reply: "If you’re going to do it then do it quickly then get out before you start, but once you’re into it, stick with it."
A banker’s view
Craig Iley, former regional director of Santander’s corporate and commercial business and now managing director of business banking, Atom Bank, with 30 years’ experience in the sector, says he is old enough to remember when banking was considered a respectable profession and hopes he is young enough to see the day when that will return. Finance from banking is very important, he suggested, and went on…
"I could have comfortably cruised through to retirement and just ignored that there are a lot of problems in the banking industry and hived it off as someone else’s problem. I’ve jumped out of the warm and fuzzy into the cold and prickly and decided to join a start-up business that will be called Atom Bank. You will hear a lot more about us over coming months.
"Technically we’re not yet a bank because we’re still going through regulatory approval. Many people know how to write a business plan far better than I do. But if banks can’t be bothered to engage then they don’t deserve your business.
"The difference between winning and losing, being successful or unsuccessful, in getting bank finance isn’t a mile and it isn’t a yard. It’s usually a matter of an inch or perhaps even less. Three areas where I may be able to help are: Your relationship with the bank, the way you communicate with the bank and understanding the bank you are trying to do some business with.
" to look at your bank objectively. We’ve been so used in this country to a market dominated by four or five big players. We begin to think of the banks as a utility. They’ve been part of the furniture and comfortable until you need a new sofa then realise there’s no-one selling them. Look at your bank as you would look towards any other supplier or customer of your business. Ask yourself what they really know about your business.
"Banks portray a public image. A lot of them have very good people who are very keen to help you. But it’s unreasonable for you to sit there and think: ‘Do you know what? They should know a lot about me because they’re already my bank or because I’ve taken the trouble to produce a business plan.’ The reality inside the bank is very different. If you have a relationship director or a relationship manager he or she could be responsible for up to 600 connections.
"They’re a very scarce resource. Face to face services are very difficult and expensive for a bank to deliver. It’s going to become even scarcer. Whoever in the bank is looking at the proposition you put to them will try to pull together whatever information they can about your business. But the system is just not up to it. Everyone knows now how fast technology moves.
"The i-pad has been with us four years. Probably 50% of the market is now using tablets, 40% laptops and desktops where they are in existence probably account for 10% of the market. The banks by contrast have massive IT infrastructure, decades old and rooted in 1960s programmes. So you’d be very surprised how difficult it is for a bank to get something as simple as a single customer view.
"You have personal banking and business banking and it is very difficult for them to get a single view of a financial perspective about who you are, what you do, what your strengths are from a financial perspective and why they should lend you money.
"So ask yourself two questions when you approach a bank for finance. Consider if that was a customer or potential customer you desperately wanted to attract, how would you portray to your customer that you’re going to win, that there’s a real reason why they should want to do business with you?
"And if I was going to give the biggest contract I was ever going to award to a supplier, a contract so important that it could ruin my business if I get it wrong, what would you want to know about that supplier? In 2009 there was a serious proposal in the European Commission that every bank in Europe should be nationalised and you’d be surprised how close that came to happening.
"I guarantee you’d want to know who you were dealing with. Do you do that same level of due diligence with your bank? Why is it important to present your case well to the bank? There are lots of obvious good reasons. A less obvious reason is that people doing business in a bank are responsible to their managers and their shareholders. They don’t own that business. Capital’s a scarce resource.
"You might not realise it but you are competing for attention within the bank as a SME. The way banks are regulated and the cost of doing business with a SME is twice as much as doing it with an individual. So in terms of capital cost, to lend you £1 to build your factory is twice as expensive as it is to lend you £1 to buy your house.
"So inside the bank you’re not competing on a level playing field. This isn’t wholly the bank’s decision. Regulation in most cases drives that. You’re effectively asking the bank: ‘Can I rent your balance sheet?’ With the tension already of how profitable this or that is, you can see tension there. It’s a problem for society as a whole.
