Crowdfunding has exploded in the last number of years, offering an alternative to bank loans as a means of financing businesses or projects. John Golden speaks to Alan Fagan of crowd lending business Linked Finance, as well as Giuseppe Crupi of the Flavour of Italy group, and Barry O'Neill of O Brother Brewing about their experiences of using crowdfunding to grow their business.
In the wake of the economic recession of 2008, borrowing from the banks became almost impossible for hospitality businesses.
For the ones that did survive, borrowing for necessary upgrades was put aside until their heads were above water once more. During this time it was not uncommon to see televisions the size and weight of bank safes in luxury hotel rooms, or furniture in bars and restaurants that looked as if it were ready to give way.
For those ambitious enough to open a new business during this period, they had to salvage what they could, as banks became increasingly risk-averse in their lending. It could even be said that the typical look for so-called 'hipster bars' or restaurants (mismatched furniture, pallet tables and so on) grew out of a lack of resources, rather than any stylistic choice.
For SMEs, even those that were doing well, securing these funds involved jumping through hoops, steps imposed on the banks through regulations. Many started to seek alternative means of raising the money.
Enter crowdfunding. Although by no means a new concept, the internet age has given crowdfunding, crowd lending or P2P borrowing a new playing field on which to promote itself.
Although it takes on a number of forms, generally crowdfunding means raising money from the contributions of a large number of people, brought together through an intermediary.
Like so many revolutionary inventions, crowdfunding is believed to have originated in Ireland. Jonathan Swift set up the Irish Loan Fund in the 1720s, which provided low-income families with a loan using their neighbours' goods as collateral. The modern concept was pioneered by Nobel Peace Prize winner Dr. Mohammad Yunus from Bangladesh in 1976.
He started the Grameen Bank, which gave small amounts to poor people who were being exploited by big banks. This 'microfinancing' bank paved the way for this type of borrowing, and the proliferation of the internet gave it a new lease of life as new companies developed to broaden the concept.
In 2005, after seeing a presentation by the Grameen Bank, entrepreneurs Matt Flannery and Jessica Jackley were inspired to set up Kiva.org, believed to be the first microlending site.
Its non-profit structure was set up to fund projects in developing countries, and when sites like Prosper.com went live, one of the first major P2P lending sites that connected lenders with borrowers that was beneficial to both parties, the concept really took off. Ireland's first crowd lending site, Linked Finance, was set up in 2013 by serial entrepreneur Peter O'Mahony, after he was inspired by similar lending sites in the UK and US.
Crowd lending differs from the more familiar crowdfunding, which offers benefits or rewards in exchange for funding of a project.
How it works
Crowd lending offers SMEs the chance to borrow some capital from a number of investors, who contribute as little as €50 each, to be paid back at an interest rate determined by the level of interest in the project.
For instance, if a business needs €20,000 to expand a restaurant, an investor can offer €500 at 10 per cent interest. Another may offer the same amount at 8 per cent, and so on. When the bidding time has lapsed, hopefully the business has more offers than they require, in which case they cherry-pick the best interest rates offered. The result means that oftentimes a business can get the amount they require, for as little as 8 per cent interest, or lower, to pay back.
For lenders, it offers a viable alternative to a savings account. They are paid back they amount they lent within 36 months, with between 6 and 15 per cent interest added. For Linked Finance, the cut is 2.5 per cent of the total amount borrowed, paid by the business. Of course, as with all investments, there are risks for the lenders, as the business may fail, but Linked Finance has so far avoided this risk with its finance checks.
Alan Fagan (pictured below), head of marketing at the company, explained that its founder O'Mahony knew that small businesses in Ireland were not getting a fair shake from the banks and were struggling to progress.
“Peter understood that SMEs are the backbone of the economy. They represent a huge portion of the employment and the exchequer in Ireland, but they don't necessarily get the kind of support structures that big multinationals get when we're trying to coax them in for FDI. These businesses were being neglected, and as a small business owner himself, he knew what it was like,” says Fagan.
O'Mahony, before starting Linked Finance, founded the Laughter Lounge in Dublin City Centre, had owned printing businesses and even developed his own board game called Insider Trading based on the stock exchange.
“He knew that there are many good businesses out there that are going to suffer as a result of this standstill from the banks. He also knew that there were a lot of Irish people who had savings sitting in deposit accounts earning little or no interest, so he thought if he could bring these two groups together and put them in direct contact, we could start to get things moving again.”
Despite the fact that the concept was first developed by an Irishman, the irony is that Ireland has not been as progressive as other countries in developing a framework for crowdfunding companies to operate. A report published earlier this year by the crowdfunding consultancy firm, Crowdfunding Hub, called The Current State of Crowdfunding in Europe argues that a lack of “bespoke regulation” for P2P lending compared to other countries, such as the UK, has damaged its growth potential, as businesses are still mindful of the ongoing process of the legislation controlling it.
