A stream of alternative finance options
By Simon Creasey Thursday, 13 September 2012
If you thought the recession had forever diminished the finance sources available to printers - think again. A wide variety of options has surfaced online in recent years and ingenuity is often all you need
Traditionally, printers could call upon a number of different forms of finance to invest in a piece of kit or help develop a new business offering. In addition to the bog-standard loans and overdraft facilities offered by high-street banking operators, a number of the leading manufacturers and asset-based lenders offered bespoke finance products to ease the purchasing process. Then there were more complicated products, such as factoring and invoice-discounting that have become increasingly common in the printing industry over the past decade or so.
However, during the recession, these options have slowly but surely dwindled. Fewer manufacturers are offering special finance packages; some asset-based lenders have cut back their exposure to print; plenty of the high-street lenders have closed their books to printers, with many overdraft facilities significantly reduced or withdrawn; and fewer invoices are floating around allowing printers to take advantage of factoring-related finance vehicles.
So, all-in-all, if you’re a commercial printer looking to make an investment in a new piece of machinery or business service, things look pretty grim. Unless, of course, you’ve got plenty of capital stored away in the bank already (unlikely, for most).
But don’t despair. If you’re looking for a funding injection to take your business to the next level, over the past few years a number of innovative financial models have been targeted at entrepreneurs finding it hard to finance their dreams. Here’s a rundown of how these vehicles work and what’s best for your company.
Peer-to-peer lending – or P2P, as it is commonly known – has been a buzz phrase in financial circles for the past few years, with a number of innovative companies getting out of the blocks thanks to P2P lenders. One of the biggest and most successful operators in the UK is Zopa, the nation’s first online P2P personal loan lender. In essence, Zopa matches people with money to spare to people who want a loan. As it cut outs out the middleman, borrowers are able to secure a deal at a competitive rate.
So far, the business has completed loans worth circa £200m in value with more than 70,000 people currently lending through Zopa. Giles Andrews, Zopa co-founder and chief executive, says the business, which launched in 2005, has enjoyed accelerated growth over the past couple of years thanks to the recession and scandals in the banking industry.
"For some people, we became an anti-bank – an alternative to a hated industry – and to others we were a pretty sensible option, because we’d done a better job of lending money than these enormous prehistoric corporations," says Andrews.
Anyone seeking assurances that Zopa represents value for money should look no further than the nature of the people taking out loans with the company, says Andrews.
"Quite a lot of the borrower applicants are employed by the banks," he reveals. "They recognise that the loans are really good value and tend to be cheaper than anywhere else. They also tend to have better terms and conditions attached, so you can repay them at any time with no penalty other than paying interest on the number of days you’ve had the loan."
Given Zopa’s success, it’s hardly surprising that other P2P operators have followed suit. One of the latest market entrants is Civilisedmoney, which launched late last year. Co-founder Jason Scott came up with the idea of creating a ‘civilised’ bank because "banking is kind of uncivilised – it’s not a nice thing". The company employs the same basic principles as Zopa: it matches people with money and people who need it to get a business idea off the ground. Civilisedmoney has two basic funding options – a straightforward P2P loan fixed at a competitive rate or a crowdfunded option in which investors take shares in a business.
Scott says Civilisedmoney is a "true alternative" to the products offered by the traditional high-street banks. "P2P lending is a really interesting space right now and the response we’ve had has been incredibly positive," says Scott. "For some people, even the idea that we do what the banks do, but without being the banks, is good enough."
Crowdfunding enables people to raise money for innovative new projects by getting like-minded individuals to pool their money to back the idea, person or business. The model is breathtakingly simple. The person seeking funding posts their business plan on one of the many crowdfunding websites and sets a funding target. Investors are invited to pledge money to the person seeking investment in return for equity in the business or some kind of reward related to that business.
The funding drive runs for a set number of days and if the target has been met at the end of the time period (or, better still, exceeded), the business owner receives the funds, with the crowdfunding website holding back a small fee (typically 5%). If the target isn’t met, investors get their money back.
