The worrying means of finding cash to support SME’s
I read an article last week which highlighted research from the Bank of England that had shown nearly half of all borrowing by SME’s is backed by the boss’s home. What I found almost as shocking as the fact that bosses were putting up their own homes to support their businesses, was that the article did not find this shocking at all.
Instead it was written to explain how the fall in house prices could impact the amount of money bosses could borrow to invest in their business. At no point in the article did it say that using one’s own home as collateral for your business could be a very risky and bad idea. Most people I met when we were starting Lashbrook Lassis generally explained how we could access more money to use as investment. I’m almost glad that at the time Jo and I didn’t own our own home, as this may have been viewed as a potential cash cow to fund our ill-fated company.
The article also made me ask, if the number of home-owners amongst young people is falling, who do we expect to be starting new SME’s? When we speak of dynamic and innovative new companies, it seems to be in contrast to the vast majority of home ownership in the UK which is dominated by those who are over 65. Therefore, it seems hugely apparent that if we want young people starting businesses, then we either need to get them on the housing ladder or provide another source of significant funding that they can use to start a business.
I’m sure some will point to angel investors who can help young people start a business, yet the criteria for what investors use to determine the potential for a company is generally opaque and inconsistent. For instance, I listened to the story about Mariam Naficy who set up a website called Minted.com that designs personalised stationary. To begin with they were haemorrhaging large sums of money and had almost next to no orders. So Mariam decided they needed funds from a venture capitalist to keep the business going. But how was she going to extract any funds from anybody when her company was losing money without any prospect of making a profit? Well, Mariam explained, she spoke about her previous internet company which she had sold just before the dot com bubble had burst. This, as it turned out, was enough of a reason for a VC to put $2 million into Minted. For most people, this would surely be scant reason to place $2 million of their own money into such a company – though who am I to say?
All I can really ask is, how is any of the above considered a fair or good way for funding new SME’s?