Oireachtas Joint and Select Committees
Tuesday, 11 February 2014
Joint Oireachtas Committee on Jobs, Enterprise and Innovation
Access to Finance for SMEs: Discussion
We move on to our discussion on crowdfunding with Mr. Peter O'Mahony, founder and CEO of LinkedFinance. I welcome Mr. O'Mahony and Mr. Marc Rafferty of LinkedFinance to discuss crowdfunding. I also welcome three business borrowers who have used LinkedFinance: Mr. Maurice McMonagle, HSD Healthcare, Dublin; Ms Lisa Redden and Mr. Olivier Vander Elst of Greenaer. Before we begin the presentations, in accordance with procedure I am required to read out the following note on privilege.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are also directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person or entity by name or in such a way as to make him, her or it identifiable. I remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I hope that has not scared Mr. O'Mahony off. We are delighted to have him in today. Some of the members have had the chance to meet him over the last couple of months. This committee decided to spend some time examining access to finance for SMEs and exploring alternative sources. LinkedFinance is a very good example of an alternative source, as opposed to the mainstream banks. It is very worthwhile having this conversation and I thank the witnesses for coming here today. This committee plans to spend the next five or six weeks on this issue and to compile a report for the various Ministers flagging the areas we want changed and where we need to see more resources put in. Even the Department of Finance is discussing many alternative sources of finance that are needed apart from the main banks. It is worthwhile having this discussion and hopefully we will be able to link back with the witnesses throughout the report stages if we can.
Mr. Peter O'Mahony:
I thank the committee for this opportunity. I will give some background on why and how we established LinkedFinance. I originally came up with the idea when Martin McAleese ran Your Country, Your Call in 2010. I could see at the time that small businesses were struggling to access finance. I had run a printing business in the past and it is notoriously difficult to raise finance to run such businesses. When I did some research I saw that the SME loan book in Ireland was approximately €46 billion while household deposits were nearly €90 billion, even though the country was having a very hard time. Therefore household deposits were double the requirement for SME lending. I thought if one could release some of those funds or make it attractive for members of the public to lend to business it might be a good idea.
When I did some research I found that crowdfunding had been invented in Ireland in 1720 by Jonathan Swift. He had a very simple idea. He ran the Irish loan fund and put €500 of his own money in. At the time a peasant farmer could not borrow money in Ireland. The idea was that he would lend money from this fund to a peasant farmer as long as two of his neighbours were prepared to stand behind him as guarantors on the loan. The idea was that if the borrower defaulted or ran away to Australia, these two neighbours would step up and take up the loan on behalf of the borrower. We did a little research and there had been no defaults because the most shameful thing one could do back then was to disgrace oneself and bring one's neighbours in on it.
A modern-day equivalent is a company called Zopa.com. Established in 2005 it has loaned €400 million so far.
Zopa stands for "zone of possible agreement", and is the zone between the rate a saver can get for putting his money on deposit and the rate at which a business can borrow money from the bank. Somewhere in the middle is the zone or the rate at which both parties are prepared to lend and borrow. At present a saver in Ireland would get a return of 1% interest. In Ireland the rate of interest on an unsecured business loan could be up to 12%.
LinkedFinance.com started in March last and has secured a €1.8 million bid on our market, with which we have lent money to 63 different businesses. The zone of possible agreement in Ireland is between 8% and 9%. The rate of interest on our average loan is 8.9%, which is one third cheaper than the bank rate. The lender is probably receiving eight or nine times the rate of interest that he or she would have earned from holding the money in a deposit account. We are involved in peer-to-peer lending.
The company that started Zopa has lent approximately €400 million. A company called Lending Club, which is a major player in this market in America, has lent $3.3 billion since 2007 and is currently lending at a rate of $300 million a month. It is very big business in America. The equivalent of our company in the United Kingdom is Funding Circle, which has been in operation since 2010 and has lent £200 million. This time last year the British Government started lending through the Funding Circle platform because Dr. Vince Cable, Secretary of State for Business, Innovation and Skills, considered it the most efficient and effective way to lend money to small businesses quickly. The British Government has lent £20 million to date through fundingcircle.com and I understand there are plans to lend more.
There are a number of crowdfunding platforms of which people might be aware, which serve different segments of the market. Zopa and Lending Club provide consumer loans, while Funding Circle and LinkedFinance do business loans. An American company, Kiva, accepts donations and typically lends money to Third World countries. Reward crowdfunding is similar to Kickstarter.com in America, which has lent $800 million dollars to starter projects and arts projects. In Ireland the website fundit.iedoes exactly the same. Equity crowdfunding caters for companies, particularly start-up companies, which sell a small percentage of their businesses to a big group of people. The major player in the market is the UK company Crowdcube.
