‘Neither lender nor borrower be’ so the saying goes but in business, debt borrowing can be the critical ingredient that leads to investment, jobs and fuels the acceleration of growth, according to experts at River Capital. Tony McDonough reports
It is not unusual for a business to boast that it is “debt-free” and that is, of course, not a bad thing.
But risk is inherent in running a business. The question isn’t so much whether you take a risk but how much risk is appropriate. Businesses benefit the economy and society best when they are growing. And debt can be a critical component in enabling pivotal growth.
John Gray is head of debt investment at River Capital, an SME loan and equity provider based in Liverpool that has been supporting businesses in the city region, and more recently beyond, for more than 30 years.
Merseyside Special Investment Fund (MSIF), of which River Capital is the main division, was set up in 1994, backed by EU cash. Its mission was to provide funding for ambitious Liverpool city region businesses who were operating in what was then a tough local economy with limited supply of funders.
Businesses needed MSIF more than ever following the financial crash of 2008/09 when banks became highly risk-averse when it came to business lending. That reluctance among banks to back early-stage SMEs has become a permanent feature.
That means, according to John, that demand for River Capital four separate loan funds is as strong as it has been. Which is also a sign that, despite another challenging economic period, entrepreneurs still have that appetite for risk to fuel growth.
“There are two kinds of debt that businesses will typically look for – strategic debt for growth or reactive debt for distress” John told LBN.
“The latter is the challenging one because you are trying to plug a gap where the business model has been inefficient. But unless you fundamentally address the route course in the business operations you have just delayed the problems further down the road.
“In these circumstances, we encourage businesses to engage with the regional professional market for advice on the future strategy.
“If you are a business owner and you say ‘I have a strategy to grow my business’, do you take on debt to gear up to achieve growth, such as bringing in the staff? Otherwise, you are waiting for the new markets or profit retention to allow you to afford the staff.
“It helps to be able to bring that capital investment in early, to set the right foundations for the business strategy, knowing that the growth unlocked provides a cashflow to more than cover the costs. If you are using it at the right time with the right advice, then debt can be a very effective tool.”
River Capital’s four loan funds are:
- Small Business Loans are for between £3,000 and £25,000 for purposes such as working capital to asset acquisition with a view to providing growth capital.
- Northern Powerhouse Investment Fund offers loans from £25,000 up to £100,000 NPIF II River Capital & GC Business Finance Smaller loans backed by the British Business Bank.
- NW Business Growth Loan Fund with loans from £100,000 to £500,000 available for early stage, growth capital, capital expenditure, acquisitions and succession planning.
- Flexible Growth Fund with loans up to £1m available to Liverpool city region businesses or businesses looking to relocate to support expansion and expenditure projects that will support job creation.
John acknowledges that River Capital, as an alternative funder, will usually charge a higher interest rate than a bank because they are usually taking on a higher level of risk. But with the money comes a relationship.
“Banks are generally the cheapest, but they will adopt the best security position, and they won’t want to extend there risk beyond the available security. Our loans are generally unsecured against a debenture and a personal guarantee with no liens on personal dwellings.
“We are trying to offer access to finance to companies that do have a good growth strategy but need that little bit of extra help to get deliver the growth.”
“Where we are different is that River Capital is focused on relationships”
First contact a business has with River Capital is with one of the investment managers who will understand the requirements of the business and offer guidance as well as deliver the debt investment.
Once the investment is in place, the business will then have access to a portfolio manager who will provide a relationship service that banks have started to withdraw from.
“My entire team are experienced former bank managers, and their work is all about relationships. Our job is to go into businesses and be a sounding board for the chief executive,” said John.
“A CEO’s job is quite lonely in an SME. Internally they have limited people with which to discuss strategy or business concerns. Traditionally the bank manager was the person in the room who would be that sounding board.
“However, in mainstream banking that face-2-face service with experienced managers is being significantly diluted in favour of call centres. People are now coming to us for second round funding and third round funding because there is a physical relationship with whom they have a productive conversation with.
“And that may have built up over many years. They will often accommodate the higher cost simply to gain access to that long term relationship contact. We can’t do everything, but we offer invaluable knowledge of the ecosystem. If we don’t have the solution, then it is likely we know an advisor or peer who does.
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“Often the businesses are taking on debt for the first time, so we have a duty of care to educate them on the product and process, which in turn can shape the operational function of a borrower for future investment conversations.
“We invest time with a business gathering information to help navigate the lending process but also support the relationship conversations after investment. Each iteration of lending with a business gets more efficient because the core information is retained in the relationship.
“We market to SMEs that a conversation with River Capital is free, so if you have a growth strategy for your business and aren’t sure of the right funding route, then we are more than happy to invest time in a conversation.”