"Regulation is driving a lot of bank capital into the housing market – not just here, but also in Australia, New Zealand, Canada. People are starting to realise that’s a drag on investment in businesses around the world. It’s a big issue. People have a hand to play in getting this on the agenda of government. A lot of people are involved in various forums and have political connections. It is something that needs to be raised as an issue – about making it a more level playing field in where money is invested.
"Think also about what you’re prepared to pay. There comes a point where it’s just not worth the bank doing business with you. It might be a little proposition and in terms of return on capital it is going to get it is more sensible for them as business people to employ that capital elsewhere. Make your approach by all means but just remember, you’re not making it on a level playing field.
"In communication the fund seeker holds an advantage in conversation with the manager or other contact at the branch. You can manage the messages they hear and what they see. You have to be honest and open. But you have to be open with each other as well. You would be surprised how many times I have seen propositions turned down not because of a business per se, but because among the directors and the partners one of them may have something on their record that worries the bank for some reason.
"It isn’t that there has just been a bad Press. In the last nine or 10 years lots of people have been financially stretched. It happens. The issue is: the other directors and shareholders or other partners may not know about this. They haven’t been able to have that conversation openly with each other. So when you go to the bank it indicates there’s a lack of openness and honesty within the business.
"You could have managed that message among yourselves but you didn’t. Credit agencies are very important in the process of bank decisions. They are going to become more important. This information is privately available to you as individuals and if you don’t take control of that credit data – there is an opportunity to work actively with the credit agencies – then you’re missing a trick. You can improve your position and head off something that could become an issue.
"Finally, how much do you know about your bank? Does size matter? It seems to in banking and it seems to in the UK. Who is the world’s local bank – HSBC? It is by many measures the biggest bank in the world, depending on which search engine you look at, there are around 200 countries in the world. HSBC, the world’s local bank, the biggest bank in the world, in 200 countries around the world has a market share exceeding 10% only in three countries - Hong Kong, the UK and Mexico.
"Now, there’s no issue with HSBC or any other bank for that matter on this. But you have to know who you’re dealing with. Are you going to ask the right person or the right bank the right question? If you don’t, it’s unlikely you’ll get the right answer for your business. So there are three areas where maybe you could make a difference of 1% or 2% in what you ask for. And that might make a difference between being successful or not. So I want to encourage you to think about your banks differently.
"The banks themselves are very old. They’re a 17thC model in most cases. It doesn’t fit well with the modern world. So it shouldn’t be a surprise that they have a problem in reaching their requirements. But it always is a surprise to them. That’s partly the banks’ fault. It’s the way they promote themselves. The listening bank, friendly bank, the bank that likes to say Yes and all the rest of it… It’s not that they don’t genuinely mean it. It’s just that – you know what? – they’re just not set up that way.
"Some changes are coming that may be of interest. British Business Bank is potentially very important to the UK economy. It’s very important to financial markets and very important to the way we’ll be doing business within 20 or 30 years. The origins arose during the recent financial crisis. One of the things that became apparent was that British banks were very successful at building different income streams. It was easy for them when the crisis came to divert capital from one centre to another. They could move it from SMEs to large corporate, or elsewhere. But also it became clear that wasn’t necessarily to the good of society.
"Unsurprisingly there has been public outrage over the public having to bail out large banks. That’s the reality of what the situation was, though. A lot of changes are coming down the track. As we speak there’s a competition arising within SME banking. That will be a major change, creating more choice when it comes to raising finance in the future. I don’t know yet what will come out of that. But some areas that will be looked at include increased portability of business, including current accounts. Also the ability to move your account in the same way you might transfer your mobile phone number. They’ll make it easier to go into things like direct debit initiation, faster payments and that sort of thing.
"Sharing of credit data among banks could arise, so that if you move from bank to bank you have a file that’s portable. You don’t have to start from scratch all the time. They may consider the possibility of a referral system. When a bank turns you down very often it’s because it doesn’t fit within the credit gate I touched on earlier, or it just doesn’t fit their credit risk appetite. Because it doesn’t fit their credit risk appetite doesn’t mean it won’t fit someone else’s. So they will explore a mechanism of passing on deals they can’t do to other types of funds including crowdfunding. They’ll also encourage more banks to come into the market.