We at LinkedFinance lend to the butcher, the baker and the candlestick maker. The butcher and baker were very quick to come to the site, and we then looked for a candlestick maker to complete the nursery rhyme. We lend to a range of companies, including medical device companies and two electric bike companies. We have been successful in lending to businesses on the high street and to the food and agricultural sector, which is a major player in Ireland. Recent studies reckon this worldwide business will be worth about $15 billion in 2013. We believe that crowdfunding, which does not have a home, may present Ireland with a great opportunity to capture 10% to 20% of the expected 45,000 jobs in crowdfunding by 2015. We have already been approached by some people from the IFSC to see if crowdfunding would be the type of business that could move into the financial services sector.
When we surveyed the 63 companies that we have lent to, we found that the companies that received these loans have managed to create more than 180 jobs already and, equally importantly, have sustained about 1,000 jobs. We hope to grant more than 200 loans in the next 12 months and, based on the figures we have, we expect this to deliver more than 600 jobs in that time.
I would be delighted to respond to questions from members.
I am very enthusiastic about the whole concept. Although Mr. O'Mahony mentioned start-up businesses, LinkedFinance does not cater for start-up business but for those who have been in business for two years. Will Mr. O'Mahony comment on that?
He also referred to the British system, which seems to be very successful. Am I correct in stating that Great Britain has a different tax arrangement from Ireland's? Will he describe the tax changes he would like to see?
Ireland has become the hub for a number of different industries, one of which is the aviation industry. Is there a possibility that Ireland could become the centre for crowdfunding, if not in the world, certainly in Europe? What would the State have to do to achieve that?
Mr. O'Mahony referred to the butcher, the baker and the candlestick maker. If a lender invests in a company, he or she feels a loyalty to the business. An example I was thinking of is a butcher shop that seeks a loan of €20,000 to install a new cold room and extend its business. I imagine that everybody who lends the money and gets a return from it feels a loyalty to the butcher. Has Mr. O'Mahony evidence of that? The individual does not own the business, but he or she has lent money to it.
Mr. Peter O'Mahony:
We at LinkedFinance.com do not lend to start-up businesses at present. Our typical business would be a business that has been trading for at least two years. The main reason for this strategy is that we have a duty of care to our lenders. Our lenders are members of the public and we have nearly 5,000 registered lenders. We carry out the credit and identity checks that one would expect a bank to do on a bank loan, and it is very difficult to do that in a start-up situation. Our plan for the future is that we would get involved in lending to start-up businesses. Ideally, it would be on a co-funded basis, such as funding those in receipt of grants under the Leader programme, from Enterprise Ireland or from the local enterprise boards. We do not have the personnel in place to provide that all-important mentorship for start-up businesses. It is on our roadmap but, as Senator Quinn said, we do not lend to start-up businesses at present. We also feel there is quite a lot of money in Ireland for start-up businesses, particularly for technology start ups, with the support of Enterprise Ireland, and even regular businesses receive support from Microfinance Ireland. Our belief is that businesses that have been in operation for 18 months to three years are only getting started but need extra capital to move to the next level.
The British tax system is more flexible with regard to using pension funds or ISAs to invest in crowdfunding or peer-to-peer lending. That does not exist in Ireland. Seán O'Sullivan from "Dragons' Den" suggested as part of the recent report from the Irish Entrepreneurship Forum that the Government should put an initiative in place to support crowdfunding by allowing people to earn up to €10,000 in interest every year without having to pay tax. That would be a fantastic kick-start for businesses. Apparently the reaction from Government was positive and this is an idea that might be implemented.
Senator Quinn asked about the possibility of Ireland's becoming a hub for crowdfunding. As I said, it really does not have a home anywhere. There are two major companies based in San Francisco. I have met people from both of them and they are considering coming to Europe. The remaining companies are scattered over the world.
There are two other players in the donation space - Indiegogo and Kickstarter - which are looking at setting up in Europe in the coming months. There is a great opportunity for the Government to show that it is friendly and receptive to the companies, because Ireland is a perfect place for them. They are technology companies and can see that our having Google, Twitter and Facebook here makes it a very receptive market. The Government could stand up and show that it wants to embrace this marketplace.
The UK Government is one step ahead of us because it started lending cleverly through the platforms there. Basically, it took up 20% of any loan that was on the Funding Circle's marketplace. The UK Government did not want to exert undue influence on the market. If a loan was €10,000 then Funding Circle would put an €8,000 loan on the market and the policy was to let the market run and let everybody bidding on the market set the price of the loan. Let us say the interest rate was 8.2%; the UK Government would take the remaining 20%, the last €2,000, at a rate of 8.2%. Therefore, it got a fair market return on its investment, but €2,000 was not large enough to change or influence the market, which is a good way to operate. We are networked with all of the platforms around the world and everybody thought the initiative was the most positive way for a government or municipal authority of some sort to get involved. In addition to the UK Government, there were councils. For example, Camden Council, Leicestershire County Council and Nottingham City Council have started to participate. That means that if one sets up a business in Camden, in north London, its council will lend through the platform and give a low-interest loan.
