By Martin McTague, FSB Chairman, Policy and Advocacy
Many small business owners are naturally deterred from seeking investment from new sources of finance – but that in itself is a risky strategy
I’ll never forget the sense of excitement, hope and confidence I felt when I took the leap and set up my own business. I’ll also never forget the moment it all drained away when a few years later – as recession kicked in – my first business went bust. Nothing can prepare you for the toll it takes when something that you’ve built up from scratch, which you’ve invested in personally, financially and emotionally, slips away from you.
Among my fears was the worry I’d never be able to get another loan to start again. The bank manager would have a big black mark next to my name. My confidence was shot to pieces. I set up another business with what I had left and ran it from my back bedroom. I’d gone from having 60 employees to none.
That was nearly 30 years ago, and thankfully I’ve had rather more success since then, having eventually sought a different form of finance. But I wonder how many small business owners are held back from taking a risk and funding investment because they lack the confidence to do it.
FSB research shows that small businesses are consistently pessimistic about the availability and affordability of credit. In part, it’s because many entrepreneurs still go instinctively to traditional lenders – and traditional lenders can err on the side of caution when it comes to small business lending.
There is a lack of awareness and understanding of the myriad of funding options now available. But I’m convinced it also comes down to a lack of confidence to take one of these not-very-well-worn paths; a perception that it’s too risky.
There’s a paradox here, because what may appear to be a risk-averse decision can actually bring its own significant risks. For a start, if you’ve raised finance against personal assets like your home – as I did the first time around – then there is extra anguish if your business hits a rocky patch.
The better funded your business is, the more secure it is. It’s better to borrow in a sensible way, diversifying your sources of finance to make your business more stable and resilient. All of this is dependent on having the knowledge – or the help and support to acquire it – to work out what the most appropriate way of raising finance is for your business.
There is scope here for the Government to help. For those turned down by a traditional lender, there should be better monitoring of the requirement for banks to refer a greater proportion of unsuccessful loan applicants to alternative finance platforms.
There are also opportunities presented by open banking. While it may take some getting used to, the option to share banking data with third parties could make it far easier to access finance, switch providers and compare different offerings at the touch of a button.
In my case, I never did go back to the bank for a loan.
After a few years, though, I did build up the confidence to look for an alternative form of finance. I chose the venture capital route – sharing the risk with investors rather than bearing it all myself. If I hadn’t found the confidence to do that, I might never have grown the business or become an employer again. I could still be sitting by myself in that back bedroom.