It may have been Valentines Day yesterday, but with banks’ reluctance to lend to businesses, they could push more start-ups into the arms of angel investors.
With UK banks still showing a reluctance to lend to businesses, companies could well be forced to look towards alternative sources to fund their ventures. The recession may be over, but with UK GDP figures just crawling over the line into positive territory, how are the banks doing? Those vital foundations of a functioning economy and an equally vital source of lending for start-up enterprises.
Banks may well have received an eye watering £850 billion of taxpayers’ money to keep them afloat but a glance through last week’s House of Commons Committee report, ‘Maintaining financial stability across the United Kingdom’s banking system’ the crisis of confidence that has haunted banks since 2007 appears to have a sting in the tail for businesses in the UK seeking funding.
Despite recent declarations that they are ‘open for business’ banks are still struggling to help those innovative start-up companies the country needs to help UK plc climb out of recession are still being starved of investment. Lending to business, as the report suggests, is ‘falling short of legally-binding commitments entered into by two of the banks that received the most support: the Royal Bank of Scotland (RBS) and Lloyds Banking Group’
The reasons for the banks’ inability to meet their lending commitments are unclear but when it comes to small or medium sized business, lending in a downturn is perceived as even more risky than usual. This creates a paradox where businesses are starved of the vital capital they need to grow which in turn can lead to the failure of those businesses vital to a flourishing economy.
This can only be bad news in the long term for banks looking to bolster their balance sheets. So where can businesses turn to for help? The obvious answer is angel investors.
What has become an age of austerity for the banks could be a golden age for angel investors, those wealthy individuals willing to take a calculated gamble on start-up companies. But it isn’t just start-up capital angel investors will need to provide if banks continue to refuse or give unfavourable terms to businesses hoping to borrow.
According to an article in this week’s Scotsman, angel investors in Scotland are increasingly acting as bankers to fledgling companies, providing £1 million in overdrafts or loans in the past twelve months. Angel investors are also being asked to act as debt providers in the absence of loan and overdraft facilities offered to businesses by banks.
It isn’t just in Scotland that banks are perceived as the villains for taking taxpayers’ money and showing reluctance to lend to businesses. Ask any business owner or entrepreneur in the UK and you are likely to hear that trust in banks is at a low-point.
This could well be good news for business angels, if not for entrepreneurs struggling to launch their businesses. As we have established angel investors are becoming more picky with the businesses they invest in, therefore for all but the most promising businesses, there will be no easy alternative and the door will remain firmly shut when it comes to accessing vital capital.
But what this means for business angels, who unlike banks require an equity stake in the businesses in return for investment, is they can now afford to be even more choosy when faced with more choice. Due to the perception that banks are the villains when it comes to lending, those businesses with the most potential will be more likely to take the angel investment route rather than approach the banks.
And for those entrepreneurs who do make it through the deal funnel, they can gain access to valuable advice and coaching from those who have been there before, rather than just cash from the bank.
There is a caveat. How many of these extra businesses seeking capital from business angels will be viable? According to the banks, one reason they haven’t been able to reach their lending target is the higher proportion of those companies needing credit not having viable business models.
This leads us to two conclusions. Business angels will need to be more wary when it comes to assessing the viability of companies. Banks meanwhile will need to be careful that their reluctance to lend now creates an irreversible trend of the best businesses turning to business angels for their start-up capital now and in the future.
Tags: angel investment route, Angel investors, bank lending, Business Angel, business lending, economy, entrepreneurs, equity stake, investors, Lloyds Bank, RBS, start-up, start-up businesses, Start-up capital, UK GDP