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Item 3 is the commencement of our inquiry into access to finance, which has exercised committee members for some time. I am very pleased that we are joined by an extensive panel.
Thank you very much, convener.
Despite the result.
Yes—despite the result. I looked at the latest figures for our members’ awareness of alternatives to bank finance and it is fair to say that it is poor. Less than 30 per cent of our members in Scotland are aware of things like peer-to-peer lending and asset-based finance. If we look through the range of options, it is interesting to note that the figures are lower for Scotland than they are for the United Kingdom, and that picture is repeated if we ask them about their awareness of specific alternative finance solutions.
Thank you for that. I will bring in some of the others in a moment but I would like to tease out a couple of those issues. On today’s panel we have the Scottish Investment Bank and Scottish Government officials who are involved in finance. What could they be doing better to assist FSB members to access finance?
When we ask our members about financing, they tend not to differentiate between the public and private sector offerings—they just talk about alternatives. One of the issues with products that are offered by the Scottish Investment Bank and others is that they are aimed at a specific group of companies. They are not designed to be, and are not going to be, alternatives to the general finance that members of the business base require. If our members are to look at market interventions, less specifically targeted measures might be better. However, if people are not asking for finance in the first place, the details or the design of those schemes are of secondary importance.
Are the public sector schemes of little relevance to your members?
Yes.
My second question goes back to what you said about bank lending. Sitting to your left are representatives of RBS and the Bank of Scotland, who between them have 70 per cent of the lending to small and medium-sized enterprises in Scotland. Is there anything you want to say to those individuals on behalf of your members? [Laughter.]
Like “Hello”?
We enjoy a good relationship with all the major banks in Scotland. We recognise that there are two dominant players in the Scottish market.
Two thirds?
Yes—two thirds, or 66 per cent.
I had better bring in the banks, to let them respond to that. I will start with you, Mr Barclay. Two thirds of Mr Borland’s members think that you do not care.
If I may, convener, I will make a few opening comments. As well as chairing the Scotland board for RBS, as you said, I am head of the corporate banking division in Scotland, which is the part of the business that looks after small to medium-sized businesses, right along the spectrum to larger businesses.
I operate the Bank of Scotland brand in Scotland, which is part of Lloyds Banking Group. Bank of Scotland is the brand that we use in the commercial sector, which is similar to Ken Barclay’s arena in that it goes from SMEs right through to the top end of the corporate space. Scotland is a key part of the economy for the bank. We are the largest private sector employer by full-time equivalent in Scotland, so it is meaningful for the organisation.
I am sure that my colleagues will have issues that they want to tease out and pursue. Before we get into that, I would like to hear from the other panellists. Perhaps Ian McCall will say something on behalf of the Scottish Government. You might have heard Colin Borland say that many of his members are not connected with public sector finance and are not aware of what is on offer. Will you respond to that?
We find that there are issues on the demand and the supply sides. Some companies are postponing their borrowing to fund growth plans and are waiting for positive market developments before they make long-term commitments. Some viable firms are unable to secure funds at the levels that they are looking for, and some companies are not pursuing finance because they believe that they will be turned down.
Talk of encouraging dialogue sounds like the kind of woolly, wishful thinking that people come up with when they are short of concrete proposals.
Not really. We are talking about some businesses’ perception that the banks are closed and that funds are not available to them. The banks have resources that they want to disburse. If the demand is there, we need to join things up a bit more positively.
Will Kerry Sharp say something about what is available from the Scottish Investment Bank to help businesses that are looking to expand?
The Scottish Investment Bank is the investment division of Scottish Enterprise, as you are probably aware. The team has a couple of main tasks, one of which is the financial readiness service, which supports companies that are looking to raise funding. We help such companies to make their business propositions investable. We also help companies to understand and access the appropriate funding sources for their business. Last year the team supported 460 businesses and raised funding of £56 million. There are a lot of businesses in Scotland and we cannot support them all, so we focus on businesses that have high growth potential and exporting potential, because they will add the most to the economy.
If your approach is to lend to businesses that you identify as having growth or exporting potential, is that too restrictive? Should you have more freedom about who you lend to?
We are part of Scottish Enterprise, so our remit is to try to achieve the best for Scotland. We cannot do everything for everyone, so we must focus our efforts where we think that they will have the best impact. There is a lot of evidence that growing and exporting companies are the ones that have the best impact for Scotland in the longer term.
My questions are for Ken Barclay. The Royal Bank of Scotland acknowledged that there was a problem, which is why it initiated the independent lending review. You said that the report made “uncomfortable reading” for you. Can you expand on that? Were you surprised at some of the outcomes in the report?
Our role is to help as many businesses as we can to expand job opportunities in this country and to help the economy in its totality to grow. From 2008 to 2013, we had to reduce our balance sheet by several hundred billion pounds—a figure about half the size of the UK economy has come off our balance sheet in the space of four or five years. We also had to raise deposits in order to equalise our loans and deposits, which took an enormous effort. Several years in, however, we recognised that the pendulum had probably swung too far or had stuck, and we needed to do something about that.
Judging from what Mr Borland said earlier, it appears that your message is not getting through, because there are more applications for funding but less lending. That does not square up, does it?
I take you back to my point that we are in the process of making our organisation safe and ensuring that we have the right level of debt across the whole organisation. What we established in 2008 was a non-core division, and many of the assets in that non-core division are declining over a long period. As a consequence of that, much of the totality of our lending to the sector is in long-term decline. If you look at the new lending that we are doing at the front, you will see that our lending to small businesses is up 30 per cent this year from last year, and our role is to continue to support those businesses that are coming in the front end. We have had a lot of exposure to commercial property that is declining and will continue to decline, which is compensating for the business that we are putting on at the front end.
What is the main barrier to SMEs coming to, say, RBS for funding? Is it your criteria for funding? Is the process still too complex?
Some observations that are made in the Large report suggest that the process is too complex. However, we are the only bank in the UK that has had all its relationship managers accredited by the Chartered Institute of Bankers, which will allow our relationship managers to have far better and deeper conversations in understanding businesses. That has been going on for more than a year and we will continue to do that. We want all our front-line bankers to be professionally qualified—that is the next stage—because that will allow far better conversations to take place between banks and customers. We hope that that will result in increased confidence to approach the bank among our customers and ensure that we can help them when those demands come in.
You say that you are getting people through a system of qualifications. I am surprised that they did not have those qualifications in the first place. What is your timeframe for that? You also say that business is up by 30 per cent, but we are still hearing that more people are applying for but fewer are getting funding. I take the point that we should be trying to convey a positive perception of the lending sector rather than a negative one, but we still get the impression that there are barriers. The FSB says that many of its members are not aware of how they can access the finance. Are you really getting your message out?
We could always do more. We are working with the Institute of Chartered Accountants in Scotland to establish how best we can serve the small business community by ensuring that the proposals that we get from businesses make sense for us. We therefore need to understand the business plan, the business’s cash flow and the proposal that the company puts in front of us. We need to be convinced that the management team has the ability to run the business and repay the bank debt.
