At Money&Co., we really like and respect the coverage of CityA.M. Already a fine nespaper and website, it has risen to new heights under the stewardship of editor, David Hellier. But no-one’s perfect (least of all us). Below, Money&Co. CEO Nicola Horlick picks a bone (or two, or more than two, actually) with a recently published purported overview of crowdfunding.
Last week, CityAM published an article entitled ‘Crowdfunding: A brief history’. The piece acknowledged that there were four types of crowdfunding – donation, rewards-based, debt and equity – and yet the entire article focused on equity crowdfunding.
At the end of last year, Cambridge University and NESTA published a report entitled ‘Understanding Alternative Finance’. In that report, it was estimated that alternative finance providers made a total of £1.74 billion available to UK companies during 2014. The major categories were person-to-business lending (£749 million), person-to-person lending (£547 million) and invoice discounting (£270 million). Equity crowdfunding only accounted for £84 million. The report predicted that alternative finance providers would make £4.4 billion available to UK companies in 2015, with the vast majority of this coming from lending sites like Money&Co. So why do journalists fail to see that debt providers are the real providers of finance to UK SMEs?
Fifty per cent of startups fail – the FCA warns of a high probability of losing money
The Breedon Report was published in 2012. It predicted that a funding gap of £59 billion would open up for UK companies by 2016 if the government did not do something urgently. The government responded by making funds available to SMEs via alternative finance providers and enhancing the benefits to equity investors via the Enterprise Investment Scheme. The Seed Enterprise Investment Scheme was introduced to encourage wealthy individuals to back startup businesses. These incentives to equity investors have been helpful and there have been some very successful equity fundraises via crowdfunding sites.
The recent equity raise by Chapel Down winery was a media darling, with an equity raise of £4 million through Seedrs last year. However, the fact remains that the vast majority of money being made available to UK SMEs is coming from debt sites. Indeed, Money&Co. funded a £1 million loan in the middle of last year and this remains the largest-ever crowdfunded loan to a company outside the property sector.
The risks to individuals investing in startup businesses are considerable. Fifty per cent of startups in the UK fail and the FCA has warned that individuals investing in startups through an equity crowdfunding site have a high probability of losing all of their money. This is not true of debt sites like Money&Co. Companies that borrow money via Money&Co. must have a minimum of three years’ filed accounts and must have been profitable in their last year of operation.
Debt doesn’t have the tax breaks, but it’s less risky than equity
We take a first-ranking debenture over all of the assets of the company and any pre-existing secured debt must be discharged. We will allow a company to have a facility from an invoice discounter though as this is helpful to the company’s cash flow. None of the companies that have borrowed via Money&Co. so far have missed a monthly repayment, but it is inevitable that there will be some bad debts eventually, but we estimate that this will not exceed 1 per cent of monies lent.
If you are getting a gross return of just under 9 per cent on a portfolio of Money&Co. loans and 8 per cent after fees, then even if you allow 1 per cent for potential bad debts, that is a total return over time of 7 per cent, which looks pretty good when inflation is zero.
Debt crowdfunding doesn’t have the benefit of the tax breaks that equity crowdfunding enjoys through use of the EIS and SEIS, but it is less risky and the income generation from a portfolio of loans is something that is particularly attractive to those who need income.