However, due to Ireland's strong track record in venture capital investment for SMEs, it posits that the future of crowdfunding in the country is bright. “Based upon present growth in technology and the sciences in Ireland, crowdfunding can play a critical role in supporting the growth of innovation in the SME sector,” the report concludes.
Alan is betting on this, and while he welcomes any regulation that would give borrowers and lenders more protection, he insists that it hasn't deterred businesses from getting on board so far.
“This whole movement is still comparatively new. Linked Finance was only set up in 2013 and we’ve already completed loans for hundreds of Irish SMEs. We mightn’t be moving as fast as our nearest neighbours but the sector is gaining ground every day.”
The benefit for businesses – especially hospitality businesses – is the speed in which the whole process can be delivered. As mentioned above, banks can often make owners draw up complicated and time-consuming projections before a loan is considered, by which time the opportunity may be gone.
With crowd lending, the whole process is expedited. From first applying to going live on the website takes around two days.
“The amount of time between that and when the money lands in your bank account is subject to how your loan performs on the market,” says Alan.
Although the website features a number of industries, Alan says that hospitality businesses have an advantage when it comes to attracting lenders.
“Small hospitality businesses tend to do really well because our lenders like the businesses that they can touch and feel. They like to be able to walk into them and get a feel for the location and the people in there. Now, that's not always the most rational way to go into an investment but emotion and being able to relate to a business certainly plays a part.”
For Flavour of Italy, this aspect encouraged it to use the platform, as not only could it help secure the funding needed to set up its second Pinocchio restaurant in Temple Bar, but Giuseppe Crupi of the group says it was a way to attract new customers from the lenders.
“It's nice to share with them the new project and what we are doing with it,” says Giuseppe. “It's a faster option than bank finance and we can also build a network with our lenders so they can see what we are building and they might become our customers.”
Founded in 2005 by Maurizio Mastrangelo and Marco Giannantonio (pictured above), Flavour of Italy was originally established as a distribution company specialising in authentic Italian food products.
However, since then it has grown considerably and now includes their Pinocchio restaurant and wine bar in Ranelagh, an Italian school of cooking, outdoor catering services and a travel agency specialising in tours around Italy for food lovers.
It managed to secure a €40,000 loan through the website, and has since opened up its new restaurant in Ireland's busiest tourist area. After establishing a name for itself in Ireland, Giuseppe says the group was “not surprised” by the amount of interest it received.
As Fagan mentioned, people like the idea of getting involved with a business they can interact with, an idea that Giuseppe echoed.
“We guess that the lenders belong to a wide range of individuals: definitely food connoisseurs would be interested as well as people who like our brand and enjoy the idea of joining our family. We reckon that a slice of this group would include investors who could see the potentiality of such a dynamic project.”
Dedicated to the craft
Of course, it's not just restaurants that Irish people have an affinity for. When it comes to defying the odds and growing in a difficult time, the craft beer movement in Ireland has been the poster child. Only five years ago, the sector was but a few small producers catering to an extremely niche part of the market.
Now it has grown exponentially, and over 60 breweries are producing, selling and exporting beers. One such brewery is O Brother Brewing based in Kilcoole, Co. Kildare.
Started by three brothers Barry, Brian and Padhraig O'Neill in 2014, the three quit their varied careers to start brewing, a story echoed by so many other craft brewers in the country.
Now producing seven beers, including their flagship The Chancer pale ale, The Fixer red ale and The Sinner IPA brews, there came a point where demand outstripped supply for the company, thus they needed to expand.
With the close-knit craft beer community backing them, and a successful social media campaign, O Brother managed to put together a hugely successful funding round, gathering 292 per cent of the €20,000 needed, meaning they got the amount at a very favourable 6.5 per cent interest rate.
For Barry O'Neill (whose background is in accounting) the strong uptake came as a pleasant surprise.
“We did expect a bit of interest as other breweries had had successful campaigns before us, but we were fully funded at a much lower rate than all of the other loans that were live at the same time. I think this really shows the level of interest out there in Irish craft beer; there is a confidence that there is a sea-change happening in how people are drinking beer and that great Irish craft beer is here to stay.”
For O'Neill, the plan was always to go through crowd lending to fund its expansion, as he saw it as not only an alternative to the banks, but a better option both financially and socially.
“The social element of being able to share our story and let people be part of our growth and development was a key factor, to be able to bring O Brother Brewing to a new audience and to end up with lenders who are really invested – literally – in our success.”
As well as expanding its production by introducing larger fermenters, the brewery – which is now a “working brewery” as Barry describes it – will become more visitor-friendly, adding that “touch and feel” element which is so important. It's this social aspect that Alan Fagan thinks will be the main selling point of P2P lending in the future. A business can get a loan and advertise itself to prospective customers at the same time.
“Think about it, if you’ve lent money to a business, you now have a vested interest in seeing them succeed so you’re going to use the business and promote it to your friends and family. It’s a powerful thing.”