You are more risk averse now than you were before, which is one of the barriers. Basically, you are trying to play safe.
As I said at the outset, we needed to make the bank safe. We never again want to be in the position that we were in 2008, so that was the first step that we needed to take.
Is that attitude encouraging entrepreneurial movement? Is it really encouraging people who want to move forward, in which there is sometimes risk?
That is undoubtedly the case. I mentioned that the pendulum has probably swung too far, so we need to correct that. That point is at the front of our minds.
What is your timeframe for that?
Our new chief executive officer will announce to the market RBS’s financial results for 2013 in the fourth week of February. That is when we will make public announcements about how we intend to move forward in a much more proactive way.
Okay. Thank you. Does the witness from the Bank of Scotland want to comment? Are you more risk averse as well? Are you lending better? Are customers coming to you because your process is less complex than that of RBS?
I cannot comment on that. However, we have approved more than 80 per cent of the applications that we have received. One of the challenges, as has been said, is to ensure that we educate our customers and potential customers about what we can and cannot do. One of the key considerations is that we do not do equity on our balance sheet and we invest in Lloyds Development Capital, invest through the Scottish loan fund and invest with the business growth fund. I know that RBS is also involved in those.
I have a list of members who have follow-up questions. I will start with Chic Brodie.
Good morning. I declare an interest in that in a previous life I worked with two of the banks that are here as what I have learned is now called a transitional troubleshooter rather than a consultant or a company doctor.
I will start, if I may. In order to ensure that our front-line relationship managers are closer to business, virtually all of them are accredited now, as I mentioned earlier, by the Chartered Institute of Bankers.
How many have actually dealt in the marketplace?
As part of their accreditation, they are required to work for four days a year in business, not with a view to identifying opportunities for us, but for them to understand how business people work and operate. That has been very well received by businesses and it has been exceptionally useful for our relationship managers, who have now become much more aware of how business works.
Okay. What is Mr Gardner’s response?
We operate a slightly different model. We have a number of key markets or sectors and we give our relationship directors fairly intensive development around them.
That is fine—although I am not overly convinced that four days a year will help people to understand businesses or the market.
We need to go back to before 2007 if we want to look at what might be called normality in the availability of finance. Between 2005 and 2007, we had a long period of fairly substantial growth, and the substantial expansion at that time took us into areas where there was too much debt in small to medium-sized businesses. At that time, the balance of responsibility probably lay with the front line rather than with the credit function; however, I emphasise again that in needing to make the bank safe, the pendulum probably swung too far in one direction and there was probably some good business that we could and should have done that we did not do. We recognise that, so our job is to ensure that that pendulum of risk swings back much more into the centre and that the people who are responsible for righting or sanctioning business are aware of the our determination to ensure that we are on the front foot, out with customers and making finance available.
So, there is no disconnect between the relationship managers and the credit teams.
I would say that they are probably closer than they have been for a considerable time.
That is encouraging.
From my point of view, the important thing is that we look after our customers as well as we possibly can. As far as I am concerned, competition is a good thing for everyone, but we have to look after our customers, do our best by them and ensure that we are playing our role in helping the Scottish economy.
I echo those comments. Competition is healthy and challenges us to ensure that we are performing at the top of our game.
Just before we move on, perhaps Colin Borland can tell us whether FSB members think that there is enough competition in bank lending.
We have to be careful about what we mean by competition. Two big players might dominate the SME market, but would the situation be any better if, when I walked down George Street in Edinburgh, I saw a sign of a different colour outside certain branches, given that they are all offering the same products at the same price? We have been quite heartened by the Office of Fair Trading market study, not only because it will look specifically at Scotland but because it will look at the products that our members use as well as the number of people in the market. If we are thinking about getting some genuine competition into the marketplace, we also need to think about how we get other people to use different models that provide a realistic alternative to the main high street banks. Such an approach can only be good news.
I have a question for Ms Sharp. I should say that I, too, have dealt with Scottish Enterprise.
There are not, as far as I am aware. There are a number of products out there and the plan is to make things clear so that companies understand what is available and what it means.
Do you think that the number of funding streams outwith the bank relationship managers, the proliferation of business advisers—or “finance advisers”—coupled with the efforts of the business gateway and social enterprise, results in chaotic access to finance for businesses out there on the street?
I do not believe so. There is always more that we can do, and we spend a lot of time trying to understand how we can do things better. We ask our companies, our customers and all the people with whom we deal, and we always act on what they tell us and try to make things clearer. I do not believe that there is a “chaotic” environment. There is a lot out there but, as I said, companies are looking for choice and the availability of different products for their needs.
I am the committee’s European rapporteur. What engagement do you have with the European investment fund and, in particular, the updated COSME—the programme for the competitiveness of enterprises and SMEs—fund, which is due to be released shortly and has €1.4 billion available to assist small businesses? The rest of the UK has about 78 advisers who can access that. We have four, including Scottish Enterprise, Highlands and Islands Enterprise and the West of Scotland Loan Fund Ltd. In discussions that I have had in Europe, we seem not to have tapped into that at all, other than through one venture capitalist in the south of Scotland. What engagement do we have with those funds?
We have a lot of engagement. A steering group has been set up between a number of parties, including Scottish Enterprise, the Scottish Government and HIE. That group is particularly looking at horizon 2020, which is the funding that we have immediately in our sights. We are working through how to access it.
That is large-scale investment. I am talking about the COSME investment—the guarantee loans or equity for finance schemes that are available. The information that I have is that because Scotland is not a member state, we do not access that, although we have four interfaces—or five if we include venture capital—with those funds, which could encourage those funds to be made available.
We are interfacing. We are understanding what European funding is about and what it means. There are a number of European sources of funding, and they come with a lot of requirements. The team needs to look at those sources in order to understand the benefits, who can access them and how, and what is the best European funding for Scotland and for companies. We are engaged on that, but there is a long way to go to understand it fully. It is not simply a case of telling companies that the funds are there and they can go and access them. There is quite a lot that comes with that. We are concentrating on horizon 2020 initially and will move on to COSME as much more detailed analysis comes through.
That is interesting. When I asked the same question of a senior member of Scottish Enterprise at our away day in Irvine, he told me that he would try to get more details and asked me whether I could provide him with more details. I am not sure where the engagement is taking place. It is certainly not taking place in Brussels and I am not sure that it is even taking place meaningfully here. It might be being discussed.
If we are leaving this issue, we need to let the Scottish Government officials respond.
I want to mention two things. One concerns the 332 schemes that were mentioned. The Scottish Parliament information centre has produced a good guide to the financial assistance that is available to business. I have not counted it page for page, but I do not think that there are 332 schemes in it.
I thought that there were 121 schemes, but there was a witness here who said, “No, you’re wrong—it’s 332.”
