What does the credit crunch mean for these businesses? In particular what will happen to two things that are critical to their prosperity: the availability of investment money and sales opportunities?
It might surprise you but I am very optimistic on both fronts.
In truth nobody knows how this will all end because it affects different parts of the economy at different times and we are still experiencing the first stage effects, but let me look at some of the issues that are coming out at the moment.
The biggest effects at the moment are being felt by the banks and by some wealthy individual investors. Banks and investors are both loosing money because they made poor investments in the property market in the USA. Not all banks and only a few private investors, mainly those who put money into certain hedge funds, but the ones affected have lost huge amounts of money – billions of pounds.
Banks will become a bit more careful who they lend to and they will charge a bit more when they do lend. They will be especially careful about lending on property because everybody has convinced themselves that property prices are going to go down. But let’s not forget, banks have to lend to rebuild their businesses.
So where will banks want to lend?
One area that has been growing and I am sure it will grow more, is factoring and invoice discounting: lending against amounts due from customers. Early stage businesses are major and growing users of this form of finance and we will see increased competition and hence better terms from the banks for the best quality lending – judged not on the business itself but on the credit worthiness of the businesses’ customers. So if you are selling to big blue chip companies you are in a strong position and you need to be asking your banks for the best terms they will give.
Conversely you will find it harder to get an overdraft. There is a specific legal reason behind this – bank lending specifically on your customers debts is more secure for the bank than a general charge over your business.
Now let’s look at investment.
The stock market is lower than it was in 2000; the property market is generally accepted as being overvalued so where can investors look for capital gains? In my view the early stage business now represent a real alternative for many investors.
My business has seen growth in the number of people wanting to invest in early stage businesses caused I suspect by two quite different things which will continue to drive this trend: dragons den and EIS Tax relief.
Let me declare my position Dragons Den is a wretched programme - more about entertainment than business but absolutely fantastic at raising the profile of early stage business investing. It has done more to develop the industry than anything else. For all you entrepreneurs out there the real life experience is quite different to that portrayed on Dragons den.
I have never seen an investor speak to an entrepreneur except to show respect and encouragement – where there is criticism it is delivered by a “critical friend” and not as a put down. Most people focus on the money, as you would expect, but many have said to me 18 months later that it was the advice and business contacts of their investor that made all the difference.
The second issue is very different: EIS tax relief.
EIS (Enterprise Investment scheme) tax relief is only available on investments in companies with less than 50 employees and with balance sheets of less than £7m. The tax relief is very generous to investors giving investors income tax relief and tax free capital gains and inheritance free gains as well. Not only this but if an investment does not work out there is further tax relief at 40% on the loss. Speak to you accountant or tax advisor for full details.
Now what is going to happen to customer demand – what will the customers (typically consumers or bigger businesses) of these early stage businesses do?
Some consumers are being squeezed by the banks via their mortgages but many are not. In particular the over 50’s who are more likely to be mortgage free or to have lower mortgages they may well be doing a tiny bit better because of higher savings rates.
Similarly bigger businesses are being squeezed and are after better deals or cleverer ways of working. In short there is a pressure, and growing pressure for change in many markets. Change is the vital opportunity for early stage businesses - one thing is for certain when money gets a bit tighter there is always a market for better products or slicker services.
So I would urge you to think about change and development. Go for that investment ands build your future. Now I know many will say that they want to keep control and not “give away” any of their equity.
Don’t give it away sell it to an investor, a business angel, for the best price you can get!
Remember owning 75% of a very successful growing business will be a much more enjoyable experience than owing 100% of a smaller struggling one especially when you have a big bank debt secured via a personal guarantee on you home!
for more informaton visit www.advantagebusinessangels.com
