16 Jul 2013

Beer and chocolate – sweet return or bitter taste?

As businesses struggle to borrow from banks, Sarah Smith reports on an alternative model beginning to fill the gap. But is peer to peer lending a sustainable way of attracting investment?

One of the great mysteries about the great recession surrounds lending to small and medium sized businesses (SMEs). The banks say they are keen to lend, the businesses say they are desperate to borrow, yet lending is still at record lows.

All over the country there are small businesses who have sad stories to tell about being repeatedly turned down for bank loans and who therefore can’t invest, expand, grow and employ more people.

The five big banks in Britain supply 90 per cent of the loans to SMEs. They control most of the market. And they say they would love to lend out more money if only businesses would come to them and ask for it. They claim lending is down because demand is down – business are too nervous to ask for money in this difficult economic environment they reckon.

Rubbish, say many of the businesses I’ve been talking to. They describe painstakingly applying for loans they desperately need to expand their business, only to be turned down flat in a few hours – less time than it could possibly have taken the bank to properly assess their application. Or they complain about being left waiting for months before they are refused a loan – sometimes missing out on crucial contracts while they wait.

The government has tried to threaten and tried to cajole the banks into lending again, without much success. So it’s hardly surprising that a new way of doing business has sprung up to fill the gap.

Plan B?

Peer to peer lending is a fairly new idea that allows individuals to invest directly in small businesses. With interest rates at an all-time low, savers are looking for better returns than they get with the banks, at the very time businesses are trying to raise money from anyone but the banks.

Websites like Funding Circle and Zopa have sprung up to introduce these people to each other and get the funding flowing. It’s an interesting idea that is growing fast. When the recovery really gets going and the banks do want to start lending again, they may discover their former clients have found another way to get the cash they need and won’t go back to traditional funding routes.

Other companies are going straight to their customers to raise the money they need to expand. Hotel Chocolat has issued chocolate bonds to its investors, who get paid interest in chocolate in return for lending the company money. Meanwhile, Scottish craft beer producers BrewDog launched “equity for punks” – selling shares in their company to their dedicated fans in return for a lifetime discount on beer as well as share of the company. They raised £1m in under 24 hours.

Free beer and chocolate certainly sounds lot more fun that the traditional returns you might receive for investing in a FTSE 100 company. But is it safe? There is no guarantee that any of these small companies will definitely succeed. Invest in one that fails and you could lose all your money. That’s the risk you take in order to get a much better rate of return than you will find with a guaranteed deposit account with a high street bank.

So the question is, what stories will we be covering in five years’ time? Telling the tales of the banks who lost their clients as they’d found new ways of raising finance? Or the stories of the small-time investors who lost their money in the peer to peer lending market?