When Elizabetta Camilleri was pooling funds together to launch her start-up business three years ago, she did not intend to break into the bank. The Maltese entrepreneur, who studied an MBA at London Business School, shied away from the risk.
So did the banks. “I don’t think banks were going to give us a loan on an idea. Even people who have strong businesses struggle to get loans from a bank – let alone someone with [just] a good idea,” said Elizabetta, who set-up SalesGossip with Emilio Sanz in 2011.
The start-up provides an online and mobile service that gives users access to fashion and beauty deals. Since launch day, the fledgling founders have signed up more than 600 fashion stores in the UK, and their mobile app user-base has swelled from 500 to around 250,000 users.
“In reality there is a lot of risk associated with start-ups… banks shy away from that,” added Elizabetta, who helped self-fund her company’s launch, the total pot reaching £300,000.
Since the financial crisis, the high-street lenders have been scaling back their SME loans and many are no longer willing to take a punt and gamble on up-starters.
SalesGossip is one of a multitude of small firms who turned their backs on traditional start-up finance to launch. Crowdfunding has become a more viable option, but many business school graduates prefer to invest personal capital – and retain all of their equity. If a business succeeds in growing, the decision will pay dividends.
SalesGossip’s UK location, in Shoreditch, East London, is significant. A lack of trust in high-street banks has convinced many British founders to avoid taking out loans. Entrepreneurs are also resistant to yield control of their business to outsiders. A UK-wide study, commissioned by the Institute of Chartered Accountants of Scotland (ICAS), confirms these fears.
Analysis of 9,000 companies for the government’s small business survey revealed that a generation of entrepreneurs are “debt shy”.
There have been attempts to improve access to growth funding. A British Business Bank, recently launched, is thought to have eased the flow of credit towards SMEs since the global recession crippled access to capital. Technology entrepreneurs will also be buoyed by the knowledge that the UK government pledged an extra £10 million to help smaller firms get connected, and another £2.5 million to support Tech City in London, where SalesGossip is based.
However, the levels of capital investment within the economy remain well below the pre-credit crunch levels within SMEs, the ICAS report concluded. Even entrepreneurs who do bank on traditional lending prefer a “mixed cocktail”, combining internal resources and debt.
Dr Ross Brown, from the University of St Andrews, said: “While many use bank lending to fund capital expansion, some draw heavily on their internal resources to fund their growth.”
This does not bode well for small businesses, whose success rates are fragile. According to Harvard Business School, three out of four new companies fail within their first year of business.
While the UK’s GDP growth has been promising, the new ICAS research says the economy’s growth potential is being put at risk. As entrepreneurs continue to shun debt, there are growing concerns about their impact on the UK’s economic recovery.
Dr Ross added: “The fact that many high growth SMEs are 'reluctant borrowers' may be holding back the economy. Stimulating the 'demand' for lending matters for economic growth.”
Dr Neil Lee, from the London School of Economics and Political Science, is the type of researcher who will give entrepreneurs cause for concern.
His findings, published by ICAS, show that even though high growth SMEs are 9% more likely to apply for finance than other start-ups, they are no more likely to be successful.
High growth start-ups have the most potential to drive economic growth and employment, his data suggests, and entrepreneurs continue to shun private equity funding. But the financial sector is still failing to provide.
Dr Neil said that policymakers need to consider the way they target initiatives at particular firms, and added that initiatives to stimulate levels of demand have been “largely absent”.
Equity finance, typically used by tech start-ups, is not appropriate for many of the UK’s fastest-growing fledgling businesses, such as food and logistics companies.
He added: “General measures to help all firms grow will be more expensive, and less successful, than efforts to improve access to finance for the minority of firms, which have the potential to make a disproportionate impact on the national economy.”
His view is shared by many in the start-up community. Michael Brice did not even bother applying for bank loans when he launched his business. The ambitious entrepreneur, who set-up Howcanwe? in June 2012, self-funded the launch.
His start-up, a boutique advisory firm which helps businesses formulate strategy, has a small team of two. “It’s very lean – I basically funded it by myself,” said Michael, who studied an MBA at Melbourne Business School. He added that in the early stages he kept things low-key while testing his business model on campus.
Swiss-based entrepreneur Trudi Haemmerli’s tale is typical. After leaving Novartis, the giant pharma firm, she launched PerioC Ltd, a life sciences start-up, which is registered in the UK.
Instead of seeking venture capital or begging big banks for start-up cash, Trudi, a St. Gallen HSG MBA graduate, invested her own funds. Along with four other managers and co-founders, she raised about £500,000 of personal investment.
“There are different [funding] opportunities, and I got the role of looking long-term and short-term,” said Trudi, who is the company CEO.
Stuart Thomson, a business advisor at Start Up Direct, looked bashful when he gave high-street banks a bashing. The start-up supporter stood aside James Pattison, the organizations chief executive, as the pair discussed fledgling funding from a Tech City incubator.
“Banks do not loan to firms under two years old,” said Stuart. Yet since 2012, Start Up Direct has helped 500 SMEs, James said proudly. The organization is the direct delivery partner of the UK government’s Start-up Loans Scheme – an initiative that provides loans and mentors to entrepreneurs. The scheme has dished out £1 million in funding so far.
Despite government efforts, many argue schemes have not gone far enough, and that not enough pressure is on banks’ shoulders. Opposition politicians are quick to lambast the start-up lenders.
Meg Hillier, the UK MP for Hackney South and Shoreditch –including East London’s tech scene – said that banks have taken away facilities from businesses and the poor.
She added: “Those people are being driven to borrow money at higher rates elsewhere because you can’t get simple, small personal loans from banks.”
Commentators argue that the focus for banks needs to be on increasing competition and other systemic problems that can impede access to finance for SMEs.
But “challenger banks”, which have grown in profile since the crisis, promise more funding than the investment behemoths of old.
Since the credit crunch erupted, dozens of new banks are attempting to chip away at the influence of international finance houses. Many of them also have government blessing.
TSB, recently floated on the stock market, is a front-runner. Even Santander, the UK's fifth-biggest bank, fancies itself as a challenger. Their aggressive effort to win small business customers has not gone unnoticed.
Gwyn Price, a Santander regional director for corporate banking, was in a confident mood. The south east director was championing his challenger bank’s SME offering from Kent Business School.
Gwyn’s punchy PowerPoint presentation pointed out that Santander is ranked first in the Eurozone by market capital. The firm has a €74 billion market cap.
He also said that there is now £9 million of growth capital available for SMEs, and that the UK SME scene was a strategic market for Santander. “[We are] putting our customers at the heart of our growth,” said Gwyn.
He added: “[We are] differentiating ourselves – we wanted to help fast growing businesses.”
As it was during the aftermath of the financial crisis, banks’ aims are to challenge reputations. For start-ups, this competition could drum up more loan opportunity. But many entrepreneurs and self-funders remain unconvinced.
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