The Parliament has produced an intensive and informative document that lays out all the schemes, which could be quite useful.
How up to date is it?
There are no immediate plans to undertake another survey. We undertook four surveys and, since that work was completed, various surveys have been undertaken across the UK by the British Bankers Association and others. We have been digesting those surveys and looking at the position in Scotland. We recently summarised the surveys and brought together all the conclusions. I am happy to share that piece of work with the committee if you would find it helpful. It will give you an insight into what all the surveys across the UK have been telling us.
Sorry—I want to follow up on that before Chic Brodie comes back in.
That was my final question.
That is fine. On the last point, about SME access to finance, we have heard from the finance secretary when he has come to the committee that the Scottish Government views access to finance as utterly crucial to economic recovery. Are you saying that there are no plans to do a follow-up survey to the 2012 study?
We have not made any decisions to do a follow-up survey. We are monitoring the situation and we have been looking at the outcomes. Since we completed our surveys, a lot of work has taken place at a UK level; Colin Borland mentioned the FSB survey that has taken place. We have been digesting those surveys and extracting from them the information that is relevant to the Scottish marketplace. As I indicated earlier, we recently—in the past few months—pulled that all together into a note that covers all the major surveys, and I am happy to share it with the committee if that would be helpful.
That would be helpful.
With regard to access to finance, we look at what is available across Scotland, the UK and Europe, and we look at the terms and conditions of the different programmes to try to make the most suitable form of finance available for SME customers.
When are you hoping for that to be put in place?
We are hoping that the decisions on that will be made in the spring.
Good morning, panel. I will go back to bank lending, and direct a question to Mr Barclay. The main driver of the difference between RBS and its peers is the extent to which it screens out pre-applications. Is there a connection between that and the perception in the business sector? You seem to be more stringent than your peers in screening out.
The Large review identified that pre-screening is not necessarily a bad thing, because it allows us to identify fairly quickly the applications that have a better chance of success. However, the review acknowledged that, as a consequence, we are missing some opportunities. We will look at that. As I said, we will respond in full to the Large review in February. If that approach is one of the things that we feel is appropriate to change, we will change it.
So you recognise that there might well be a problem with your screening.
I recognise that we might be missing opportunities to support customers.
You say that that will be rectified in February.
We intend to review the recommendations and adopt them as best we can.
Does Mr Borland think that SMEs would welcome that approach?
The issue has been fed back to us. Pre-screening is not always a bad thing, as Ken Barclay said. I could approach a bank manager who said, “To be honest, Mr Borland, this scheme is daft. You’re never going to get money for this in a million years. Don’t even bother applying and damaging your credit rating.” A bit of advice like that is helpful.
Can we expect the situation to be better by early next year?
We have the funding and capital available to support what we believe will be increased demand in the coming months and years. We want to support as many businesses in Scotland as we can, to help employment and growth in Scotland. If there are ways for us to do that better, we will learn from and implement the recommendations.
I met someone from a business in my area who said that she found it difficult to access finance. Her business is up and running and she wants to extend it. It was unclear which business sector banks would fund and what criteria would be applied. She would submit a business plan and that would be all right but, a few weeks later, a bank would say, “You haven’t got this; you haven’t got that.” Is progress being made on that side of things? An application might be acceptable but, instead of asking for everything at once, a bank might have more questions or want more information after looking into the application further. Time is of the essence in business. Is a procedure laid out with all the criteria that are required for submitting a business plan? Do you have set sectors that you prefer over others for lending?
We are happy and prepared to write business in all sectors. We are not capped with limits. We have a lot of property on the books, but we are still doing more property lending, although perhaps not as much as we did. No sectors are off limits for us.
Over the past couple of years, we have been running events for our members and helping them effectively to write a “How to make the bank manager say yes” guide. A lot of the stuff that Ken Barclay has mentioned is what we are telling our members. It is not necessarily to do with how much security can be offered, as they might have plenty of security and might not want any more of it. It is more to do with future projections, balance sheets, having a solid business case and so on. That seems sensible.
Are you saying that you are not having a good relationship with the banks at the moment, but we can expect an improved relationship in the future?
Things can only get better, as somebody once said.
I am glad to hear that.
Sticking with Mr Barclay and his pendulum that swung too far, about which we have heard so much, I think that that image conjures up a slightly deterministic understanding, as though what happened just happened. It seems from some of your answers that you seem to be accepting that it was not the result of uncontrollable forces, but that it was about decisions that RBS made—RBS turned the dial too far. Is that a more appropriate image?
I will accept that as an image. The dial was undoubtedly turned too far one way in 2005, 2006 and 2007. Some statistics suggest that there was £50 billion of excess capacity in the SME market in 2007, which reduced to £25 billion. In other words, the sector could not afford to service the level of debt that was in it in 2007, or even in 2009. We have probably gone the other way now. There is now £25 billion short in the SME sector across the whole UK, and we in RBS and the other banks need to do what we can to fill that. If the dial was turned up one way, it needs to be turned down to facilitate the process of money getting back into the economy.
I suggest that scale is a part of the problem. Let us consider this country’s banking and financial services system and compare it with some others in Europe. In Germany, for example, two thirds of the financial services sector, in terms of assets held, consists of local banks, with local governance and local decision making. In the UK, such banks account for something like 3 per cent. We have a very centralised financial services system, which is dominated by massive players. If one massive player turns its dial too far, that has a systemic effect.
I am not sure whether that was a speech or a question.
It was a proposition.
Before you respond to it, I should say that it was a little bit off the topic of asking the banks what they are doing in relation to access to finance. I do not think that we can reasonably expect the representatives of RBS or the Bank of Scotland to answer a proposition about an entirely different banking model. They are here to answer questions about their business and how they are operating.
My suggestion is that the scale of the businesses is part of the problem, and I would be interested in the witnesses’ reaction.
Perhaps we could have brief responses.
A key factor is to bring the decision making as local as possible. We have therefore delegated substantial lending authority to our relationship teams spread throughout all the communities in Scotland and we have relationship directors in every MSP’s constituency. Those decisions are made based on knowledge of the sectors in which the customer operates and the regional variances between, for example, the Highlands and Islands and the central belt in the same way that we differentiate across the UK. We see the strength in having a locally based decision model.
I echo that. The vast majority of credit decisions are made locally.
In systems that are set by the bank as a whole.
The decisions are based on the recommendation of the relationship manager—they do not have to go through a credit function to get a response. The decision is made by the relationship manager locally.
Surely you would accept that the relationship managers were not all individually deciding whether to turn their dial this way or that. RSB made the decisions and they went too far in one direction. Does the scale of the business not mean that, when a wrong decision is made, the effect is systemic?
If you get into a situation in which there is too much debt in the sector, the one thing that you do in order to make the organisation safe is to turn the dial that you have described. I argue that we turned the dial too far and we need to ensure that we turn it back, so that we get into the equilibrium in which we support business at the right level and businesses can be successful and create jobs and economic prosperity for Scotland. We have a role to play in that and recognise that more needs to be done.
