This is my synposis of the Background and challenges that face Crowd Funding as a solution as presented by Knowledge Peers in Feb 2014.
Background Funding UK SMEs
- 5m SMES in the UK with turnover of £3.3bn sales. Sole traders make up 75% of this, and 2/3 profitable in 2013
- Lending from banks has reduced from 41%-36% to SMESs over the last few years, trend of deleveraging SMEs continues – high risk
Ranked the most popular form of lending is:
- Bank overdraft
- Directors loan
- Angel investor
Common concerns as is
- Complexity of documents and banks understanding of the business.
- Complexity of evaluating funding – figure out 4-5 sources; a lot of admin
- 85% of owners said that personal guarantees are not acceptable
- Speed to completion / reaching a point of certainty
- Loss of control
- Terms – losing control and loss of decision making
- Opaque terms, 40% worried about complex obligations
- Lack of ownership and oversight of the process
Cost is less of an issue
Banks funding is centred on low risk and personal security. Only lend to those that don’t need it
Background to crowd funding
- £263m of debt and equity funding has been raised with crowd funding, of which £237m is debt, equity £21m, and both £4m. Crowd cube is only 3 years old
- Benefits access to funding and certainty in 2-3 weeks, investments £1000 average per event and per investor, 70% of which are HNW individuals
Research sample of 120 SMEs
- 73% of SMES with turnover of gt £500k, were owner managed by majority shareholder
- 60% sought funding, 70% were successful,
- Cash flow focussed 71% categorised as general growth, 65% general operational
Who do SMES contact? 1st port of call – people they know
- Banks 42%. (Only 64% of owners knew their main bank contact)
- Lack of confidence in what banks were doing, unhappy with the process, banks not taking responsibility
- Banks as facilitators e.g. the loan guarantee scheme
- Key business contacts 40%
- Family trusted people
- 25% professional services
- Perception is the cost of the advice too high, and a lack of trust, and lack of confidence in advisors
Crowd funding includes a broad range including selling invoices and is perceived to alleviate the main issues:
- Personal security
- Speed to reach a decision and assess risk 1-2 weeks initial view Equity can take up to 3m
- Taking Control of the process, and good process
Better perceptions of Crowd funding
- Quick decision upload details 1-2 weeks, better predictability in a shorter time
- The terms allow for more flexible payment options if there are difficulties!?
- 73% consider legitimate, 42% would consider equity and 42% consider loan
- Reputation not such an issue
- 55% consider CF as a good way to access investors,
10% are worried about the IP risk, sharing their ideas publically
Balance between investor and business
- Businesses performance is the sole means to guarantee payback
- Balance between lender and investor.
- Are crowd funders storing up problems in their portfolios?
- How issues are managed. Is there enough visibility / trust / approachability?
Crowd funding take up in the sample
- 0% of the 120 SMEs used crowd funding, 76% were aware, 87% of FAs were unaware**
- Is CF a threat to IFAs? Or just needs sorting as a RTM?
Opportunities for improvement
- It’s unclear as to the reality of the different crowd funding options upfront and the process to get on board could be clearer
- IP risk and protection
- With the introduction of the FSA regulations in Apr 2014 the number of players and confidence is expected to grow
- Differentiation – Trustworthiness 63% considered the model trustworthy, 61% said crowd funding same level of trust as FS – industry reputational damage
- DD – bank type process, how is it managed, can it be simplified, taxation and broader issues?
- Integrity and sustainability; 10% Returns for investors seem too good to be true, how about retaining more for the crowd funder to mitigate any risk.
Here is a link to the efforts of the USA to regulate crowd funding http://www.ft.com/cms/s/0/b80096ba-a3c7-11e3-88b0-00144feab7de.html?siteedition=uk#axzz2vfwnrCAB
For more information direct from Knowledge peers