I shall turn to the final area mentioned by the Senator, which is loyalty.
Mr. Peter O'Mahony:
Loyalty is the greatest interest of LinkedFinance. The reason we called our organisation LinkedFinance was that we wanted the borrower to link with the customers. Our average borrower at the moment has 186 lenders. For a €30,000 loan, the average person bids €150 to lend to that business and, on average, between 180 and 200 people will be involved in each loan. As the Senator mentioned, it is a great opportunity for people to start being loyal and provide support to a business. Let us say a loan goes live today; the first repayment will be due in a month's time. We have lent to a couple of butchers, and one of these, who had a loan that went live last July, very cleverly said "Thank you for supporting me on the loan. The first repayment will go through tomorrow and, by the way, if you want to pop in to pick up any meat for your barbecue this weekend, there is a 20% discount for every lender who has lent to me." That butcher had a great take-up on his offer. Such lending creates a bond. It is important that the lender likes the borrower, but it is also important that the borrower likes the lender. Let us say that butcher was going through a tough time and the time for his monthly payment is fast approaching; he will decide not to bounce a cheque because the lenders are also customers, and the last thing that butcher wants is dissatisfied customers. We feel that the link between the lender and the borrowers is key.
With regard to the business going forward, members of the public lend through the platform and by creating a link we feel that we are driving defaults virtually down to zero. In our industry the number of defaults is typically very low. For example, Zopa has lent nearly €200 million in the past three years and its default rate is 0.3% on all of the loans. That is down to the community effect, whereby borrowers suddenly feel very responsible in terms of repaying the money.
Deputy Dara Calleary sends his apologies. I know the delegation has met him on previous occasions. It was Deputies Calleary and Lyons who suggested extending an invitation to the delegation to attend, but unfortunately Deputy Calleary could not attend today's meeting.
Go raibh míle maith agat, a Chathaoirligh. Gabhaim buíochas leis na finnéithe as ucht an cur i láthair. Tá brón orm go bhfuil mé beagáinín déanach.
This is a really interesting and important new sector. It is good because it democratises the ability for people to loan money. Also, shocking though it is, there are people who are investing in property again in order to provide for their future. Crowdfunding offers a mechanism for investing in a productive element of the market.
I have a few questions. What is the typical length of loans? Is there an average duration for a loan, in the witnesses' experience? With regard to accessibility for SMEs, is the knowledge level on the sector high among SMEs or businesses? Mr. O'Mahony mentioned a lot of figures. Does he have comparative figures on the volume of such loans in, for example, the United States? Mr. O'Mahony mentioned the level of default. How has the amount of default grown? Is it a level growth? Is it a continuous growth? Have there been peaks over the past number of years?
Interest rates provide equilibrium in terms of demand versus supply. Is there enough supply, in his experience? What is his view on the regulation of the sector? What are the barriers to growth, in his experience?
Mr. Peter O'Mahony:
The Deputy's first question was on the terms of loans. All of our loans are three years in duration and are fully amortised, which means 36 equal repayments with every repayment having interest and capital added. The difference between our loan and that of a bank is that there are absolutely no penalties for early settlement. Therefore, if a business decides that it does not need a loan any more because there is a cheaper alternative, or for whatever reason, all it must do is pay back the outstanding capital. There are no penalties for settling early. That is important in order to give a business a bit of flexibility.
The Deputy's second question was whether SMEs know about the service. When we launched last March, if we were in a room that contained 100 people we would have felt that fewer than ten of those people would have heard of crowdfunding or peer-to-peer lending. The situation is different now. Last week we made a presentation to the Tralee Chamber of Commerce with 150 people present, and I feel that more than 50% of those present would have heard of crowdfunding, participated in some type of crowdfunding, watched something about it on television or seen it in the press. Crowdfunding is becoming more known in the sector. We spend a lot of time trying to inform people and we meet representatives of chambers of commerce, SMEs, ISME, the Small Firms Association and their memberships. I have planned the business since 2010 and everybody I met on the run-up to its launch said I would find it very hard to get people to lend through the site because nobody trusts the systems any more, but that there would be a very lengthy queue of borrowers down the road vying to borrow. Sadly, we do not have a huge queue of borrowers, because most SMEs have got used to surviving without capital, which is not a good thing. Instead, they are using personal resources such as credit cards, extending their credit terms with suppliers and that type of thing. That is what is being used for cashflow. The biggest message that is difficult to get out is that an organisation will not have to wait eight or 11 weeks for a decision; we will make a decision in two or three working days. That is the biggest barrier we have come across in the marketplace - that businesses have become resigned to the fact that capital is not available.