My questions are addressed to Mr Gardner and Mr Barclay. Do you agree that, in many ways, we have been bit unfair to the banks in as much as, on the one hand, we demand that they rebuild their balance sheets according to a much safer model but, on the other, we are shouting and screaming at them to lend more money?
That is a challenge that we face. Ken Barclay has also alluded to the fact that we should not make every lending decision an approval but should challenge and lend to the correct businesses.
With respect, my question was whether you believe that we have been a bit unfair.
I suggest that—
A yes or no response would be good.
We are trying to support the economy to grow, so it is helpful to discuss what the banks are doing in a positive—
We will come to that. Have we been a bit unfair to the banks—yes or no?
It is unfair to ask a question such as that while requiring a yes or no answer.
I thought that it was a straight question. I am beginning to worry about whether, if I cannot get a reasonable answer to that question, there is any point in asking any more questions. However, I will persevere. Given your resources and the funds available for lending are diminished, is it fair to say that, broadly speaking, you have choices about the directions in which you lend, for example mortgages and personal lending—retail banking—or business lending? If that flexibility is there, have you got the choices right?
We were, to all intents and purposes, a global organisation. We are now very much focused on being a retail and—let us call it—a commercial business bank in the UK. We have the funding and capital to support what we expect to be significantly greater demand than exists, whether in the retail bank for mortgages or personal loans or in the business bank for the businesses that are likely to show appetite to borrow money. There is more than enough funding and capital to support that demand for the foreseeable future.
That is very reassuring. In effect, you have not had to make any choices, because you have a huge pile of money to lend and it does not really matter how you divide it up across the areas of lending that we have described.
I was referring to the fact that we have made a determination that the capital that was invested in other parts of our business—be it the investment bank or international banking—has reduced, with the intention of concentrating very much more on the UK to support growth in the UK. Today, we are discussing Scotland. We will look at our portfolio of companies and assets and determine whether we are overweight or underweight in any sector at any point in time. To use Mr Harvie’s description, we will turn the dial up—or down, if we feel that we have too much exposure to a particular sector. At present, we have the appetite to do business in all sectors in the Scottish economy.
There is no shortage of funding, then. You have a big pile of cash that you are more than willing to lend to get it out working in the economy.
There is a real determination to make sure that we meet the demand as and when it comes in, and to support the Scottish economy and growth.
That is very reassuring. If that is the situation, I am surprised that people are not rushing in their droves to buy your shares.
That is because we own them.
The important thing is that we concentrate on making sure that money is going out to customers. If that results in profitable business and the bank’s profits increase as a consequence, that will impact on the share price. I emphasise that we want to make available the funding that we have to more and more customers. You can all help us in that. You can get the message out to your constituents by saying, “I’ve heard that the banks have liquidity and capital available. Go and talk to them.” Everybody can play a role in supporting the Scottish economy to that end.
Sure. Okay.
That is a dream world, Mr Barclay. I have been into some of your branches with some of my constituents and I have seen the consequences. The message does not need to come just from us; it needs to be heard internally within the bank.
When I go up and down the country to see customers, I sound like a broken record. I visit customers all the time and tell them exactly the same story that I told Mr MacKenzie. We are not going to satisfy demand in its entirety, because there will be some customers that we are not able to support. However, I emphasise that we have the capital and funding available to support customers.
You said earlier that you discovered retrospectively—after some years—that the small business lending portfolio that you had back in 2005 was a very risky one. My understanding was that the toxic parts of banking did not relate to the small business sector at all. You seem to be saying that that is not the case.
I think I was referring to the fact that in 2007 there was £50 billion of debt in the SME sector that was not serviceable. That reduced to £25 billion in 2009 and now there is a shortage of £25 billion in the SME sector as invested in by the banking industry.
Are you saying that that debt, which was presumably not just lent willy-nilly with gay abandon, became unserviceable as a result of the credit crunch, or that it was always unserviceable?
Undoubtedly we made some mistakes. There is no question about that. The industry was lending too much money to the sector. When we hit the economic buffers in 2008, we recognised very quickly that there was too much debt in small businesses. Many of those businesses recognised that and had to take corrective action to ensure that their levels of debt came down, in the same way that many households—and Governments—did.
I would be interested in a bit more information on that analysis, if you could send that to the committee. It is news to me, and it will be news to a lot of other people, that the leveraging was at an unsustainable level for small businesses.
Absolutely, and I am frequently able to state our exposure to individual sectors. We set a risk appetite for individual sectors and know where our exposure is within those sectors. We are able to respond to our regulator and tell it exactly where we are—that is a critical component of risk management.
So, if you discover that, for instance, you are overexposed to the popcorn sector and need to rein in the horses there, you will communicate that to all your relationship managers, who will then implement that policy.
I would hope that it would be a dynamic environment and that we would be aware of where the trend was. As the trend moved in one direction, we could pull levers to get ourselves back to an equilibrium.
Did you not just say to Mr Harvie that decisions are made locally rather than centrally, as you have just described?
That is exactly the case, yes.
Surely those systems of management are diametrically opposed.
No. At the front end, the business—the popcorn sector—will come in and the centre will be able to determine what our exposure to the popcorn sector is. If we feel that we have too much exposure to the popcorn sector, we will go to the people on the front line and tell them that we have tightened up certain aspects of lending to that sector. In that way, we can manage our portfolio much more dynamically. Decisions can be made locally, but they will be made within the confines of a policy that can change as a result of an overexposure to one sector.
Okay. Thank you.
I have a question on exposure to individual sectors. It is primarily for Mr Barclay, but Ian McCall and Kerry Sharp may wish to answer. Do you see 2014 as a year of opportunity, especially within the tourism sector? Are you focusing some of your efforts on having an open-door, we-are-here-to-lend approach?
Some big events will be happening in Scotland in 2014, and we are actively working with the tourism board in Scotland and many of the companies that are involved in that industry with a view to establishing where we can help.
I still get the message from my constituents that, especially in the hotel trade, they want to expand or develop their businesses but they are knocking on a closed door.
If you could share any specific examples with me, I would be happy to look into them.
Is there an opportunity for the Scottish Government to encourage small businesses to invest? Are the business gateway and Scottish Enterprise being proactive about that?
I would like to think so. In 2014, the Ryder cup and the Commonwealth games provide a huge opportunity for the economy of Scotland, so I think that, yes, all those agencies will be looking to promote the opportunities in the tourism sector in Scotland.
Given that 2014 is just around the corner, I am surprised that you are not saying that you have had a substantial increase in inquiries from that sector. Surely we do not want to wait until 2014 happens and then find that we have missed the opportunity.
First, we work closely with VisitScotland, so we have a number of accredited relationship directors and relationship managers. We are seeing an increase in inquiries and in demand and we are working with others.
