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Difficulty in securing credit means Britain’s top entrepreneurs are increasingly looking at alternative sources of finance

25-Feb-2010

New research1 from Investec Specialist Private Bank and the Entrepreneurs’ Organization amongst some of Britain’s most successful entrepreneurs, reveals that 77% are looking to secure funds in the UK during 2010, but 59% believe this will be difficult to do, and a further 15% expect it to be very hard.

Alternative sources of funding
Given this, many are set to increasingly turn to ‘alternative’ sources of finance. Some 35% intend to use invoice discounting and asset based lending; 28% are considering raising funds through private equity and 17% are looking at mezzanine finance. Just over one in ten (11%) intend to borrow from friends and family, and one in four will rely on credit cards. Some 17% intend to sell equity in their existing businesses to raise capital.

Speaking at an Investec Specialist Private Bank and Entrepreneurs Organization event on the challenges and opportunities facing successful UK entrepreneurs, leading businessman Robin Smith, who founded Host Universal, a communications network specialising in ethical brand strategy and viral marketing said: “We recently secured finance from Asia, partly because it would have taken too long to obtain from the banks here.”

Bill Liao, author of Stone Soup www.stonesoupway.com said: “I’m not surprised by the shift amongst entrepreneurs towards alternative sources of funding and away from traditional banks. Rather than bail out the banks it might have been better to put more of this money into funds to get more new organisations off the ground.”

Keith Curran, founder of Yes Telecom and a mobile telecoms entrepreneur added: “In the current environment, it is better for entrepreneurs to target the three ‘Fs’ first – friends, family and fools - before approaching the institutions.”

Peter Selkirk, chief executive of Egber H Taylor and Company Ltd said: “If you have a good business then it’s not impossible to get finance. It’s harder and it’s more expensive, but it’s not impossible. The bigger issue is that UK plc is in a troubled state and needs to fix itself by looking at the rest of the world as a market. There are huge funds locked up in the Asian and Middle Eastern capital markets. We have to show that UK entrepreneurs do a better job than those in the US, France or Germany - and to show that it’s the best place to do business.”

Commenting on the one in four entrepreneurs looking at raising capital through private equity, Paul Wilkinson, Chairman of Produce World and the Big Bear Company said: “The difficulty with the private equity model is that it has become over-hyped in terms of exit multiples. They need to reduce their aspirations, and they also have to decide whether they are investing or managing the business. They can be investors or operators but not both.”

Optimism and obstacles to growth
The research from Investec Specialist Private Bank and the Entrepreneurs’ Organization’s survey reveals that 72% of entrepreneurs see the economic climate in the UK in 2010 as an opportunity as opposed to a threat. However, there are still a number of obstacles to overcome in order for British business to grow. Half of the entrepreneurs interviewed said that lack of client demand was a challenge, and one in three highlighted political and economic uncertainty as a worry. One in four cited access to credit and 17% highlighted onerous legislation.

Commenting on the findings, Keith Curran said: “You have to learn how to spin things on their head. For example, companies are cutting back on in-house catering, so we have set up a business to deliver coffee in offices. We’ve set up another one to help companies who want to retain staff but can’t afford to give them pay rises.

“Two people selling shoes can go to a third world country and one will say there’s no market because no one is wearing shoes, while the other will say there’s a fantastic market to sell shoes because no one has any.”

James Layfield, founder of Never Ever Limited, an umbrella company under which he has developed various business opportunities said: “I launched a business in March 2009 and will launch another one in April this year. It’s all about finding a niche. For example, I am currently selling 10% of my future earnings in return for £1m today, which will bring returns to the investor for the rest of my life.”

Overseas expansion
When discussing business opportunities for entrepreneurs, some see the overseas market as representing better prospects than the UK. One in 10 entrepreneurs interviewed by Investec Specialist Private Bank and the Entrepreneurs’ Organization revealed that they plan to shift their UK business operations to other countries with more favourable terms for businesses, and a further 17% are considering this. Similarly, one in 10 intends to move their residency away from the UK, and 19% are looking at this.

Dr Sally Ernst, President, EO UK and a serial entrepreneur said: “It costs three times as much as it did in the past to set up a business in the UK because of tax, the regulatory environment and the recession. It is a much more lucrative proposition to invest in China.”

Michael Conway, founder of the Quayside Group said: “The UK has great benefits and places to live and work. But if measures aren’t taken other places will become more attractive, and with technology like a laptop and Skype, it’s easier to run a business from anywhere. With an online business, your location becomes less important.”

James Layfield said: “I’ve recently set up businesses in Istanbul and Madrid, and the US has set up a new visa structure to encourage entrepreneurs – the UK could learn from other economies.”

Peter Selkirk said: “We can clearly see that this country will not sustain a market for environmental equipment so we will need to look abroad for growth. The world is a huge place. So the obstacles that I see are all to do with the mindset – how to get people thinking internationally. Entrepreneurs tend to focus on their locality but we need to get skills in the huge bed of talent that we have here to look outside of the UK. In my own company, five years ago we may have received an enquiry from the Lebanon and said no, we can’t deal with that – now anything is possible.”

Ed Cottrell, Investec Specialist Private Bank said: “We live in a very different world. The ‘entrepreneurial class’ – in terms of generating revenue and jobs - will be key to the UK economy recovering and more needs to be done to help them. Not only in terms of tax and regulation, but also access to credit. When considering providing funds to entrepreneurs, there needs to be a strong focus on risk management but also a determination to understand their business and be flexible enough to come up with a tailored solution to meet their needs. This is the main challenge for the financial services community and one of the main obstacles to banks not lending more to businesses.”

If you would like a copy of the full research results, please contact Victoria Haydon on 0207 597 4101

1. 71 highly successful entrepreneurs with interests in one or more businesses with turnover of at least £1 million in annual revenues from their UK business interests who are either clients of Investec Specialist Private Bank or members of EO took part in the survey during December 2009. The survey was conducted online and it was anonymous.