With regard to the volume of loans, when we first started in March we provided one loan every two weeks of about €30,000 or thereabouts. Last week we did three loans and we hope to do four loans this week, which means we are very close to providing a loan a day. As a business model, a loan a day can very easily become two or five loans a day. We are very happy that we are on target for where we wanted to be.
On the lenders side, everybody told us it would be difficult to get lenders' money. Since day one we have had a huge surplus of lenders' funds. We have no issue with being able to fund businesses. Today and every day we have hundreds of thousands of euro in excess funds available and ready to lend but we have strict criteria for people to come on the platform. However, we are not getting enough borrowers through the system at the moment.
On the demand and supply side, we would have seen this as a business with two sides in that we needed to attract lenders and borrowers. We had in mind that our marketing budget would be divided down the middle; 50% for each. We have spent hardly any money on acquiring lenders. All our efforts and focus has been on the borrower side, which most people would find surprising.
On the regulation aspect, we have been working with the Peer2Peer Finance Association in the United Kingdom and we were involved in drawing up the White Paper it has in place. Regulation will come into play from 1 April this year in the United Kingdom in a soft and light way, so to speak, with a view that a year later it will have settled down and all the criteria will be in place. We believe regulation is a good idea because it would give our lenders and our borrowers a little more comfort but we would be concerned that if the regulation was too tough, it might slow down the progress of businesses such as ours being able to get out to the market and bring many borrowers on board.
Regarding our observation in the market, since we have launched everybody, without question, is very positive about this as a business model, how it can work and all the transparency. Anyone who has ever been on our site can see everything about every bid, every loan, and the interest rates people are getting. It is important that there is some control in the business. We would want to make sure that a rogue trader did not come on the market in the future and unsettle it because once that element of trust disappears, it would become a very hard business for everybody.
Regulation will be important and it is the reason the platforms in the UK have pushed for it. Somebody described the model that would probably work best as being similar to the airline type model where the sites were bonded, which meant each site had to put €100,000 or €50,000 as a bond to show they were of good character and also to protect lenders on the other side, but that is not what is happening in the UK. It is that the UK Government will regulate them as if they were payment platforms rather than financial institutions.
Mr. Peter O'Mahony:
There are no restrictions in place that would be a barrier to this sector growing. What happened with funding, certainly in the UK, was the ideal way for the Government to support the sector. In terms of what happened, this time last year Funding Circle was lending at a rate of ST£1 million per week. Five weeks after the Government started participating and lending through the site, that had increased to ST£5 million per week; there was a five-fold increase. It was like getting a stamp of approval from the Government but in the biggest way possible, which was that the Government had sufficient confidence in the system to be lending public money.
I thank the witnesses for attending. Along with many other people I had first heard of LinkedFinance from the article in The Irish Times, which described a company not too far from Leinster House, and the idea sounded fantastic. I have met with the witnesses previously and I would be a big supporter of what they are trying to do in Ireland. There appears to be consensus already in the committee that it is an innovative and positive way to do business.
I will make two points. Obviously, this is part of a bigger roadmap in terms of how this cross-party group can try to direct policy at Government level regarding access to finance. The United Kingdom Government has taken the step and joined in with Funding Circle. We are not at that stage. I will put a question now to which I know the answer but I want it to be on the record to ensure it forms part of a report. Apart from the regulation side, if the Government were to approve this model, what steps would it need to take to ensure we can be informed on how to recommend this to Government?
I am very conscious that there are three business owners here today who have benefited from this. I would like to hear some of their experiences in that regard.
Mr. Peter O'Mahony:
I will answer the first question. In terms of what Government could do, we have some great agencies, including Enterprise Ireland and Bord Bia, that could engage more with the sector. Bord Bia would be a great example because food and food retail businesses would be very popular on our site. I suppose it is because the 200 lenders, as Senator Quinn said, can get behind those brands and support them. If someone is looking at Killowen Yogurt, which borrows through our site, they can actually see it on the shelves of Tesco, Marks and Spencer or Superquinn. They are really buying into the brand. In my case, I had never tried Killowen Yogurt before it borrowed on the site but it is the only yogurt we have in the house now. There are many Government agencies we could work with and help some of these companies because lending €100 to a yogurt company makes one an ambassador for life. My children now know the brands that borrow through LinkedFinance because their products are now in our shopping trolley. That falls across people who lend on the site but the proof of the pudding is in the eating, and it is great that we have two companies who borrowed on the site.
Mr. Maurice McMonagle:
We are slightly unusual in so far as we are a business to business rather than a business to consumer type business. Our business is supplying medical technology to veterinary surgeons for equine and small animal use. We take a great deal of human surgical technology and move it across to the animal side. It is a type of technical sell. It is a business to business type operation.
