Conrad Ford, Funding Options CEO, on why he set up his disruptive SME lending market place

The thing about being a business owner is that your business will either have loads of money, our just about to run out. Maybe there is a middle ground, but I’ve never come across it.

Generally, I’d say that whenever we have money in the bank we spend it. That’s what being a growth business is all about. It may be used to expand our product range, try a new marketing initiative or maybe just batten down the hatches when the regulators move the goal posts on financial marketing

Inevitably, however, at some point, you’re going to need an external injection of cash. Unless you’ve got really rich parents, you have two options, debt, and equity.

But, raising money for your business through something like equity crowdfunding, or via an Angel Investor can take months, if not years and depends really on who you know, more than what sort of business you have.

Debt finance, is much simpler, quicker and enables you to avoid selling shares in your business.

The problem is though, that high street banks, don’t really lend to SME’s money anymore. It’s apparently too much of a risk and the due diligence is too erroneous to lend to lots of small businesses. So, what they do instead is aggregate their lending to alternative finance providers, who in turn lend to these small businesses who would have traditionally borrowed directly from the banks.

So, if you are a business and want to borrow some money where do you find these alternative providers?

Well, like the banks, you probably don’t want the risk or have the time to do the due diligence by scouring the market for new, established, or unheard of alternative providers.

You can instead, go with a new online disruptive broker like Funding Options, who have already done the hard work for you and selected panel of alternative lenders and can arrange finance on your behalf.

Here we talk to Conrad Ford, the founder of Funding Options about the highs and lows of the business he started to help connect SME’s with the most appropriate type of financing.

First off, why did you found Funding Options who’s it for?

I’ve worked in banking for most of my adult career, through the global financial crisis in one of the big banks originally in their strategy team, and then focused on the small business segment.

I was seeing first hand that there was a really big problem emerging in terms of SME lending. So I founded Funding Options in 2012. That was around the peak of the global financial crisis on SME lending.

Although the crisis itself hit in the late noughties, probably the peak of the impact on the real economy was around then. Obviously, a lot had been written about lending to small businesses, and some of it’s not true. But it was undoubtedly the case that banks were very, very conservative about lending to small businesses, and that was causing a major problem.

Lots of SME lending businesses started around that period. MarketInvoice, which you’ve interviewed, is one of them actually.

But most of them were focused on just being lenders themselves.

Whereas my take was slightly different, and it was that when you look at the history of financial services as the internet emerged, and generally speaking, when financial services go online, comparison sites and aggregators tend to be the propositions that win, simply because they offer access to a much wider range of products and providers.

So I took the view that nobody had successfully done the same thing for small business lending, which is what led to me setting up Funding Options.

In fact, the business that we have now is fundamentally the business I intended to build, to my surprise.

We’re a marketplace for small business lending, which means that small businesses come to us, sometimes quite big businesses, and we help them find the right products and providers to finance their business.

We’re focused exclusively on debt finance, which means we don’t help businesses with equity investment. We’re not a Dragon’s Den. We made that strategic choice relatively early on, because it’s a very complicated and specialist market.

We focus on quite traditional small business. They might be retailers, they might be construction firms, haulage companies. There are of millions of small businesses around the country that struggle to get finance from their bank. And there’s a whole host of reasons why they might struggle. One of them, of course, is they might have credit issues. They may have had a bad trading period or equally, they might have got divorced and that would’ve impacted their business.

But equally, they might need money really quickly, for example, if they’ve got a new contract. They might be buying some specialist equipment that the bank can’t finance. There’s a whole host of reasons why small businesses don’t fit bank lending, and those are our target customers.

What about loans sizes, do you have an average? 

Because we’re a one-stop-shop, it’s extraordinary diverse.

The smallest we’ve done is hundreds of pounds and the biggest is well over £3 million, and that was for working capital and general cash flow. That was a very sizeable business. But the average is about £40,000. And I think there’s a reason for that. If you’re a really small business and you need £1,000 to buy a chair for your hairdresser or a lawnmower for your gardening businesses, most small businesses take the easy route and just use their personal credit cards. They probably shouldn’t but they do. And equally, if you have a really large business and you can credibly raise a million pounds of debt, then you’re going to be surrounded by corporate finance experts and accountancy experts, and your FD will probably know how to do it. It’s the ones that are stuck in the middle that really struggle.

If you’re looking for £40,000 of debt, it’s way too much to use your personal credit cards, but it’s way too small for a traditional advisor to be interested in helping you.

And that is our sweet spot, because we’re online, we can cost-effectively serve those customers. That’s the core of our business.

How hard was it for you personally to get the business off the ground and get your initial funding? Did you fund it personally or did you get some external debt or equity funding in place for it?

I got equity funding actually on a business plan, which is quite rare. I was in a lucky position in that I’d been a senior executive in a company where one of the directors was a very successful angel investor. As soon as they were interested in investing in my plan, then a number of other angel investors came along as well.

So I raised equity investment very early on, before we’d actually started, which is relatively rare, and not something I’d necessarily recommend. I think if you can bootstrap, it’s probably the best thing to do, in retrospect.

It was relatively easy for me because of my network and contacts, but actually, I would say that the actual start of the business was not easy at all. You have to learn some pretty brutal lessons, which is a skill set that you don’t learn in a large organisation.  You can be highly effective in a large organisation like a big bank because you’ve learned certain skills, but they’re actually fundamentally useless in starting up a business.

