The starting of a new business is always an exciting experience as there is really no way of knowing what is going to happen. Will the business survive a year and fold, or will it be successful and perhaps in time pass on to the next generation?
In any struggling economy and particularly in Ireland right now where bank lending has become difficult to obtain, it has become necessary for many start-up and existing businesses to seek other ways of getting finance to grow their businesses.
In the last few years a new type of funding has become popular. It is known as crowd funding and it’s a cooperative type lending scheme where ordinary people lend small amounts of money to a company, at an agreed rate of interest, for a three year period.
I first heard of this type of borrowing, when a fellow Cork man Ernest Cantillon who owns the Electric Bar and Restaurant on the South Mall, raised some money through a company called Linked Finance to fit out and stock a coffee/pancake restaurant in an unused building alongside his business premises. Most of his lenders are now his best customers to make sure that the business does well so that they will get their loans repaid. Definitely some cute Cork lenders!
I don’t really know much Linked Finance, the company that facilitates these loans, except to say that they seem to be a very well-run company and any transactions that I have had with them have been done smoothly and efficiently.
About 12 months ago I saw on their website that another Cork restaurant owner Claire Nash was looking for some funding through Linked Finance to expand her very successful restaurant business in Princess Street in Cork. Having known and admired Claire’s operation for many years I decided that this would be a project that I would indeed be interested in lending to and so I joined up Linked Finance, put a few quid into my account and made my first successful loan bid (and yes I have made a few visits since, to buy a coffee or two!)
The operation of this type of lending/borrowing mechanism is very fascinating and very fair. For example if someone looking to borrow some money is accepted on to the lending platform of Linked Finance, details of their company and project are set out and also the amount of money they are trying to raise. The public at large then have about two weeks to make a bid within a lending range of between 5% and 15%.
So let’s say we decide to make a bid to lend some money to a company that wants to borrow €15,000 for a particular project. As I understand it the loan has to be fully subscribed for the loan to go ahead. We then decide what amount of money we are prepared to lend and the rate of interest we want.
So let’s say that we decide to lend €250 and are seeking an interest rate of 10%.
At the end of the two week period let’s assume that the loan is fully funded and in fact oversubscribed as many of the loans seem to be then the borrower can avail of the lowest loans on offer and discard the rest. If our offer of €250 at 10% is within that grouping then our loan will be accepted and our loan is then repaid with interest of 10%, on the balance outstanding, over a three year period. If however the €15,000 has been raised on a range of loan offers at up to say 9.5% then our loan offer will be rejected.
My experience over the last 12 months has been very interesting and quite satisfying. I have made a number of small loans to companies with an average rate of interest of 8.58%. Mostly these were to companies operating not too far away from where I live and to companies where I understood what they were trying to achieve. In some cases I knew the people involved.
As lenders we don’t get any tangible security for the money we lend except for the promise of the borrower to pay it back. We are lending however mostly to small family businesses who probably will never be able to borrow again if they default on the loan as their good name will be damaged. On the other hand we are getting a good return on our money invested for the risk we take and if we lend to a number of different companies we spread the risk. It’s certainly more interesting and productive than having money sitting in a bank deposit earning very little right now.
Overall my experience has been very positive and it is a good feeling that the money lent is helping small companies to survive and expand and in many cases take on new employees. Money that the companies might not have been able to borrow. So far, touch wood, all the loans are performing and my money is being repaid with a nice bit of interest being added!
Ted Dwyer Family Business