The famous Chinese Whispers story about the commanders at war who sent a verbal message down the line to HQ has always been a favourite of mine. “Send reinforcements, we are going to advance” was the message but on the way it got lost in translation and evolved into “Send three (shillings) and fourpence, we are going to a dance!”
Today this story can be applied to the context of small and medium enterprise (SME) funding. On the one hand we are hearing the banks are open to driving economic growth by ‘sending in reinforcements’ and once again lending to SMEs – however, the economic stalemate continues.
SMEs are not emerging from the trenches because they either cannot or are not borrowing from the banks. A recent survey conducted by lobby group the Irish Small and Medium Enterprises Association (ISME) found that half of businesses that applied for credit in the last six months were refused. So, the troops are taking matters into their own hands.
Globally, across all areas of SME finance, a revolution is underway. Entrepreneurs are building crowdfunding platforms which enable private individuals to use their ‘three and four pences’ to invest and lend directly to SMEs. This is working. Here in Ireland, we set up the country’s first crowdfunding platform for SMEs, called Linked Finance, one year ago. Since then we have helped almost 70 businesses access credit, helped create 200 jobs and sustain hundreds of others while simultaneously undercutting the banks by 30pc by offering unsecured loans at an average interest rate of 8.9 per cent. We broke the one million lending mark within six months of trading.
Crowdfunding is a simple but clever way to introduce cash into an economy. It is set to continue to grow exponentially for a few key reasons. Firstly, investors are struggling to get decent returns on their money. Secondly, businesses are desperately in need of credit. Thirdly, it’s quick money. You can complete the auction and have the money in your account in a matter of weeks unlike more traditional routes which can take up to six months.
On a recent visit to Dublin the world’s foremost crowdfunding expert Simon Deane-Johns, co-founder of the world’s first peer-to-peer lender Zopa, predicted the market for such lending to small businesses in Ireland could grow to Ђ100 million in three years. He said peer-to-business lending could, if anything, grow even faster in Ireland because of the greater sense of community between businesses and people here.
Crowdfunding not only provides investment, but builds strong business relationships as a company’s lenders become its customers, ambassadors and salespeople in effect. Bankers get bypassed, the wheels of business are kept turning, and everyone wins.