Funding your dream without the ‘nightmare’ of a bank loan
Entrepreneur Rupert Lee-Browne deliberately steered clear of the banks when he started in 2002. Here's why he advocates using alternatives
Launching your own business means being in the driver’s seat, with the steering wheel in your hands and control at your fingertips.
Yet at the first intersection, many entrepreneurs turn to a bank to fund their start-up and are swiftly booted to the passenger’s side.
Opting for an alternative funding route can be the difference between setting your own direction or allowing a bank lender to force you onto a diversion.
Banks lack vision
When it comes to funding small and medium-sized businesses I’m critical of banks because they lack the flexibility to support a concept that they perceive as high risk – a category into which almost all new enterprises fit.
Since the financial crisis, banks have been required by regulators to hold more of their own money to offset against risky loans. As a result it’s much easier to stop lending money when the return isn’t guaranteed or to implement strict conditions to reduce the risk.
Small and mid-sized businesses bear the brunt of this cautiousness, despite their enormous contribution to the UK economy; employing 60% of the workforce and representing 50% of GDP.
In preparing to launch Caxton, I had steered well clear of the banks and found a number of private investors who said they would back me, but when it came down to it they couldn’t put the money up.
In the end I had to fund it myself with only £25,000 in savings. For most people, raising even that much would take years and so I recommend using one of the many alternative lending sources that are now available.
Alternative lenders are not only a more accessible option, but can offer the foresight to see the value of a new and disruptive business concept. Crowd sourcing and peer-to-peer lending, such as Funding Circle, are two models that have revolutionised the financing system by connecting private investors with creditworthy businesses.
Often these investors are business owners themselves and so are better placed to appreciate your circumstances. Also, because they’re playing with their own cash, they’re more likely to take a risk in order to receive a good return.
If it’s applicable, then invoice discounting (also known as factoring) is a very good way to ensure your cashflow.
There are the traditional discounters who require all your invoices to be sold to them, or there is a new breed, such as MarketInvoice or Urica, which will enable individual invoices to be factored.
There is also the route that we went down at Caxton, issuing retail or mini bonds. It’s effectively unsecured debt from lots of people (in our case, we asked our customers) so there are risks to them. But it’s a really great way of raising funds from people who already know and trust you.
Today, we only have the funds from our bond and the cash reserves we have built up. I made it a vow from the start that rather than taking money out of the business in the good times we would build up the cash reserves on the balance sheet – that way we would have sufficient capital to weather any storm.
Ultimately, there is no single funding avenue that will suit every business, and entrepreneurs should consider an alternative avenue as carefully as they would a traditional lender. However, with numerous options how available, thousands of UK businesses have found success without a bank.
Rupert Lee-Browne is the CEO of £760m-turnover currency support business Caxton FX.