I believe we were the third loan with LinkedFinance. I met Mr. Conor McAleese, who is not with us today, at an enterprise show in the RDS. As it happened, we had known each other many years previously but we got chatting. At the time we were in the process of developing our facility in Sandyford and ploughing money back into the business. In the best traditions of enthusiastic entrepreneurs we had done all the work. We decided that as we had put all our work and capital into this investment we had better put a few bob back into liquidity. We borrowed the money. We had talked to our own bank, which shall remain nameless, about it. We had a good deal of love-bombing, so to speak, but no results. We put in an application. It was sent back to these anonymous underwriters, the people who live in the IFSC who do not have names or faces in the way bank personnel used to have names and faces. In the meantime, I met Mr. McAleese. We were vetted as thoroughly as the bank vetted us but it was within a number of days. The loan went up on the site and within two weeks we had the €18,000 we required at a rate better than the bank would have given us. I did not have to give my first-born son as security although the way he is behaving at the moment, perhaps I should have. We got the money within a couple of days. We continued on with our business.
One of the critical aspects, and I come from a corporate background originally so I am used to being the guy who has all the resources around me, of setting up one's own small business is that it makes one realise there is the corporate world and there is a small and medium enterprise, SME, world. We are an SME dealing with an SME. One can get the people on the phone when one wants to talk to them. If one has a problem, they will talk one through it. It is not a question of going through layers of people who have jobs for the sake of jobs. They are dealing with people who are as enthusiastic about their business succeeding as one is about one's own business.
As it happens, we have just finalised our second loan on the site - I think ours is the second or third business to arrange a second loan - to develop the business. We could have obtained the money from the banks, but why would we pay the banks interest when we can pay it to our friends and family who loaned to the business and give something back to the community and the people who visit vets and buy my equipment? Call me a socialist, but this is keeping money in the economy. SMEs keep and spend their profits in the economy and this is what will drag the economy out of the mess it is in. As far as I am concerned, all the Googles in the world will not do this, even if saying this is popular or not. That is our experience.
I am delighted to hear that because I wanted to hear the testament of people who had got involved because it seems to be a win-win for people. When it works, it works for everybody who becomes involved in it. There is also a social and entrepreneurial aspect to it. Everybody is lifted from this exercise.
May we hear from some members of the other group also?
Ms Lisa Redden:
We had a similarly good experience. We had also approached the bank, with which we had a good relationship until then. The key benefits of using LinkedFinance as opposed to the bank were that we were able to secure a better interest rate than we could have had with the bank. The platform also gave us the opportunity to expose the business This was a real benefit and it did it very well. As the Senator pointed out, the loyalty comes back to the business and many of those who lent to us have become customers of Greenaer which has been positive for us. The exposure has also led to the creation of two new jobs in the company. It has been a good experience and is one we would repeat.
Mr. Olivier Vander Elst:
In a previous life Mr. Rafferty was involved in Smart Transport and we knew each other. We were attracted to LinkedFinance because of its progressive element with which we could identify. The whole process of going to the bank is not pleasant but in going through LinkedFinance the process moves faster and the bidding is quite exciting. It suddenly becomes a story to tell, that one managed to get a loan at an interesting rate. We obtained our loan at a very good rate which much more competitive than the rate on a loan from the bank would have been. Afterwards, many people came forward to us at trade shows and elsewhere to tell us they were among our lenders. Automatically, one is bound to give them a discount. These loans create a bond that one would not have with a bank and we will probably be interested in a second round loan at another stage.
The experience has been all positive. As Mr. McMonagle said, dealing with LinkedFinance is like us talking to a company that understands where we are and which is as excited by its development growth, as we are about ours. We are bound together on the same journey. We have been spreading the word and it is quite surprising that it is not used more. The problem is in finding the right borrowers. Perhaps the help LinkedFinance needs is in getting the message across, without having to spend significant marketing money on it. Getting borrowers should be an easy problem to solve.
I welcome Mr. O'Mahony and the group represented today. This proposal is interesting and innovative. Mr. McMonagle mentioned that when he was awaiting a response from the banks, he decided to approach LinkedFinance. Are LinkedFinance customers a mix of those who are frustrated with the banks and people who make a conscious decision to use LinkedFinance? Are people moving more towards making a conscious decision to go with LinkedFinance rather than the banks? Is the business developing through word of mouth?
Mr. McMonagle spoke about being vetted by the banks and customers of LinkedFinance being vetted just as they would be with the banks. However, is LinkedFinance lending to people who have been refused loans by the banks? Senator Feargal Quinn spoke about new start-ups. Part of the problem about which we hear so often is that new start-ups find it impossible to get finance. LinkedFinance is not focused on new start-ups, but does it have plans to deal with them in the future? What type of people are the lenders? Are they business people or retired? What is their background? Are there limits to the overall level of funding or the number of customers being accepted for business?
