Growing businesses are faced with a dilemma. Many firms want to expand and, as the economy begins to recover, they can identify exciting opportunities to do so. But business expansion is dependent on finance – and finance remains expensive.
Banks are still reticent to lend to even the most promising businesses. In reaction to this, a small but growing number of firms are devising their own, creative ways of raising money.
Businesses that wish to expand, but do not want to rely on banks to finance that expansion, have been thinking about alternative methods by which they can raise the cash that they need. Many have turned to their customers in an effort to bolster their finances.
These firms have developed ‘creative’ financial products that appeal directly to their existing customer base, and allow them to bypass the rigmarole of bank managers and loan applications.
It is worth remembering that ‘creative finance’ in this sense should not be confused with ‘creative financing’, which is a way by which some property investors raise money.
There has been a range of interesting creative finance schemes launched in recent months. Perhaps the most headline-friendly was the ‘chocolate bond’ launched by confectionery retailer Hotel Chocolat.
Hotel Chocolat wants to expand its manufacturing facilities, upgrade its plantation, and launch new stores in the UK and Europe. Rather than relying on conventional bank finance to fund these plans, the retailer decided to turn to its customers. Hotel Chocolat now offers members of its ‘chocolate tasting club’ the opportunity to invest £2,000 or £4,000 in its chocolate bonds. The customers receive a return of 6.72 or 7.29 per cent respectively – an attractive rate in the current climate. The key difference between this and a conventional bond, however, is that the return is paid not in cash but in chocolate.
King of Shaves, the toiletries company, has also turned to its customers for financial backing. Last year the firm issued five thousand £1,000 bonds to customers. Investors received a 6 per cent annual return, as well as a bundle of high-end shaving products from the company. The so-called ‘Shaving Bonds’ proved popular, and investors were apparently found for all five thousand bonds.
The most successful creative finance schemes are those that have a unique characteristic that appeals directly to existing customers. Firms like Hotel Chocolat and King of Shaves have recognised that it is easier to persuade people to invest when they are already loyal to the brand. Raising finance in this manner is therefore probably only a viable option for firms with a strong existing brand profile.
Similarly, you need to consider ways that you can differentiate your finance offering from a conventional savings account or bank bond. This might mean offering investors special products, or organising events to which only investors are invited to attend.
It is also worth noting that, while both the shaving bond and the chocolate bond have offered returns significantly higher than those provided by most savings accounts, this is unlikely to be the main reason for most investors’ participation. Instead, customers often want to feel part of the brand, and an intrinsic element of the firm. There are few better ways of achieving this than investing. Do not presume, therefore, that you have to offer huge financial returns; instead, concentrate on unique ways that you can reward investors.
If you choose to raise money through bonds, you must remember at all stages of the process that this is a form of debt finance. When the bond reaches maturity, you are obliged to pay back the principal – that is, the amount that the investor gave you to begin with.
Bond issues are regulated by the Financial Services Authority (FSA), and you will need to have your scheme authorised by them. Most firms choose to appoint an advisory firm to help iron out the legal issues on their behalf; the King of Shaves bond issue, for example, was overseen by BDO Stoy Hayward, a large accountancy firm.
The severity of the recent financial collapse has caused many businesses to rethink the way they raise money. As a result, interest in creative finance looks set to increase. If you wish to expand your business, have a loyal customer base, and would rather not be at the mercy of the banks, this type of fundraising might well be right for you.
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22 June 2020 • 9-minute read
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