Ripe for the picking: guide to alternative finance for SMEs

May 2013

With UK SMEs facing funding issues due to a contraction in bank credit facilities, the CBI has produced a guide to alternative sources of finance. Treasury Today was at the launch event in London.

As the UK economy wobbles around a triple-dip recession, the Confederation of British Industry (CBI) is educating small and medium-sized enterprises (SMEs) on the broad range of finance options available to help them grow, including asset-based lending, equity investment and peer-to-peer (P2P) lending.

CBI’s recently released guide, ‘Ripe for the picking: a guide to alternative sources of finance’, produced with support from GE Capital, addresses a significant knowledge gap: 50% of SMEs said that they did not know where to go for alternative finance.

The CBI alternative finance guide highlights some of the choices available, including:

• Asset-based lending (like invoice financing).
  
• Supply chain finance.
  
• Trade finance.
  
• Peer-to-peer and crowd funding.
  
• Retail bond market.
  
• Self-issued retail bonds.
  
• Private placements.
  
• Business angels.
  
• Venture capital.
  
• Corporate venturing.
  
• Business Growth Fund (BGF).
  
• Private equity.
  
• Public equity markets.
  

At the launch event in London on 20th May, which attracted more than 50 people mainly from the SME space, a Managing Director of a growing biotechology firm was enthusiastic about the alternative finance “decision tree” component of the guide. “This is very useful,” he said.

 

Funding growth

Speaking at the event, Katja Hall, CBI Chief Policy Director, said: “We need to stop talking down the economy. Growth is improving, but the UK needs to be careful not to choke funding for growing firms.”

The CBI highlighted research showing that high-growth medium-sized businesses could be worth up to an additional £20 billion to the economy by 2020. It comes as a GE Capital report shows that SMEs plan to spend £51 billion over the next 12 months, but will need the right funding to realise their potential.

Giving his tacit support for the CBI guide, Vince Cable, Secretary of State for Business, attended the event in order to explain the government’s role in boosting the supply of finance to growing businesses. He spoke about the difficulties SMEs currently face when attempting to access bank credit lines – although there is an estimated £20 billion in available bank funds, the new terms and liability agreements that banks are trying to get SMEs to sign up to is the reason why they are looking at alternative funding.

Cable believes that the UK government can play a “catalytic role” in stimulating the alternative finance market. During the past year, the government has launched a number of initiatives including:

• Business Finance Partnership (BFP): Launched on 5th December 2012, the government has made available £100m to SMEs through seven providers, including Funding Circle, Beechbrook Capital and Credit Asset Management.
  
• Reviewing the policy environment: From April 2014 the Financial Conduct Authority (FCA) will regulate the P2P lending market after calls from providers themselves to be regulated.
  
• Business Bank: Launched in September last year, this is the government’s “best kept secret”, according to Cable. Its aim is to rationalise the government’s interventions, with £3 billion of funding coming from a mix of loans and equity and £1 billion coming from private capital.
  
• Prompt Payment Code (PPC): Today a total of 126 FTSE 350 companies have pledged to pay small firms promptly, after Business Minister Michael Fallon threatened in November to name and shame them.
  

 

The chocolate bond success story

To illustrate innovative ways to access alternative sources of funding, Peter Harris, Co-Founder and Development Director, Hotel Chocolat, shared the company’s success story of raising £4m through issuing chocolate bonds to its customer base and paying back the debt in chocolate. Its ground-breaking funding project garnered Hotel Chocolat the Judges’ Choice Award at last year’s Treasury Today Adam Smith Awards.

The Hotel Chocolat culture, based on the three tenets of innovation, authenticity and ethics, meant that it had a very loyal customer base of around 100,000, who were surveyed to see if they were interested in supporting the business’ development and expansion plans. The company was clear in communicating five reasons why customers should invest:

1. Creating manufacturing jobs in the UK.
   
2. Sustainable cocoa growing in St. Lucia.
   
3. Opening of the Boucan restaurant.
   
4. Expansion of UK retail activities.
   
5. Exporting high quality British chocolate.
   

The company had tremendous success: it initially raised £3.7m and then six months later raised another £360,000 all from 1800 investors. Harris believes the company’s achievement was down to the fact that customers trusted the company, “unlike the banks”, and they like what the company does and want to help it grow. It was an “emotional response”, he said.

For other companies thinking about following a similar route, Harris had the following advice:

• Ask yourself whether you company is suitable.
  
• Decide on the terms: Hotel Chocolat issued a three-year, non-transferrable bond.
  
• Make the invitation appealing.
  
• Choose advisors, such as lawyers and accountants with experience.
  
• Decide how you will pay back the bondholders.
  
• Investigate tax implications.
  

The final point elicited a complaint from Harris about the HMRC’s response to alternative financing situations. When the company tried to obtain pre-clearance from the HMRC in terms of tax implications, the HMRC sat on the fence and said it couldn’t comment until after they issued the bonds. This was “disappointing”, said Harris.

This insight was first published on www.treasurytoday.com