Mr. Peter O'Mahony:
I think the polite term for the type of people we attract who may have been with the banks is that they are people who have been "disenfranchised" by the banks. We have a borrower who has a retail outlet on Liffey Street. He opened in 2010, when the snows came, and for two weeks did not have one customer through the door. He went to the bank and said he needed to pay wages on a Friday and asked to borrow €1,500 to pay his staff. Eleven weeks later, he was refused a loan. He made the decision there and then that he would never use mainstream banking again. He would save money before buying anything and handed back his credit card machine. All he uses his bank account for is to pay suppliers who insist on being paid by transfer or cheque. Before we met this man, he had been saving up €5,000 over six months and then buying a new fridge and then saving for another six months and buying a new counter. When he met us, that allowed him to borrow €30,000 in one go to open a second retail outlet and employ 11 people. He did not have to save for six or nine months. Not everybody is like him, but we have other borrowers who have borrowed €25,000 from us. They were told by the banks that they would be given €25,000 for their business and that the banks wanted to support them, but they needed to put €25,000 in a deposit account as security against the loan. Obviously, if the business person had the €25,000 in the first place, he or she would not have needed to borrow.
We are not the lender of last resort, nor are we just meeting people who have been turned down. We are meeting people who want to get things done quickly. They might have a van that is in trouble and needs to be replaced and they cannot wait eight weeks or survive without making deliveries for that length of time. They want to move quickly. It is a kind of social business. Mr. Vander Elst's and Ms Redden's business is in the green energy area - electric bikes. The people who lent to them would love that business because it is a socially conscious business that is better for the environment and so on.
A question was asked about who was lending or the type of people who were lending. We have no millionaires. The average loan bid is €146, a tiny payment. They are people like the rest of us, ordinary guys on the street. If we profile the average person lending on the site, it is a man between 40 and 55 years of age. The average person has deposited just under €2,000 for lending - small money. Everything we do on the site is about diversifying the risk. If somebody puts €1,000 on the website, everything on it would tell him to put €50, the minimum bid, into 20 businesses, rather than put €500 into two. Some of our businesses will fail, without question. We guarantee that will happen. What we do not want is for somebody to put half of his or her funds into one business. Ideally, he should put €50 into 20 businesses and if one of the businesses fails, he or she will still have 19 performing loans.
The profile of the people lending on the site has not changed since day one. It is a great mix of people, which is what we want. Therefore, we have a business like Greenaer which deals with what consumers want, with customers who can make offers on its bikes or see a trade exhibition and so on. Businesses like Mr. McMonagle's are similar. He is supplying vets up and down the country. One of his lenders might have a sister or a brother-in-law who is a vet and this might open a door for him. There are always such opportunities, which is why we called it LinkedFinance to try to link borrowers and lenders.
With regard to start-ups, it is not until we become more established that we can deal with them because it is very hard for us to make an informed decision on whether a start-up business will succeed.
The only way we will do it in the future, probably, is by matching funding or co-funding with people who can put a bit more time and effort into mentoring or helping the business get started.
Deputy Kyne's fifth question was on the limits. There is no limit to how much somebody can lend through the site. We restrict it so that people can only bid up to a maximum of €2,000 on any project. That is for two reasons: first, we do not want someone to make a mistake and put their whole fund into one particular loan; and second, we do not want somebody to control a loan. For example, with Greenaer, the electrical bike company, we would not want a competitor in Cork totally funding the loan and maybe putting a bit of pressure on the owner to buy his bikes, only supply his saddles or whatever. Therefore, €2,000 is the maximum and, ideally, from the business's point of view, we would like 100 or 200 lenders to participate in each loan.
Mr. Peter O'Mahony:
Virtually all SMEs that we would look at have some type of overdraft in place. It is important for us to be able to look into their past and see that they have had loans previously. It is the easiest way for us to see that they have been responsible with finance previously. That is the most important thing that we are looking for.
Virtually every business that we look at had a hiccup between 2008 and 2011, because every business did. Times were hard and they may have had a bad debt, a customer who disappeared and did not pay them, or something like that. We are prepared to look at that and understand what that was, and if they recovered from it or got back on track, and now they are pushing forward again, we will lend. A blot on the copybook or a bad mark in the past does not mean that we cannot lend to a company. Ideally, we look for people who may have had multiple loans and we can see how well their repayment schedules have worked. Deputy Kyne asked whether the businesses have existing loans. We have people who have a bank loan, an overdraft and a lease on a car and we are coming in as another form of finance for them.