Absolutely, but surely there are opportunities for 2014. Tourism is an extremely important sector not just for the committee but for sustainable growth within the Scottish economy.
Yes, tourism is one of a number of key sectors. As I said, we operate in a number of key sectors, including tourism, manufacturing and oil and gas services. We engage with Scottish Enterprise around those.
I am conscious that we are a bit behind schedule and that some members have still to ask their questions.
I want to develop further the tourism theme that we have been looking at. According to Scottish Enterprise’s access to finance survey for January to June 2013, tourism has not done particularly well and there are big gaps between sectors. For example, 38 per cent of tourism businesses attempted to access finance, but only half were successful in doing so, whereas 21 per cent of businesses in the financial and business services sector attempted to access finance, and those businesses had an 86 per cent success rate. It strikes me that there has not been a big change in culture if it is so much easier for people in financial and business services to access finance than it is for people in tourism.
If you have a good business and a good business proposal, it is incumbent on us to take your proposal seriously. If we are uncomfortable that what is being proposed is a sustainable venture—there may well be an opportunity in 2014 or 2015, but we might not see an ability to service the debt after that—is it in the best interest of that company to borrow money from the bank in that way? That would be a reason for saying no to a particular application.
You are obviously a lot more positive about the ability of financial and business services sector companies to repay their debts than you are about companies in other sectors. We have talked about tourism, but life sciences are another key sector for our plans for the growth and diversification of the Scottish economy, but only 53 per cent of life sciences businesses were able to raise the required amount of capital, compared with 86 per cent of businesses in the financial and business services sector.
On that point, I think that there is a maturity around that industry, whereas the risks in life sciences are much higher. Fewer life sciences companies are successful, but when they are successful they are enormously successful. Typically, those businesses are serviced by equity capital, which is a different kind of capital. Life sciences businesses often face a challenge if they go to a bank when they are still in the throes of determining whether they have a sustainable business.
Do you think that there is perhaps a lack of imagination and risk taking when it comes to those new businesses and new sectors?
We do not want to find that we are lending to every company in every sector, because that will not be the right way for them to borrow. If a company gets into financial difficulties, it will not be able to service its debt. You need to look at the prospects for a business and determine whether it has what I would describe as the right capital structure. Very often, such businesses will not have the ability to service debt. That is why I said that if someone has a business plan, we need to understand their cash flows and track record. That gives a much better chance of a successful outcome for all concerned.
The access to finance survey also shows a wide variety of success in access to finance across the country. I represent the south of Scotland, where only 50 per cent of businesses were able to access the required amount, in comparison with 70 per cent in the west of Scotland. That seems to me to be a huge gap, particularly given the fact that more businesses in the south of Scotland tried to access finance than did so in the west of Scotland, although they had a far lower success rate. Would anyone care to explain that geographical difference?
The figures that you are referring to are in the appendix to the SPICe paper. My Scottish Enterprise colleagues will correct me if I am wrong, but those figures are from the SE access to finance survey that was done with around 1,056 account-managed companies. It is probably worth bearing in mind that those were 1,056 of the 2,000 elite account-managed companies in Scotland, and that we have 340,000-odd businesses in Scotland. Although the figures that you quote are interesting, I would be wary of extrapolating too much from them and applying that to what is actually happening out there on the ground with the businesses that make up the business base.
I support what Mr Borland has said. The caveat on the figures is the conduit of businesses that have been looked at, and the type of finance that they sought. I cannot seem to find them at the moment, but there are figures in the SPICe paper that show that something like 43 per cent of businesses were looking for public sector finance, such as grants, so bank finance is not the prime focus of those businesses. The type of support that those businesses were looking for has to be put in context.
I still wonder why businesses in the financial and business services sector did so well. Are they getting more public money?
I cannot answer that question because I am not close enough to the account-managed businesses.
Have FSB members made Colin Borland aware of any differences between the sectors? Do some sectors fare better than others?
We do not currently analyse access to finance figures by sector. That is partly to do with sample size and getting reliable figures. However, we hope to be able to do that with the work that we are doing across the UK with the Treasury.
My question is for the Scottish Government and perhaps the SIB for perspective. We will look at alternative funding models with the next witness panel. Since you are here now, I thought that I might ask you about that area.
I do not agree with the figures. When it comes to the business angel community, we should be particularly proud of what we have in Scotland. The business angel community has grown substantially since we became involved in the area in 2003; we have something like 19 active business angel syndicates. At the height of the banking crisis the business angel market in the UK collapsed by 63 per cent, but in the same year the activity of the Scottish Investment Bank and its business angel partners doubled. We have a proud story around our business angels.
Are you saying that there is a disproportionate strength in Scotland relative to the UK as a whole?
There definitely is.
Can you provide statistics that counter the ones that I gave? Perhaps you can write to us on that.
I can recommend an organisation, LINC Scotland, which acts as a trade association for the business angel networks in Scotland. It will celebrate its 20th anniversary next month. LINC Scotland produces yearly data on business angel investment Scotland, which it puts on its website.
The figure of £22.5 million that I gave came from that organisation. I would be interested in a further written submission on the matter, because if Scotland is disproportionately strong in the area we will want to reflect on that.
We need to finish this part of the meeting by 11 o’clock, and three members want to speak. I will bring in Hanzala Malik first, because he has not yet had an opportunity to ask a question.
The banks seem to be getting a hard time, which might be unfair. A bank must see the business case for any application for investment that comes to it. However, you might explore the possibility of working with Scottish Enterprise, which has a responsibility to encourage our businesses in Scotland to flourish. We have identified an issue, particularly in relation to tourism, which is a strong area that we want to develop. Perhaps through partnership working with Scottish Enterprise you could come up with some kind of scheme or pilot project to support and develop the sector, so that there is a better return in the future. Can you look into that?
We have a good relationship with Scottish Enterprise. If we think that there is a gap in the market, it is incumbent on us to endeavour to fill it, as I said. We will take the suggestion away as one that we should follow up.
Thank you.
We have seconded one of our relationship directors into Highlands and Islands Enterprise for a year to explore such opportunities and ensure that there is a stronger relationship, so that we support Scotland.
That is excellent.
The committee has heard that women in business can be more debt averse. Do the banks have a view on that?
May I talk about what we are doing to try to encourage women to start up in business? I think that the root of the issue is that not enough women are starting up in business, rather than whether women want to borrow money. Through our inspiring enterprise programme, we have committed to helping 20,000 women start in business across the UK by the end of 2015. If we are successful in that, we will have 20,000 more businesses than we would otherwise have had. When businesses are established and are willing and able to borrow, we might start to see some changes.
Again, I echo Ken Barclay’s comments. Unfortunately, I do not have any statistics on the specific question about borrowing by women in business. Our focus is to support entrepreneurialism across all sectors. Part of what we are trying to do is to free up front-line staff to spend as much time as possible with entrepreneurs of whichever gender to help them to grow their businesses.
