Alternative Funding for SMEs

Posted on: 01 Nov 2013

Category: Articles

I remember having a conversation with a friend of mine, a few years ago. He reminisced about his first steps towards becoming an entrepreneur and recounted the number of visits he made, as a young man, to various banks trying to get them to extend facilities to help finance his fledgling property business. The visits were numerous and with each appointment he would measure how many minutes it took before he was politely ushered out of the door. Today, he is the CEO and major shareholder of a multi-million property development company with projects in all the major cities across the globe.

What changed the course of his career catapulting him from obscurity to the jet-set lifestyle that he enjoys today was quite simply, access to funds and a sound, scalable business idea.

In our profession we come across aspiring entrepreneurs who have excellent business propositions but who lack the funds to kick start their enterprise or to take their existing business to the next level. Unfortunately, Malta lags behind when it comes to venture or angel investment and raising finance from the banks without having collateral is nigh on impossible.

Alternative fund providers have devised ideas to bypass the banks and give SMEs access to capital. Crowd-funding is one such option, recently legally recognised in the United States and other developed nations. Crowd-funding enables start-up companies to access funding from private investors through an intermediary, normally an internet-based service provider, such as Kickstart.com. The start-up would initially establish the level of funding it requires to launch or to produce a product and the intermediary would market the project and raise the required capital through its portal. Once the target value is raised, the intermediary releases the funds in favour of the start-up business. Should this target not be reached, funds are returned back to the original investors. A successful placement can compensate investors either in-kind by providing them with products, a system known as reward crowd-funding, or may even offer equity in the company through shares, stocks and bonds issued by the company and technically referred to as securities crowd-funding. In the latter case the benefits of opting for a crowd-funding project as opposed to an Initial Public Offering are clear and range from being cost-effective, time efficient and less bureaucratic.

Another viable platform could be a licensed Retail Fund which is established specifically to invest in start-ups and businesses who find it difficult to raise the necessary capital. The fund could also include local government as a founding shareholder with additional investors coming from a mix of individuals and corporates. A democratically appointed Board of Directors, representative of the various investor groups, would be guided on investment decisions by a panel of multi-disciplinary experts. The role of this Investment Committee would be to evaluate proposals put to the Fund and assess not only the business model/idea presented but also its scalability and, more important of all, the investability of the entrepreneur/s presenting it.

The returns for the fund would vary, depending on how well the fund is managed and prevailing market conditions. The benefits of using such a platform are various. First and foremost, retail funds are generally open to novice investors, therefore tightly regulated by the MFSA ensuring an enhanced level of investor protection. This together with the quality of the Investment Committee gives great comfort to investors wishing to invest their hard earned money. As opposed to a crowd-funding initiative, a retail fund is not tied to any one particular venture but rather to a multiplicity of businesses. Therefore the risk in a retail fund is spread over all the investments made by the fund and the loss made from one failed business may be compensated through the success of another.

Over these past years we have seen a variety of alternative funding sources for SME’s however Malta still lags behind in this area. As the Maltese jurisdiction continues in its development as a stable environment for investment funds, it may be the right time to develop such a crowd funded investment platform to invest in local entrepreneurs and help them launch their businesses locally and also quite possibly overseas. The government could take a lead role in promoting such a fund through an agency such as Malta Enterprise, effectively putting such a system in place to replace the existing grant schemes to SMEs, which offer no return on investment to the government. In such a manner the government could make available sums of money for start-up SME’s with a possibility of receiving a fair reward.

Author – David Borg