Mr. Maurice McMonagle:
I will address that question as well. In the early days we made the mistake, or otherwise, of not having an overdraft from our bank. We operated on a prudent basis and grew the business probably more slowly than we could have if we had had an overdraft. The irony of it was that when the business started to grow and we needed to get an overdraft, the bank would not give it to us, and there was plenty of cashflow. All it would say was that it wanted us to take a term loan and turn that into an overdraft. That did not really suit our business. It seems the banks have a pot of money to give in overdrafts and, because they do not know how much any of their candidates will draw down at any one time, they are reluctant to earmark money that may or may not be drawn down at any particular time. They like to have the certainty of a loan. That did not really suit us in the sense that we did not want to take out a long-term facility.
We have an existing loan for a car for a sales representative, which is through Skoda Finance, where we sourced the car, but we had trouble convincing the bank that we were worthy of an overdraft because we had not had one previously. That, to say the least, was fairly annoying because it is a profitable business and we had been with that bank for ten years. The bank also has my wife's business, our mortgage and our personal accounts. They know everything about us, which, in retrospect, is probably not good. With LinkedFinance, we went, we made the case and the job was done. I am still waiting to hear from a bank about the loan. I do not have time for that; business moves too quickly. One cannot be sitting around waiting for answers.
I welcome Mr. O'Mahony and Mr. Rafferty. I particularly welcome those who have received funds who are taking time out from their businesses to be with us today and share their stories.
I have a few questions for Mr. O'Mahony. I met him previously and I am familiar with LinkedFinance. He stated it is difficult to get people to borrow money. Is there a particular issue with borrowing as a loan or borrowing as equity? How does LinkedFinance manage the equity, if it is putting in an equity stake? How does all of that work? Is there a considerable amount of administration involved? How does it operate?
Mr. Peter O'Mahony:
On the reluctance to borrow, Deputy Collins referred to Mr. McMonagle and Mr. Vander Elst taking a couple of hours out of their day. It is difficult for an entrepreneur to do that. All business people in Ireland have got used to the fact that if you want to apply for a loan, you have to fill out an eight-page form. If you are working hard and doing a full 12-hour day, you are coming home in the evening to face this form that is just an unending list of questions for you to fill out.
We are different. The quickest our loan application form has ever been filled out is 37 seconds, and we have a timer on the website. What we are trying to do there is get rid of all the friction in signing up. However, it is hard, until we are fully established, for businesses to realise that there will not be an eight-page form to fill out. A business owner may send the form to the bank, fold his or her arms and think the job is done, but the bank will come back to him or her two weeks later looking for supplementary information, and then it will change the rules on what it was looking for in the first place and how the business owner will guarantee the loan. We have tried to make the application as simple as possible. On day one, our application form was four pages long. We found that 60% to 70% of the applicants were skipping out of the website or leaving our website on page 2. Therefore, we sat down and had the brainwave of making it a two-page application form. But then, of course, everyone left on page 1. What we did thereafter was to have a single-page application form, and one can go through all the fields in less than a minute. That gets one onto the system and allows one to understand what we will be looking for as supplementary information, and we give the full list. We never ask for anything in excess of what we have listed as the documents we will require to put the loan together. It is a learning curve. For me, as an entrepreneur over the years, filling out those long forms was just an absolute headache.
Regardless of crowd-funding, it would be helpful if the pillar banks standardised their forms so that when I apply for a loan, I could fill out one form, photocopy it, drop it in to the four or five different banks and get them competing against each other for my business. At present, all the formats are different and the information required is in a different layout. It would be simple to do. I accept it would be a big printing job, but it would be simple to standardise the application form for a loan.
That has been done, more or less. There is a standardised form.
My question was, how does Mr. O'Mahony manage the equity? If I decide to invest in a company that LinkedFinance has introduced me to and I am an equity holder, is my relationship directly with the company? Who manages the equity?
Mr. Peter O'Mahony:
Excuse me. We are probably best described as a dating agency. We are between the lenders and the borrowers. As a lender, you are lending money. You are not buying equity in the business. It is a business loan that you are giving. Once you decide to lend €100 to Greenaer, the bicycle company, you deposit the money with LinkedFinance, you make your bid, and if it is accepted and Greenaer decides to go ahead, we will transfer your €100 into Mr. Vander Elst's account. Then Mr. Vander Elst has a commitment to pay you back 36 repayments, including the principal and interest. That will come back in to LinkedFinance and is credited to your account. We do all the transactions and all the payments, backwards and forwards.
Mr. Peter O'Mahony:
There are key areas that we looking at. We would look closely at the last six months' bank statements for activity. That would show us gearing. It would show whether they are operating within their means and it would show any payments that are bouncing or coming backwards and forwards. That is important. We also look for tax compliance because the last thing we want to do is lend somebody €20,000 just to pay a tax bill. It will not push the business forward or help it grow.
