Money talks

Access to finance should be championed if low carbon economies are to grow and prosper.

Ensuring viable small and medium-sized enterprises (SMEs) have access to credit to support growth has been identified as a key priority for the coalition government. Nowhere is this more pressing than in the low carbon community, where the CBI estimates £150bn of investment will be needed in the power sector alone, if we are to reduce our emissions output.

How easy is it for SMEs in this sector to access finance? According to the low carbon entrepreneurs participating in our panel discussion at the Liberal Democrat Party Conference, the answer is not very. Both described their own experiences and difficulties in accessing finance, in terms of the lack of availability of credit from banks, but also around the effectiveness of the more targeted government-led schemes. Dean Curren, director of Himag Solutions, a company that produces planar transformers (more on this opposite), argued that while the banks like to give the impression they will lend, what they do not promote is the condition the money must be guaranteed by the directors, often on a family home.

Kate Craig-Wood, founder of Memset, a green cloud computing company, echoed his frustrations. She believes viable companies should not have to take the additional risk of a personal guarantee on a commercial loan as often they will have already invested all of their personal wealth, often at great risk.

These concerns were echoed in comments from both the audience - the most animated across our events at the three party conferences - and from John MacArthur, Vice President of CO2 Policy at Shell, who shared his own understanding of these difficulties, gained from his experience running a small company.

These challenges lead to a catch-22 situation where on one hand the banking sector should be encouraged to lend more, while on the other the public is demanding reforms to curb risky lending practices. But if the government owns such a large stake in these banks and it is committed to enabling the flow of credit to help businesses grow, why can't it set targets to lend to small businesses?

In March's budget, the Chancellor announced the five largest banks in the UK would make £76bn available in credit to SMEs - £10bn more than what was lent to them in 2010. However, even with such large amounts committed, our small business panellists did not feel this was having an impact on the ground.

Curren argued that many government funding streams for SMEs can often be too stringently regulated and limited for a particular use, such as research and development. Other government funding initiatives, such as the Technology Strategy Board, are not always relevant for small businesses either. Non-ringfenced money, on the other hand, could be the difference between a company with good potential and real success.

Beating bureaucracy

Many of these frustrations are not specific to the low-carbon economy and reflect the difficulties facing all SMEs. However, we must be fully committed to growing this section of our economy.

What specific steps can be taken to nurture green technology? A higher carbon floor price, set nationally - a policy on which the Treasury is currently consulting - would make investment more attractive and help drive growth in green technologies. The Green Investment Bank also has an important role to play, but the panellists were worried bureaucracy will put off SMEs from applying. It has also yet to be determined whether the Bank will act like a bank, with the ability to raise extra funds, or if it is to be restricted solely to investing its predetermined budget. The argument against the latter is one which the Liberal Democrats, if they want to display their commitment as the green partner in the coalition - as Loreley Burt MP so strongly made the case for - need to make and win.

 

Transforming the future

Working with experts has opened up doors for Himag Solutions.

By Dean Curran.

The transfer of electrical energy from one circuit to another has been revolutionised by a new piece of technology from Himag Solutions. Called a planar transformer, its components are more efficient than the incumbent "wire-wound" conventional transformer technology, as well as being significantly smaller and lighter. Even better, the planar transformers provide this superior efficiency and compact form at no extra cost to the existing technology.

Himag's transformers are not an end user product in their own right, but an enabling technology that allows many low-carbon products to be as efficient as they need to be. In the future, it will be possible to find planar transformers in hybrid and electric vehicles, on solar panels or in the trains and planes people use for travel, not to mention medical products, telecommunications, wind power and industrial applications, among many others.

The start of something big

In early March 2010, Himag Solutions won the national Shell Springboard Award for the best low carbon business idea in the UK. The prize included a £40,000 no-strings-attached cash award - one of seven handed to each of the regional winners that year.

This means of support perfectly suits fast growing, innovative businesses as it gives them the autonomy to spend the prize on exactly what the business owner feels is the best use of that money at that point in time. While Himag has greatly benefited from funding such as the grant for research and development from the Technology Strategy Board, it can be frustrating that this type of funding is often stringently restricted to a specific use when the money would be much more useful for other areas of the business.

For example, since winning the Springboard award 18 months ago, Himag Solutions has more than doubled its workforce, from ten to 21 staff, increased sales by 300 per cent, and filed four patent applications for its innovative technology.

However, the hard cash is not the only benefit that competitions provide. The entry process often requires applicants to submit a business case for their technology, and then pitch to low-carbon industry experts, a process that provides invaluable practice for business owners.

Winning awards and grants also provides an independent endorsement of our products and business model, giving us credibility when approaching other investors as well as boosting our confidence. At the beginning of growing a new business, even the most optimistic entrepreneurs can be forgiven for questioning whether they have a winning idea. To have sector experts confirm you have a great idea is very useful.

However, even with all of this valuable experience and credibility, the process involved with raising significant amounts of finance is still a complete minefield and is not something Himag has found particularly easy.

It is far easier to raise £1m than it is to raise £100,000

The time when a business is growing rapidly is when it is most strapped for cash. If a workforce doubles in 12 months, it is extremely difficult to increase the sales revenue quickly enough to fund the additional overheads.

The obvious place for a business to find the cash to fund this growth is at its bank. Indeed, the government and our (often taxpayer-owned) banks will have the public believe they are ready and willing to lend. However, what the banks are not letting on is that the only way they will lend to a small business is if that loan is fully guaranteed by security from the Directors, by which they mean mortgaging the family home.

The risk:reward equation is understandable, and it would be unacceptable for business owners to expect risk-free assistance. However, forcing new business owners to secure large five and six figure loans and overdrafts against their homes strangles their growth and hinders the possibility of SMEs rescuing this country from its debt as it is so often said they will.

If a business owner's spouse will not let them risk the family home or they are already re-mortgaged to the hilt (if they had any equity to risk in the first place) where does a small business go next for funding? Many people would say that angel investor networks are the next best place for a small business to raise capital. However, my experience of going through this process was not good. Most of them think of themselves as real life Dragons from the Den, but in reality they are all hugely cautious. After pitching Himag Solutions to half a dozen angel syndicates, I was eventually made an offer. When it turned out they could only raise 40 per cent of the sum they had offered me, it was then I realised not all syndicates are as wealthy as they appear to be or say they are. Combined with the lengthy due diligence process, this wasted a huge amount of my time - time lost to the rest of my business.

Aim high

One of the major lessons I learnt about raising finance for my small business was as a result of being accepted onto the Carbon Trust's Incubator Scheme. This initiative provides £70,000 of funding to low carbon businesses for consultant-led advice on strategy implementation, raising finance etc. Since 2004 it has supported more than 40 start-ups with business development advice.

At the beginning of the first meeting with the consultants, I gave the same pitch I had delivered to the business angels. By the end of that same day, the consultants told me I was massively undervaluing my business and should consider increasing my valuation between five and ten fold.

On the back of the advice received from the Carbon Trust, I have since secured investment for Himag from America that provides support far beyond what the angels would ever dreamed of offering. The biggest piece of advice I could therefore share to all small businesses is for them to shatter their expectations of what they think they are worth and strive for far more. In my experience, somewhat counter intuitively, it is far easier to raise £1m than to raise £100,000 for the same percentage of your business.

Dean Curran is Director of Himag Solutions

This article originally appeared in the New Statesman supplement, "The green tech revolution"