We all recognise that we need to encourage more women to go into business. Can the Government do more to encourage that?
As part of the Scottish Government’s entrepreneurial programme, we are keen to support women into enterprise. We have been working with Women’s Enterprise Scotland and have given it some funding so that it can undertake work to promote women role models and work on mentoring women who go into business. Certainly, work with the banks on the figures for lending to women would be a good addition to that programme.
From the responses of the two bankers, it seems that they are not aware that women are averse to debt. Perhaps you should look into that to find out whether that is the case and whether it is the reason why women do not come back to you for loans. Will you look at that?
We certainly could do that, but the important thing is that we encourage as many women as possible to start up in business. Once the businesses are up and running, they need to have the confidence to approach the banks, in the same way as start-up businesses that involve men require to have the confidence to approach the banks and confidence in their business plan. We perhaps should have an answer to that question, but the important thing is that we encourage as many women as possible to start in business, and that is something that we are actively undertaking.
What is Colin Borland’s view on that?
We do a lot of work to try to get more women to start up in business, as it can be an incredibly rewarding career. I am not aware of any information that we have that shows that, comparing like with like, there is a gender-specific issue. However, we will certainly explore that as we do some of the broader work that I have spoken about.
Professor Sara Carter gave that evidence at a session as part of another inquiry that we were doing.
We have time for one last question.
I have one request and one question. It would be interesting if the banks could tell us the ratio of mortgage lending to small business lending by region in the UK over the past four quarters. Would that be possible? The information must be there somewhere, and it would be interesting if we could get our hands on it.
It would be interesting to see where the equity demand would come from for that. Clearly, the equity participation would determine whether a stock exchange would fly or die. It is worthy of consideration, but I would be interested in seeing who would put the equity into it.
It would certainly generate competition.
On the companies that are listing on AIM, although the stock exchange is in London, the flows of capital come from Scotland and England. It would be interesting to see whether there was demand to support such a thing.
It would certainly provide focus.
The issue of regional stock exchanges has been discussed for some years. Like my colleagues on the panel, I think that the issue is definitely worthy of exploration, but we have not tested what the demand might be.
We need to call it a day at that. I thank all our panellists for their contributions—it has been helpful to the committee to get your views.
I welcome our second panel on access to finance. We were supposed to have five members of the panel but, sadly, we lost three people—two due to illness and one due to an unexpected business commitment. I am especially grateful to Neil Simpson, who is the finance director of BrewDog, and Tim Wright from twintangibles for coming along. I am sorry that you are feeling rather lonely this morning, but that is just the way that things have worked out.
BrewDog started in 2007, since when we have grown at quite a pace and explored conventional and not-so-conventional, alternative funding options. We started very small in Fraserburgh in 2007 with the two owners and their own funds. They had a little bit of bank support, so the conventional route was explored first, but from 2007 to 2008 the company hit that problematic time in the conventional market, if that is the right way to explain it, so they had to look for different ways of accessing finance.
Thank you.
I am director of twintangibles. We are a Scotland-registered Anglo-Italian consultancy firm and we specialise in the impact of disruptive and collaborative technologies and the opportunities that they present for business. That takes us into crowd sourcing, open innovation and crowd funding. We are internationally recognised as experts in crowd funding and we have acted as advisers to the Organisation for Economic Co-operation and Development, the Commissione Nazionale per la Società e la Borsa—Consob—in Italy, Scottish Enterprise and other organisations.
Thank you. I am sure that, during the session, we will want to tease out some of the issues around that. I start with a question for Mr Simpson to enable us to understand his business’s experience a little better. Have the equity investors who have come in, very successfully, and supported the business expansion mainly been customers of the business?
A large number of them are customers but, given that there are now 12,000 of them, at this point we do not know how many of them are indeed buying the product. As we have gone through the equity rounds, we have seen more and more people investing larger amounts of money, which to me means that they are probably looking at this far more as an investment proposition as opposed to an opportunity to get involved with us and engage with us as a brand. There is a mix of both. However, I would be very surprised if the majority of our shareholders were not customers, given the reward benefits that we give them with their shareholding.
That is what I was coming on to. People who buy the equity get not just a stake in the business, but benefits along with that.
That is correct. They receive a discount in our bars and a discount for purchases in our online shop. People can weigh up their return on that product benefit over a period, but they get other benefits such as prior notice about any new product releases or an invitation to our annual general meeting. That is not a conventional AGM, as it is slightly more entertaining, shall we say, given the refreshments on offer and the entertainment. We also have a social media forum through which shareholders communicate with us regularly. They give us their comments and we give them feedback. They therefore have a real engagement with us, and we take very seriously communicating with them and keeping them involved with what we are doing.
How was the investment opportunity marketed? Was it done by you, perhaps through social media? Did you go out to traditional investment houses?
No. As I said, it is a DIY set-up. Obviously, the share offer documents are certified by an approved financial services organisation. We then list the offer on our website and promote it through social media. We generate interest through our many Twitter and Facebook accounts and the following that we have there. In addition, we have very good PR, which has ensured that the press regularly picks up on our activities and that has meant good coverage of what we are trying to do and public exposure to it.
Thank you. A number of members have questions, so we will start with Marco Biagi.
My first question is a general one about the crowd funding method. How much can it be expanded? Could it ever become central? The figures that I have seen show that it is 1,000 times smaller in monthly volume at the moment than conventional lending. Will crowd funding always be just a niche?
Its growth rate from a recent and low start has been extremely fast. There was an 80 per cent uplift from 2011 to 2012. This year, it is anticipated that the sums raised globally will be $5.4 billion. Admittedly, that is comparatively a modest sum, but if the growth rate continues at the rate of recent years, it could become a significant sum. The World Bank has just produced a report on the potential of crowd funding in the developing world and envisages a potential investment of billions of dollars from crowd funding. The scale is therefore large, and Nesta has suggested that over a three-year timeline there is a £14.5 billion investment potential from crowd funding within the UK.
It is important to remember that the figures that we have for the pre-crash days show that the banks’ net lending, rather than gross lending, was £150 billion a year to small businesses. That clearly gives a scale for comparison.
In terms of giving away equity in the business, there is no real difference from an IPO. However, the linked reward factor and the engagement differentiates what we did.
Your public relations has been rather outstanding in your sector. You have been able to command media attention. How replicable is that for other companies? It is hard to imagine another BrewDog coming along and making the same waves that you have made because, to your credit, you have already done it.
I was waiting to say that I hope that another BrewDog does not come along, but we would welcome another member in the market coming along and trying to do the same thing. On the back of our success, one or two other breweries are looking into making some sort of crowd funding share offer as well.
Before going through the inquiry, I associated crowd funding with the likes of kickstarter—very early-stage work. What is the scalability of that? It is an area of crowd funding in which I have participated through donating to something and getting something back. Will that be a major factor?