The analogy I always use is running a large organisation is like steering a super tanker. It’s hard to change course fundamentally because there’s an enormous momentum, which means that things kind of truck along at a certain rate.

Whereas if you’re starting up a business, you really don’t have any momentum whatsoever. You have no customers, no brand. So you have to be very, very agile. This methodology they famously call the lean startup I think is something that, in retrospect, I massively believe in.

I had a couple of years of learning the hard way that the skills that I had weren’t necessarily the skills useful for a startup.

But by about 2015, we had very clearly found what they call “product-market fit”, the market needed us and the product was about right. Fortunately, I was able to raise venture capital at that point, and that’s really the genesis of the current business we have. I raised a couple of million pounds and we have literally grown exponentially ever since. We’ve more than doubled every year ever since.

Now that you’re established and scaling what’s been the best part and proudest moment running Funding Options?

Well the proudest part, it’s quite an easy one. We have a sports day every year with our staff on Clapham Common. So far actually, we’ve lucked out with the weather every year. It’s not going to last forever. We were having our sports day. The previous one, we had well under 20 employees, this time round, we had well over 40.

A string of the team actually came up to me independently and just said, “This is the best company I’ve ever worked for. Love the culture, love the atmosphere.” You know, it was genuinely unsolicited and independent feedback, and that was the moment where you suddenly think you’ve actually achieved something.

There are two problems with founding a company. Firstly, all your progress is very, very small and incremental. So occasionally, somebody needs to pull you out of the weeds and remind you that you’ve come a long way, because you don’t see it on a day to day basis.

The other thing, of course, is that you’re correctly focusing on all the things that don’t work in a business. That’s kind of your job as a CEO. And it’s very easy to forget, of course, that most things are now working and that people are doing their jobs, the business is making money. It’s those kind of moments where you are actually forced, in the nicest possible way to reflect that you’ve actually achieved something, which is a lovely feeling.

And what about the hardest or most difficult moment?

I mean without a doubt, and I think it doesn’t matter whether you’re trying to build a high-growth startup like ours or whether you’re trying to run a small retail business, there’s really nothing worse than not being sure if you can pay your staff at the end of the month.

And believe you me, in the early days, I’ve been there more than once. So without a doubt, there are times for most business owners when they’re waking up at three in the morning worrying about cash flow and paying the staff. Not one night; they’re doing it day after day. You never quite understand just how grueling that’s going to be when it comes.

The worst thing about running a startup is that in the end, you don’t know whether you’re going to succeed. There are times when you’re working at your desk at midnight. Those are the those when you have the least certainty that it’s actually going to be worthwhile in the long run.

Now we’ve got to the stage right now, I still do quite often have to work until midnight, but we’re building on a successful set of foundations, but that’s not the case in the early days.

And finally, for a founder or for someone who is running a successful SME with revenue, looking to get financing. Are there any online resources, books, things like that you’ve found particularly useful that you could recommend?

Nobody has really cracked a good resource guide for equity finance. So if it were me, I’d be going to the authoritative one because it’s Government-backed and independent, which is the British Business Bank.

The British Business Bank, for those that don’t know, is the UK state development bank. It’s there simply to stimulate funding for businesses in the UK, and is Government-owned. They have a website of resources what they call the Business Finance Guide. It’s quite wordy, but ultimately, that’s the most important thing for your business right now. It’s well worth delving into for the early stage stuff. That would be my starting point.

I think the stuff that’s not very well explained, even there, is actually the mentality of the capital community and how they think. I think the best way to get your head around that is to read venture capital blogs, and there are some excellent ones out there. For example, there’s one by a venture capitalist called Mark Suster.

But fundamentally, one of the common mistakes that people make in understanding venture capitalists is to think that venture capitalists are interested in the businesses that are growing 50% a year. The reality is for the venture capital model, is that they have to be betting on businesses that they think could be really, really big. They’re literally looking for the one in ten that will knock it out the park, and they’re actually quite comfortable that most of their portfolio might actually die.

That’s the mentality of a venture capitalist. It’s the cold, hard, financial logic that they have to follow and is really, really important. I don’t think you stand a serious chance if you haven’t got your head around that.

What about for the average SME CEO who’s got ten or fifty grand’s worth of revenue a month? Someone who’s looking for some working capital or some debt financing for growth?

Well, it sounds self-serving but Google has actually made us the number one resource for that.

We have our service where small businesses find finance through our service but actually, we have quite an extensive knowledge base.

Believe it or not, we are actually number one on Google for most areas of small business finance. Business loans, asset finance etc. So our advice guide’s are a good source.

But also, I point to the British Business Bank and the Business Finance Guide again.  Because it’s independent and it’s Government-backed. With that you know what you’re getting as it is not a self-serving version of reality.

It’s a genuinely impressive institution and I think it doesn’t get the publicity or credit that it deserves. It’s quite rare, I would say, for a government to set up an institution to fund SMEs that doesn’t end up being a financial disaster.

All around the world, there are failed attempts that end up being corrupted by the local mayors or trying to pick winners and failing. What the British Business Bank does well is that they don’t put their own money in directly. They put money into private sector lenders and venture capitalists. In other words, they look for people to be matching the funding, which means that they’re not there trying to pick winners, which governments can be very bad at. What they’re doing is trying to pick high-quality venture capitalists and lenders. And for that reason, it’s been a very successful institution so far.

Conrad Ford is CEO and Founder of Funding Options