How SMEs are funded
Interesting article one of our team noticed in the Independent last week.
It quotes Alisdair Thompson, who made this very point when I co-presented with him a couple of weeks ago. I was glad to see it in print (though can’t find a link) as it struck me as insightful.
10 years ago, 10% of SMEs were funded by direct business loans. Today that figure has dropped to between 3% to 5%.
The rest finance their business by a mortgage over their house.
Banks generally cannot provide figures on how many house loans finance business, because they didn’t formally differentiate the lending when the house market was running hot.
This is the reality of small business. Very few businesses have a loan that is secured on the assets of the business. Effectively it is secured over the business owners house or with a personal guarantee. This is what makes small business so different from big business – it really is personal. If that deal doesn’t come in you have to face your CFO across the pillow at night and explain that the bank now owns another room of your house.
It also reveals why it is so hard for young entrepreneurs to get started. Without having a chunk of equity in your own house or having a close relative provide a Personal Guarantee it will be very difficult to obtain any sort of funding.
When we did AfterMail we soon worked out that as you grow you need cash – not for investment, just to fund cashflow. Say your business costs $50k a month to run, and you get your sales up to $50k a month. Home and hosed right? Well no. Your sales invoice might get approved for payment after a month because you’re in an implementation phase, and it might take another month for you to get paid. So you need 2 months cash ($100k) just to stay alive. Without an overdraft you need to raise that $100k as equity or you are forced to slow growth down to build your reserves.
It makes my blood boil when I see bureaucrats delaying projects or holding onto payments. They do not understand the stress it places on entrepreneurs who are risking it all and sweating how to make payroll.
Cash is oxygen. Small amounts of credit allow the entrepreneur to fund growth. It would be very interesting to know how many small businesses are funded by their home loan. I suspect it would be over 90%.