Crowdfunding Challenges Banks

Following a short interview at Cumbria’s ‘Wasdale Head Inn‘ I secured my first-ever paid job in 1984 as a kitchen porter.

Fresh out of school, my new hotel home was at the end of a long valley, 8 miles from the nearest shop and another 3 to the nearest town. And that’s where I found myself 2 week’s later having hitched the 11 miles so I could open my first bank account…

In search of bank funding

Over thirty years I have used that same bank for many reasons and recently was involved in a project to raise £50k – £100k of loan funding to help a business expand. Working with a financial consultant the bank was the first ‘port of call’. And about 4 weeks after the initial phone conversation we all sat around a table so I could present the case.

Within an hour everyone was smiles. Then I was asked to supply a detailed business plan with 3 years of forecasts. Anticipating the request I emailed all paperwork that week. Unfortunately, the bank didn’t respond until the consultant called them 12 days’ later. Only then did I receive an email informing me that the application had been ‘successful in reaching the next stage’. Hurrah!?

Frustration starts

Irritated by the slow process I decided to phone the bank executive who had sent me the ‘success’ email. After a bit of questioning I discovered that despite the quality of the product, the detailed plans I’d submitted and the unblemished 30 year history, the bank would want a second charge over directors’ homes in order to progress the application.

“And is that because of the risk we present or is it a blanket policy?” I asked the youthful respondent. “It’s a blanket policy” he replied rather meekly. Annoyed that information which should have been conveyed at the outset had been withheld (and aware that the process was going to take up more valuable time) the call was over within a minute.

Crowdfunding challenges banks

Concerned further time might be wasted gaining similar replies from other banks I discussed crowdfunding the £50k – £100k with the consultant. Several providers were considered including Rebuilding Society and Squareknot but ultimately I chose to register our interest with Funding Circle. And this is a summary of what happened next…

• Within 24 hours of registering on the site I received a phone call from the organisation asking if they might be of any help with our application. Sensing a bit of pressure selling I backed off slightly and said we’d go at our own speed.

• Seven days later the full application was submitted (it took no more than an hour and no detailed plan was required) and I asked Funding Circle to make it public on their site so potential investors could consider our loan funding request.

• Over the next 3 hours I watched my computer screen as investors made commitments (varying from £10 to £5,000) to our cause. In under 200 minutes our project had 100% backing yet we had still not signed off on any commitment ourselves. I was staggered at the speed and ease of it all.

• And once the funding was in place there followed a live auction (7 days) where investors competed with each other for the interest rate that would be paid on the loan. At the end of the auction we were offered a rate of 7.9% over the 3 year term.

• We were delighted with the offer and it was only at this point that we had to commit or walk away. Funding Circle had always made it clear they would take a 3% management charge on the total amount borrowed and if we accepted the offer all the money would be in our account within 48 hours less the 3% charge. We accepted. Crowdfunding challenges banks for sure.

Speed, efficiency and transparency

For this project Crowdfunding the loan definitely worked for us. The speed, efficiency and transparency of the process was impressive especially when compared to the service offered by a long-standing supplier. I understand banks may have reason to be cautious (and have fewer staff than pre 2008) but unless my bank has a drastic change of direction I can’t see myself asking them to fund a business project again.

Having said that, may be we were lucky? Not all applications that seek funds (loans or equity) get the money. As referenced in the link above, we worked with a consultant on the excellent Growth Accelerator programme; the quality of advice was a key factor that led to the project’s successful outcome.

You might want to look through sites like Seedrs and Kickstarter as well as the organisations already mentioned in this post to see how to position any bid to attract investors. But also watch this hilarious & cleverly crafted spoof film sending up crowdfunding as it highlights why some projects should never be funded.

And finally, for reference… Useful information is available through the UK Crowdfunding Association and this article published by the Daily Telegraph in November 2013 provides a subject overview as well as an independent take on the best crowdfunding websites.

Key Learning Points: Crowdfunding challenges banks for sure. Traditional routes to finance are not necessarily best. Understand how crowdfunding works to decide whether you can use this source to finance your next project. Seek good advice to help with any decision.