Tim Sawyer, CEO of Start Up Loans and one of our Small Business Decision Makers 2016, has been involved in business lending for close to two decades, and explained to Business Advice how the space is evolving – including what he thinks needs to happen next.
Sawyer was part of the team that established Cahoot – one of the first internet banks – in 1999. Since then he has seen a number of changes in the market, “for better and worse”.
“The lending process is much more robust today. When we started Cahoot it was quite slow – we were struggling with things like address verification which we take for granted today,” he said.
“On the other hand, today business lending is much more impersonal – it’s more about scorecards and computer-based decisions, which is something we’re trying to move away from with Start Up Loans.”
His company deliberately takes a more personal approach, which Sawyer believes has contributed to its success at lending to very early-stage businesses. He explained: “It’s only by actually going through the business plan with an applicant that you can spot mistakes, like people who have left out living expenses for the first six months.”
This person-centred strategy also seems to provide part of the answer to the high rates of lending to female and ethnic minority business owners that Start Up Loans boasts – with 37 per cent of funding going to women. But Sawyer also thinks that his company’s culture plays an important role in making applying for funding seem accessible.
“I have never worked for such a well-balanced company before,” he said. “We have a roughly 50:50 gender split within our workforce – helped by the fact we’ve looked quite hard at things like maternity leave – which I think is really important in attracting female loan applicants.
“Getting a good gender balance is important for the startup economy because if you’ve got men and women with the same intellect and talent and only a small number of female business owners are getting funding, then that’s lots of create business ideas which aren’t coming to fruition.”
It is a female-run company – Claudi & Fin – which is Sawyer’s favourite success story of those companies that Start Up loans has helped. Started by two South-East London mums in their home, the yogurt lolly company rapidly went from the kitchen sink to being stocked in Sainsbury’s – and needed funding to produce enough to meet demand when other supermarkets came knocking.
Yet despite his pride in such success stories, Sawyer is keen to highlight the importance of firms which stay small. “Its much more interesting to talk about the huge success stories from the government point of view, but it is ok to be small, and I think that could be reiterated more.
“Most people we lend to will still be one or two person businesses in five years’ time. But the way you end up with big companies is by having lots of small ones. So it’s micro firms, rather than unicorns and gazelles, that the government needs to focus on.”
Sawyer thinks that the biggest challenge in the small business funding space now is around providing growth funding for such firms which are still seen as too small for commercial finance. “There are enough startup loans now that if you’ve got a semi sensible business plan you can get money for it.
It’s the owners of firms that are two, three or four years into trading, that really struggle,” he explained.
“Perhaps they want to buy a van or take on a few more members of staff. They don’t need the hand-holding that startups do, but are a few years away from being attractive to a bank, and can still benefit from having someone sense-check their projections,” Sawyer added. “There are players in the market but they tend to be quite pricy, charging 20 or 30 per cent interest.”
Sawyer sees filling a gap in this market as something which a number of different lenders could fulfil. But in the meantime, he is focusing on “doing the same thing, but better” at Start Up Loans.
“At the moment we’re delivering around £3.50 of value for every pound we invest. The law of diminishing returns means that if we doubled in size, that benefit would probably go down, so I think we are probably the right size – now we want to be able to give decisions more quickly.
“We’ve had feedback that the process sometimes takes too long. Quite often it’s a week or two weeks. But it can be three or four months if people borrow through a programme which also involves training. We should really be able applications round in 48 hours when the circumstances are right.”
Elsewhere in the market, Sawyer is watching the growth of P2P business finance carefully. Folk2Folk, his local lending platform, specialises in connecting rural borrowers to lenders and proudly boasts no missed payments in its history – but he thinks the wider model has yet to be proved.
“Are Funding Circle really better than the banks with their risk models? I think that’s what it comes down to. If bad debt on the platform stays low in the next two years then I think we’ll be able to say, yes, they do have an advantage over banks – but it’s still early days.”
Whatever the future of small business funding holds, Sawyer seems likely to be at its forefront.
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