Banks – Who Needs Them?



The funding gap for start-ups and micros is huge; the problem is serious and needs solving.

The Government says it wants a healthy SME sector to revive a moribund economy and wants banks to lend more to achieve this.

But bank lending is emphatically not the answer!

This lack of funding primarily affects micros and start-ups.  Funding streams for established small or medium sized businesses – to which the label SME should really apply - are varied and relatively well established.

The funding requirements of micros and start-ups – unhelpfully also lumped under the same SME banner – are different; their marketing challenges are different and so too are their management priorities.

The issue is one of risk. A true SME is established, has a track record, a revenue stream and a customer base. The risks to which it is exposed are reasonably well understood.

The opposite applies to micros and start-ups.  In the very early stages of development our businesses are evolving very rapidly, we are unproven and have no tangible businesses assets or established customer base.

We represent a very high and unquantifiable risk. No funders want us – but do we actually need them?

Two further questions apply:
• How much money do we need?
• And, what exactly will we use it for?

Few businesses in the early stages of development can define their capital requirements.  That’s what a business plan is supposed to do but they are at best guesswork, at worst complete fabrications destined to gather dust in a drawer.  How can you predict the development of an untested concept unless you try it?

We can only assess our capital requirements with any degree of accuracy when we have developed a proven, marketable concept – when we have proved that we have something that is of value and that we can market it.

Until then we are very high risk - as much to ourselves as to a bank. Taking on a loan, particularly one secured on a personal asset such as our home, is guaranteed to lead to huge personal stress, sleepless nights and relationship problems.  I know; I have been there!

If banks are not a sensible source of seed capital for this sector, what can be done? 

Here are three suggestions. The first is one that we, as owner managers, can do something about. The second requires developing within the wider small business arena and the third probably needs government action.

Keep your capital requirements to an absolute minimum.  An early-stage business is about turning a viable business idea into ‘a proven marketable concept.’  A business at this stage requires just four things:

• A ‘prototype’ product or service
• A clear idea of the people who need what you are offering
• The ability to build and maintain relationships with some of them
• Plenty of room to make mistakes and learn!

You don’t need an office, a new leased car or any marketing material beyond a simple, professional business card!

Look at bringing in non-executive directors.  By buying a stake in a fledgling business, somebody who has actually built a business from scratch can provide a small amount of seed capital, invaluable practical expertise and advice, and the influence to get things done. 

Finally, what about our pension pots?  Many of us who start a business have pension funds built up during our days in corporate-land.  Their value is almost certainly dropping stone-like so why can’t we invest a (very) small proportion of those funds in equity in our own businesses?  It is supposedly possible to invest in tangible assets but various IFAs have conflicting opinions on whether or shares in a limited company qualify. 

Can anybody shed any light on this?  if the answer is ‘no’ perhaps we should start to lobby the powers that be!

What do you think?  Any thoughts, ideas or experiences that you would like to share?

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