Banks: A) do lend B) don’t lend C) help or hinder?

• Tim Fouracre
• Tuesday, 20 December 2011
• 5 comments
• Announcements

It was superb to see Clear Books getting national press coverage in The Telegraph last Friday (16th December 2011) in an article by Richard Tyler Banks: A) do lend B) don’t lend C) help or hinder? This was a result of my blog post Banks aren’t supporting credit easing for small businesses.

We have had an excellent reaction, positive emails and some interesting leads and questions.

Why shareholder debt and not equity?

For me, and up until now, the difference between a shareholder loan (how we have financed Clear Books) and equity is nothing more than a journal entry. At the end of the day, it is still shareholders’ money funding the business.

However, this perspective changes as soon as you seek external financing.

As this is something we are exploring, the shareholders of Clear Books have decided to strengthen the balance sheet and swap debt for equity.

Why external debt financing and not investment?

Clear Books gets enquiries from VCs regularly. It’s quite flattering really, but at the current time we’re not interested. Most VCs want a return on investment which means an exit strategy. This usually entails a public listing or a sale. I want Clear Books to be a company with personality and longevity and not a company on a corporate road focused on a quick profit.

I like owning 50% of Clear Books. I like running the company my way. I also have an excellent relationship with the directors of our corporate shareholder, Fubra Limited.

In my view, if Clear Books could secure debt financing then we can grow the business faster, reward the lender and retain our ownership and control of the company.

So where to seek debt financing?

Our bank loan application was inspired after having a coffee with our new bank manager discussing setting up new bank accounts and bank charges. I asked about the government backed Enterprise Finance Guarantee (EFG) scheme and he recommended that I submit a business plan. I put one together over a couple of days and sent it off. I was hopeful that the EFG scheme and a shareholder guarantee would provide the security the bank needed.

I was wrong. Our application proved that small, growing, innovative businesses are excluded from government backed financial support. The only alternative available to service and technology businesses with no assets is to sell equity.

However, it’s hitting brick walls like this that leads to innovative new ideas. If the banks won’t lend then unfortunately it’s down to business owners to find new viable alternatives, which is a poor reflection on support for small businesses in the UK.

Showing 5 Comments

1. 
   Milan Mach

   found your comments really interesting, the whole area of government support for small businesses is a sham, as you have demonstrates, in my own experience I have found them banks entirely resistant to any form of enterprise, they seem only to be interested in avoidance, reasons why not, I don’t know anyone who thinks a bank can help..

   5 months ago
2. 
   Tim Fouracre

   Couldn’t agree more Milan.

   5 months ago
3. 
   Colin

   Totally agree with everything you say, I wonder if you came across the other objection that we’ve had thrown back at us when seeking finance that “ ..there are larger players in your space ( online document sharing) ” . Full marks to you guys for pressing ahead with your own solution despite the competition.

   From our own experience the banks are offering dismal rates even when lending against asset backed businesses or are not lending at all, VCs are now acting like banks as are regional development funds such as the North West Fund, picking and choosing carefully from the hundreds, if not thousands of applications they receive. Sham is a good word but I can think of a few more!

   5 months ago
4. 
   Stephen Youngs

   Even existing bank borrowers are finding life difficult, a 100% payment record over several years apparently counting for nought when additional funds sought for expansion. Have you tried one of the innovative new online investor groups like http://www.fundingcircle.com? I like the bidding concept, and multiple small loans so investors can spread their risk. The fact that banks are cut out of it altogether seems a massive plus as well. As cash on deposit earns so little these days, even people with relatively small amounts to invest can be attracted to such schemes, as they get a better rate of interest and can still mitigate risk. The borrowers also get a better rate, as there isn’t a fat bank in the middle taking massive margin whilst simultaneously refusing all risk!

   5 months ago
5. 
   Tim Fouracre

   Yeah I think those ideas have great potential. The FT covered how John Lewis, King of Shaves, Hotel Chocolat and Caxton FX raised finance through their own bond schemes which is also an interesting idea: http://www.ft.com/cms/s/0/bd6229a2-d584-11e0-9133-00144feab49a.html#axzz1hHHAOEvF

   5 months ago