It already is. There are four fundamental models in crowd funding: the equity-based model, which BrewDog exemplifies; the reward-based model, such as kickstarter, in which people receive some kind of tangible or intangible reward, product or service in return for a pledge; the peer-to-peer, debt-based model, in which loans are provided through a crowd; and the donation-based model, with which most of us will be familiar through platforms such as justgiving.
I have just had an off-the-wall thought. Could there be applications to public sector funding?
There already are. There are, for example, crowd funding campaigns specifically designed for civic projects such as construction projects. There are also lots of opportunities for co-investment. We have seen examples such as the West of Scotland Loan Fund, which is predominantly drawn from the public sector and which is now quite happy to co-invest alongside crowd funding money; it will only ever meet 50 per cent of a loan, but it would be entirely comfortable with taking 50 per cent of a loan that is otherwise backed through crowd-funding sources.
Let us go back to Marco Biagi’s second question, about the types of businesses attracting crowd funding. I can see why a customer-facing brand such as BrewDog, while not exactly finding it easy, would have an obvious customer base to tap into. Somebody who is a widget maker might find it a lot harder. Is that fair?
That is entirely fair. Each business will look at the available options. They might wish to take some debt-based funding through a peer-to-peer platform. What the individual businesses can bring to a crowd-funding situation will determine the path down which they might go. We typically would take organisations through a four-stage process to decide what was the best option for them. It may well be that crowd funding might not suit them; it is not for everybody. Such things as the public equity rounds and the reward-based models that we referred to with RunRev can be tremendously demanding. It is not easy for organisations to do those things; they take tremendous amounts of effort, resource and preparation, but they are an alternative that many people feel is not otherwise available to them, and that is why they choose it.
My question is about platforms. It may be that, when BrewDog started its journey, there were not a lot of ready-built platforms out there and that that is why you decided to go with a home-brew version, if I may put it like that. If you were starting now, would you have gone with a commercially available platform, or is there an additional value in inculcating customer loyalty and fanhood by making the experience of participating in it one that is entirely controlled through your own brand and corporate identity?
If we were to start again now, we would probably explore those platforms in more detail. Back when we did the first round, the models were not so widely available, as you say, and we found that our cost base on our first round was proportionately much higher than it has been this time. We have gained experience from doing it and, as the market and our business have moved on, we are now looking at our model from the point of view of risk assessment and financial services. The costs were far higher doing it first time, compared with doing it now, but they were still significantly less doing it ourselves in round 1 than they would have been if we had gone through a platform.
I am thinking about how this kind of investment fits with other sources of finance. You have said that it is one element, alongside others. Are you able to put a figure on the additional value of this kind of investment because of the customer loyalty and the sense of building a relationship with your customers and people who identify with the brand? Does it have additional commercial value to you compared with other sources of finance?
Certainly.
Can you put a figure on that?
We cannot, at this point. If we continue to manage this approach in the right way, through our engagement with the investors, we see this as 12,000 sales reps on the road for our brand. Those sales reps will have a vested interest in the success of what we are doing. They will like the product and the engagement, so there is that commercial benefit, too.
I ask Mr Wright to comment on the issue about platforms and how much control a company wants to try to retain over the experience that a crowd-sourcing investment participant would have. Does that platform still need to be controlled in order to maximise its real value?
The fundamental proposition of platforms is that they drive down the incremental cost of every transaction. In a crowd-funding environment, you are looking to aggregate a large number of very small investments. Consequently, it is important to make the transactional cost of each of those investments very low because if you did not do that, crowd funding would become unsustainable. That is the main proposition of the platforms.
Mr Simpson, we are not allowed to physically applaud in the committee, but you deserve great applause for what you have done with your company. We have heard about what you have done, when you did it and where you did it, and you partially told us why when you answered Patrick Harvie’s question and mentioned cost. Was there any other motivation? What is your view of the accessibility of finance and the approach of those who provide finance to small businesses in Scotland? Was the reaction to that part of your motivation?
Yes. Since pre-crash times, the financial model of the banks has changed, as I guess you just heard from the previous panel, and the financial institutions take a far tighter approach to risk. As a result, any capital projects are capped at a certain percentage in conventional rounds of funding, and it is really difficult for an early-start business to access working capital funding.
Is it true to say that part of your motivation was the initial difficulty in getting access to finance?
Well, there was difficulty, but we also thought about speed of growth. Under our model, we do not do something in two years if we can do it in two months. Conventional financing models do not allow the speed with which we wished to grow our business, because the model and cashflow have to be working to make that happen. We had to access other finance routes to allow our speed of growth to continue.
Mr Wright, you heard our earlier evidence session when we talked about professional-advice-giving relationship managers who are experienced in business after training for four days a year. One of the indications in your report was that there is a lack of financial advice in Scotland. What is the problem? Is it with financial advice or with business advice? I hope that there are no accountants listening, because we heard that there is a proliferation of financial advice. What is the situation with overall business advice? We have heard about what good sales, marketing and PR do, but is there just a lack of professional financial advice?
In our report, we certainly looked at some of the evidence that came up in the Breedon review report, which suggested that poorly prepared financial statements are impairing business access to finance because businesses cannot make or present their cases effectively. We spoke to a number of the crowd funding platforms, which said that it is an issue for them that organisations sometimes try to come on to an equity-based or lending-based platform but do not have sufficiently well-prepared financial statements.
I want to move on to the regulatory underpinning of crowd funding. I know that P2P and equity-based models are fairly well regulated. What about the other platforms?
From a regulatory point of view, the UK has had an extremely vibrant crowd funding sector, largely because it has not been specifically legislated for. The reward-based and donation-based platforms are not actively regulated and do not fall under any particular regulations. Peer-to-peer lending still does not fall under any specific regulations. That part of the industry has lobbied to come under Financial Conduct Authority regulations that are being put in place from next April. The FCA has published recommendations for specific regulation of the equity-based model. A consultation from the FCA is out at the moment.
I want to concentrate on Scotland. You heard my question about AIM listing and a more meaningful Scottish stock exchange. You have a platform coming down the pike called ShareIn. Is that effectively the same thing—a soon-to-be-launched Scottish-based equity platform? That to me is a pseudo AIM-listing vehicle.
What is interesting about equity-based platforms at the moment is that all the assets that are generated are non-tradable, so they are illiquid—BrewDog is in that situation, too. There is no secondary market for them. We have had numerous discussions with bodies about the potential for introducing a secondary market for those equities. There will be a large opportunity for some body and some jurisdiction to set themselves up as the place where the secondary market operates. The advantage of having the secondary market is that it brings more liquidity and confidence and it allows people to realise and trade their assets. It underpins the peer-to-peer lending market, where there is almost always a secondary market. For example, if I were to go on to a platform such as Funding Circle and buy £100 worth of a loan going to a business and I then wanted to liquidate that, I could trade it on the secondary market on the platform. The two equity-based platforms that exist in Scotland—ShareIn and Squareknot—will be in exactly the same position as all the other equity-based platforms in the UK in that the assets that they generate are non-tradable.