"During the crisis one of the things the British government did was to look around Europe and the rest of the world to see who had fared better. One system looked at was the German banking system. People are very keen on the German banking system. It’s a three tier system: private banks, co-operative banks and small savings banks. The latter fund about 50% of all start-ups in Germany. They tend to be very small, regionally based or based on a particular type of business.
"So when the crisis came they couldn’t divert capital elsewhere. They couldn’t not support their customers. If they did that they would have been accepting the fact that they were out of business. So the tiered model has become something the UK Government is very interested in.
"If you left everything to the market the small player would be squeezed out. That’s just the way it is. It’s easier to access capital if you’re a bigger player. You have economic advantages in terms of economic distribution and other things. So the difference between the UK and Germany was that there was a bank in place called KFW, a German state owned investment bank, which facilitates the access of capital working with the small banks. So, effectively, public money is going into German banks every day. No-one bats an eyelid about this.
"Those who know about it understand that it’s actually for the better. Structurally, the British banking market wasn’t all that dissimilar 20 years ago, but we lost a lot of players in the industry. We really need to bring those back. But we need also to provide statutory protection and support to ensure they can continue to flourish. When you lose choice you are disempowered.
"The politicians, and particularly Vince Cable the Secretary of State for Business, Innovation and Skills has been a great champion of this, I think in a few years’ time people will look back and realise what a significant change he has made for the people of Britain through the British Business Bank. It is charged with improving access to finance. It will not lend to people directly. But for every £1 put in they expect to generate another £10 of lending to SMEs. The first input will be £1bn so they’re looking for about £10bn of extra funding to be made available to the banks. The range of solutions they’re looking to support cover equity, venture capital, mezzanine, crowdfunding, working with banks.
"They’ve just gone through a shadow phase and are looking at the work of 60 or 70 players in the UK market. Bear in mind there are only four big banks and they account for 85% of lending in the UK at the moment. The British Bank is looking for a lot of innovation in the sector, looking to work with a lot more people. The majority of the 60 or so either don’t exist today or are not particularly prominent. That’s something to look forward to. That will stimulate a lot of choice in the market.
"So you can do things to improve the nature of the relationship with your bank and start them thinking about you a little bit differently. While banks do provide the majority of finance in the UK at the moment for SMEs, there are alternatives. North East Access to Finance does produce a very good guide which details where else you can access finance.
"Also there’s a lot going on in the market you might not be aware of. But you will get more choice in terms of the people you want to bank with and how you choose to raise and access finance. The pace of change will increase during 2015 and 2016. The Regulator is currently looking at about 20 different licence applications. You’ll start to see some of those coming through.
"Five years ago there were no i-Pads. There are now a lot of tools out there available to help banks make decisions and help them engage with customers that the systems within big banks are just not able to take advantage of. We at Atom are also at a stage of developing a face to face strategy. I can’t say more at this stage as regulatory approval is necessary and we have to take feedback from the Regulator.
Question: How subjective are banks?
"With a centralised lending model of banks there is a tendency to take more of the financial information than the subjective information because it’s very difficult to build that into a model. In the modern world you can’t have one person looking at every single aspect of a business. It’s just not practicable. They build models that look at the behaviour of businesses and how they expect things to work. Their models try to stress ‘look what happens if…’ It’s much easier to stress something from a numerical point of view than from a subjective point of view, such as what happens if one of the management team leaves? The answer from what I’ve seen is that they take far too much notice of the financials in some cases, and probably not enough notice of some of the softer things. But it is very difficult for them to do that, in fairness. And it does have implications for the cost."
There are presently about 300 sources of financial support available for entrepreneurs seeking backing in the region. See NEA2F on www.nea2f.co.uk/media-centre/reports/north-east
Fourth in a series of four articles. Get the articles direct to your inbox by registering for BQ Breakfast - click here
First article - Finding funding for entrepreneurs
Second article - Covering both fronts
Third article - Bad experience