October 9, 2012 12:04 am
Money is the lifeblood of any business but getting hold of it has become far more difficult since the financial crisis began in 2008.
Net bank lending to small businesses has fallen every month since the May 2010 election as banks repair their balance sheets. Peer-to-peer lenders such as Funding Circle, which matches investors’ money with companies seeking funds, are growing but remain small.
Some more established businesses such as King of Shaves, the shaving goods company, and chocolatier Hotel Chocolat have issued their own bonds to borrow from customers.
The government has launched the Funding for Lending scheme with £80bn from the Bank of England to provide low-cost borrowing for banks and building societies, provided they pass the savings on to corporate customers. While “friends, family and fools” remain the first resource for those looking to set up a business, there are a number of alternatives, especially when looking for growth capital.
Momentum Instore and asset finance
When Rob and Steph Gleave were given the opportunity to buy the company they managed from its parent, marketing agency McCann Worldgroup, they jumped at the chance.
Mr Gleave, 48, had worked at Momentum since he was 17 and had been managing director of the Cheshire-based group for 12 years. “You only get one chance to do a [management buyout] and it is a steep learning curve,” he said. The pair turned to a corporate finance adviser. As well as the £4.75m for the buyout, they needed money to keep trading and fulfil orders the business had. The adviser suggested Centric, an asset-based lender established in 2008. “It was pretty straightforward. They could give a cash flow loan where a bank could not,” said Mr Gleave. He was impressed with the speed of the process and the deal was done in May this year.
Incanthera and public sector funding
Despite devising a promising treatment for cancer, Incanthera struggled to raise funds to begin preclinical trials. But following a move to Merseyside, the spin-out from Bradford University’s Institute of Cancer Therapeutics was able to access £375,000 from Spark Impact, manager of the £25m public sector-backed North West Fund for Biomedical.
Simon Ward, chief executive of Incanthera, said investors had become wary of backing new medicines, even if a successful product could generate huge returns.
He said the big pharmaceutical companies would usually fund research only once early clinical trials were successful but venture capitalists had pulled out of the sector almost entirely.
Incanthera has developed a “smart bomb” treatment that targets tumour cells directly, thereby allowing highly toxic drugs to attack tumours with no harmful side effects on other cells. It has just closed a second round of funding that would allow it to undertake clinical trials.
The biomedical fund is part of a £185m fund provided by the European Investment Bank and European Regional Development Fund, to supply debt and equity funding to small and medium-sized enterprises in north-west England.
Clarke Energy and private equity
The family owned business is unusual in having attracted private equity capital not once but twice. Founded in the mid-1980s to provide diesel engine spare parts, by the early 1990s it was experiencing double-digit growth as a servicer of gas turbines, and began to work with renewable power and combined heat and power systems.
In 1999, the private equity group 3i invested to help it grow to £180m turnover and 650 employees by 2010, when the family management bought the stake back.
The Merseyside-based business in August sold a minority stake to ECI Partners to fuel further growth. It is a service partner for GE, and has provided engines for buildings such as Guys and St Thomas’s Hospital, The Shard and the redevelopment of King’s Cross station.
Jim Clarke, chairman, said it was looking for a partner with experience in growing businesses.
Metail and friends and family
Tom Adeyoola had it all planned when he decided to leave his job with an online gaming group to set up a software business of his own. Inspired Gaming was about to be sold to an Icelandic bank in December 2007. “My bosses were about to be millionaires and invest,” he said. Then came the crash and the transaction fell through. “I was looking for £200,000. I had to do it for £50,000.” Some £10,000 came from his own pocket, then contacts, family and friends put in the rest.
Mr Adeyoola said: “That is why I say it is the best thing that could happen. I had to work out how to do it with no money, make the right choices on product and think what are and what are not priorities.”
He survived on £600 a month and cycled everywhere.
Working with a Cambridge academic, he had devised a way to create a virtual fitting room online. Metail creates a 3D image from just two photographs so people can try on garments before buying online.
It is convenient and saves costs as there are fewer returns. It also has a cheap way of photographing and uploading the garments for retailers.
Tesco will launch a Facebook application with Metail in October as the company books its first revenue. It has raised £2.7m to date.
Blue Butterfly and corporate
The brothers behind Blue Butterfly, which has created an app to allow mobile devices to access wireless hotspots in areas such as cafés without requiring a password, have found backing from an unlikely source.
Telefónica, the Spanish telecommunications company that owns the O2 network in the UK, picked it as one of the start-ups it would host at its Wayra incubator scheme in London’s West End.
Andy King, 28, and brother Owen, 20, moved from Norfolk for the opportunity after being one of 16 successful applicants out of 1,000.
They received desk space, mentoring and £40,000 in return for a 10 per cent stake, as well as pinning down a route to market for their product through O2’s network of hotspots.
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