Although crowdfunding has been floating around in the US for some time, where it was originally used to raise funds to support creative endeavours – such as providing funds for musicians to record their new album – it has become a favoured form of finance for start-ups.
Although the model is still in its infancy in the UK, there are already a number of different web operators that offer crowdfunding to UK entrepreneurs, including the aforementioned Civilisedmoney, which charges a 5% commission on successful projects.
One of the newer kids on the crowdfunding block is Crowdcube, which launched last year. Entrepre-neurs with a business idea can place their proposal and business prospectus on the Crowdcube website and allow members of the public to invest in the idea, with the minimum cash investment starting at £10. Since its launch, Crowdcube has funded deals worth a few thousand pounds and up to £1m – co-founder Luke Lang says the company that raised the latter sum managed to do so in just four weeks. Lang adds that for many entrepreneurs, the birth of crowdfunding has proven to be a saving grace in these straitened times.
"People in the City understand that there’s a funding gap at the lower end of the market. To a certain extent, there’s also an issue around raising finance through venture capitalists and business angels because it can just take too much time," says Lang. "It is over-engineered and over-complicated."
Due to the growing popularity of the financing model, Lang expects an explosion of other crowdfunded businesses in the UK over the next few years. "It’s such an innovative way of raising finance that other businesses will come along and copy us. We welcome that, because it helps to raise awareness of equity-based crowdfunding as an alternative form of funding to the banks," he adds.
Right on cue, in July, US-based crowdfunding operator Kickstarter – arguably the most successful crowdfunding website in the world – announced that it intended launching a UK operation this autumn.
But budding entrepreneurs should be forewarned that there are dangers to going down the crowdfunding route, as some Kickstarter users have found to their cost.
That’s because when you hit your funding target, you can’t stop the flow of money coming into your business. This means that you will have to dilute the amount of shares in your business more than you would like. Otherwise, you could be left scrambling around trying to fulfil massive orders for rewards, rather than focusing on getting your newly funded business up and running.
Take the example of US web designer Brook Drumm, who wanted to raise $25,000 to make cheap 3D printing kits. Drumm’s concept was so popular that he raised $800,000. He was immediately slapped with a tax bill of $300,000, which left him short of the funds necessary to fulfil the creation of the additional 3D printing kits he now has to manufacture for his investors.
Small bond issues
The jury is still out on how widespread the use of small bonds could become in business. This is largely due to the fact that they’re more difficult to successfully execute than any of the other forms of finance outlined above. That said, when done well, they can be an incredibly efficient way of raising funds. Small bonds typically involve an investor lending a business a certain amount of money over a set time period during which time the lender is paid interest, dividends or both.
To date, the method has been used most successfully by companies such as King of Shaves, Hotel Chocolat and Scottish brewing operator Brewdog, which have raised sums of money ranging from £600,000 to £3.7m. King of Shaves paid
dividends in the form of shaving products and Hotel Chocolat gave investors chocolates.
The most successful small bond issue to date was undertaken by green energy business Ecotricity, which has issued two ‘EcoBonds’ since 2010 raising £15m and £16.2m, with both issues oversubscribed.
BDO Stoy Hayward corporate finance partner Chris Searle, who advised King of Shaves and Hotel Chocolat on their bond issues, believes that small bonds are only appropriate for a small minority of companies.
"In the wake of the King of Shaves and Hotel Chocolat deals, I was contacted by a number of companies who were looking to do a similar thing. I told all of them that unless you have a large database of existing customers to whom you can market the issue, it’s no good," explains Searle. "Hotel Chocolat had a database of potential customers and so did King of Shaves. Also, King of Shaves used the small bond issue as a piece of PR to raise the profile of the brand and increase their sales and it worked. But you couldn’t just go out and discuss it with the general public because you wouldn’t raise the money that way."
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