That is at this stage.
Yes. There are significant problems associated with it, because a variety of types of share are created, some of which are specifically non-transferable. However, there are ways round that. We have advocated the setting up of a European secondary market for all the European equity platforms to be able to trade their assets in.
I want to continue with the issue of crowd funding. You mentioned how successful it has been but, although its use has increased greatly across the world, the uptake in Scotland has been lower. Why do you think that it is less popular in Scotland?
The intention of the report that we produced earlier this year for Glasgow Chamber of Commerce was to look at the general levels of interest in and awareness of crowd funding in Scotland and its fit with the financial needs of business here. It became apparent early in the course of doing the research—which was quantitative and qualitative, in that we used survey-based material and undertook more than 50 interviews with a range of bodies that are involved directly or tangentially with crowd funding—that the level of uptake in Scotland was quite low. Although the research did not have the specific aim of explaining that, we at least asked for reasons why it might be the case.
How much awareness of crowd funding do the likes of Scottish Enterprise and the business gateway have? Are they telling businesses about it?
It is fair to say that we found that the general level of awareness and understanding of crowd funding across the institutions that we spoke to was relatively low. In almost all cases, their awareness of it had been driven by a bottom-up approach, whereby their clients and contacts had come to them and asked, “What is this thing called crowd funding? What do we need to do about it?” That drove those institutions to engage with it and to gain a greater understanding of it. However, it is fair to say that most of those institutions would benefit from getting a more sophisticated understanding of the opportunity that crowd funding presents.
I have a question for Mr Simpson. You use other funding methods, obviously. Has the reaction of banks to your use of share funding been favourable? Do they feel that it is risky?
It has been extremely positive, because the benefits of share generation mean that our company balance sheet net worth has been strengthened considerably. When the banks lend, they look at a company’s equity-based balance relative to its debt funding, so they look at our crowd funding extremely positively rather than negatively.
They do that now, but did they do so earlier, when you were starting out?
At the time, we were with a different bank. At that point, the model was not proven in any sector and the values that we were dealing with were far smaller, so it did not have the same connection. We have certainly not had any negative response from our banks to the use of crowd funding.
Should banks be encouraging crowd funding, Mr Wright? Is that a message that you would convey to them?
It is an interesting point. In doing the research in Scotland that I mentioned, we spoke to all the main banks to ask them about their attitude to and awareness of crowd funding. As you might expect, we were told that they were all open for business and ready to lend and that they encouraged other entrants to the market and so on. However, they also made the point that they will turn down certain applicants and they are interested in crowd funding as a potential alternative.
BrewDog has used crowd funding to raise equity. What is the maximum limit for a business raising equity through crowd funding? You would not want to sell off the silver; rather, you want to keep hold of as many shares as you can. Where should crowd funding stop?
That is a good question. For BrewDog next week, who knows? That is a business-by-business decision that is dependent on where each is at any particular time and on how much they are prepared to give away. As I understand it—Tim Wright will correct me if I am wrong—the European legislation says that a business can raise only €5 million through crowd funding annually, so that puts the cap on what can be done through that platform.
You could buy a distillery with that amount.
You could buy half our brewery with it.
There are plenty of examples of people who are going through first, second and third funding rounds through the equity-based models. For other types of crowd funding, such as the reward-based model—the model that provided the $23 million world record that I mentioned—the rounds continually reiterate. That really suits some businesses. For example, games and software developers can go through an iterative development path, each of which is funded by a separate crowd-funded round.
Before I bring in Dennis Robertson, I want to return to a question that Margaret McDougall asked about Scottish Enterprise and the business gateway. Mr Simpson, what support has your company had from Scottish Enterprise or the business gateway?
Scottish Enterprise was supportive of BrewDog in the years prior to the crowd funding. We get excellent support for our exports on an annual basis—a considerable amount of our business is exports—and with regard to our employees and the increase in our staff numbers. We have excellent support through the more traditional Scottish Enterprise funding avenues.
Has Scottish Enterprise now caught up with what is happening?
There is an awareness there. However, not just in that avenue but in a lot of avenues, businesses often have to go and ask the question to get support, as opposed to that support being made directly or openly available to them. From a business perspective, it is a matter of awareness.
Have you had any engagement with the business gateway?
No. It has all been through Scottish Enterprise.
Are you an account-managed company?
We are.
My questions are mainly for Mr Simpson. I echo what others have said: you have an extremely successful business. I would not like to say whether it is the product or the marketing that is the reason for your success.
That will depend on where the growth happens to be. As I said, bearing in mind our credibility in the market as we grow and as we deliver the fundraising that we said we would, we would use conventional funding. Even now, however, that is limited in its uses in the business, and there are caps at certain levels. The next BrewDog adventure might be slightly more risky using a conventional funding route, in which case we would have to keep the alternative market as a possible source.
We heard earlier from the representatives of the banks that their doors are open for business.
Yes. We are getting excellent support from the bank as regards the cost of the finance that it provides to us, but the limits that are placed on that mean that we would have to fund a certain percentage of any capital project ourselves. If we do not have that funding readily available, we have to consider the alternatives for raising those funds.
Am I right in thinking that you brought crowd funding to Scottish Enterprise, rather than Scottish Enterprise bringing it to you as an option?
That is correct.
Do you not think, in some respects, that it should have been the other way round?
Yes, indeed. Given the difficulties that businesses have with raising finance, the support that we can get from public bodies will make things far easier. The awareness factor has meant that, as a few members have said, crowd funding has not been taken up so much in Scotland.
You see crowd funding as an opportunity for entrepreneurs at the start-up stage to get themselves established. It looks as if, rather than the banks deciding just to take a risk, they are more interested once a business is established and has a proven track record.
Yes. Your previous panel of witnesses may have said what their lending criteria are, but my experience so far is that, if a business has a good bit of bricks and mortar, that is a nice decision to make. If, however, a business venture is launching a new product or launching itself into a new market, there is no evidence with which it can prove its success in that. Therefore, even if it has a good track record, that is not such an easy situation in which to raise bank funding.
Thank you—you have probably clarified some of the questions that were not explored or were not clearly defined in the earlier evidence session.
I do not wish to put you on the spot, Mr Simpson, but I am about to. Does your answer to that previous question mean that the people from the banks and the credit companies who are giving advice do not really understand business at all?
My bank has been excellent, and it understands our business really well. We have an excellent relationship.
That is probably down to you improving it.
The banks have to get to know the business concerned. Any service, whether it is a public body, a firm of accountants or lawyers or a bank, needs to understand a business in order to give the right advice.
I thank both our witnesses for coming along. It has been an interesting evidence session, which has given the committee an insight into crowd funding that it would not otherwise have had. I am grateful to you for giving up your time to come along.