The other matter we look at is the funding that they have had in the past to see have they been responsible. If, for example, they had a three-year loan, did they make all 36 repayments and were they a good person to lend to?
I thank the Chairman for allowing me to attend today. I am not a member of this committee but I wanted to come in because I am familiar with both LinkedFinance and Greenaer.
I wish to declare an interest in that I am a lender, or have tried to be a lender, on the site. I opened an account about eight months ago after one of my meetings with Mr. O'Mahony, to try to see how the website worked. I put €100 into the account and have tried to lend it on a number of occasions in €50 parcels but no one is taking my money. I might be looking for too high rate, I am not sure. It is 50%. A little bit too greedy perhaps. It surprised me, however, because Mr. O'Mahony talked earlier about the potential for growth. He knows how many lenders there are vis-à-vis borrowers. As I see it, every loan coming through my account is over-subscribed, which is fascinating. I would have thought, as Mr. O'Mahony pointed out, that it might be the other way around.
I want to ask about protection. If a loan is trading for a week and the average rate is about 8.3%, what stops a couple of people coming in at the last moment offering 7% and thus having the bulk of the money? Is the €2,000 limit the only thing?
Mr. Peter O'Mahony:
The €2,000 limit is per bid. In a lot of cases, as was mentioned earlier, people who are lending are friends and family. We obviously do not want to place any restriction on that. I mentioned a butcher earlier to whom we lent. He did his barbecues during the summer. He had a fantastic butchery business and his father always wanted to support him in the business but the son was too proud and would not take cash from him. This was a perfect vehicle for him, so in the last hours of the auction be bid €6,000 in three lots of €2,000 to support his son in the business. We do not restrict from that point of view because as Deputy Murphy described, he is looking at an auction which is 100% funded. So if somebody was looking for €20,000 and it is 100% funded, every new bid that comes in the market is going to bump out an expensive interest rate. The top rate of interest at that time might be 12%. If one wants to come into the loan now, one must bid at least 11.9% and move that bidder out. On a €20,000 loan, we find that €10,000 or €15,000 might be bid in the last hour or half an hour, as people try to become part of it and bump other people in the market out of it. In the butcher's case, his father was doing that for the last couple of hours of the auction. He was picking an interest rate and putting €2,000 in. He wanted to lend €6,000 and only ended up lending €3,500 because he got bumped out just before the thing ended. We would actively encourage it. Once a loan is 100%, every new bid will make the loan cheaper, on average, for the borrower.
The second part of my question was whether the borrower has a choice. If I am the borrower and see that 50 people have signed up to lend to me, but I recognise ten of them and they are about to get pushed out, can I choose to include them?
Mr. Peter O'Mahony:
We have to make it a fair market. Nobody controls it. LinkedFinance does not control it and neither does the borrower. The lenders coming on the market make their own decision. The minimum requirement is to bid €50. Therefore, anybody can bid €50 at any interest rate between 5% and 15% to one decimal point - that is, 9.1% or 10.2%. That is the important thing about the fairness of the site. By doing it that way, nobody is unduly influencing the market.
I have a final question. When we raised this in the Dáil before, the line that came back from the Government was that generally speaking it is waiting to see peer to peer financing or crowdfunding being established in other markets before we would do it here. Is it Mr. O'Mahony's view that it is established now? He cited figures from the UK along with some of the research points. If it is established in other jurisdictions and there is a reason to move here, what is the wish list? Looking at the kind of market this it is trying to fill, is it to move away from bank and big corporate funding while not being wholly dependent on government funding either?
Mr. Peter O'Mahony:
Tax relief for the lenders would be extremely important. At the moment, if I want to lend €100 through the site, in theory, I will have to have earned €200 from my wage packet. I pay 50% and that €100 goes into the site. Then if I get 10% interest, that will be taxed as if it is income again, which is very unfair. Mr. Seán O'Sullivan from "Dragons' Den" proposed the idea that a lender should be able to earn €10,000 in interest per year before paying tax at the marginal rate. That would be really helpful because it would then be as fair as some of the other things out there for people to put their money into.
The other area concerns the Funding Circle in the UK. From our point of view, and that of everybody connected with the peer to peer and crowdfunding business, that is considered to be the perfect way to lend, namely for a government to give a stamp of approval to the sector but at the same time get a decent and honest return on taxpayers' money. It is not a donation or philanthropic money going into the site that they will never see back. The whole idea is for a government to give a stamp of approval, while also making members of the public realise that it is a safe and trustworthy way of lending to small businesses.
May I clarify that? The Funding Circle is an interesting example and a good way of how a government can help. It is not interfering with the market rate at all. The market rate gets set by private lenders. When it comes in, it makes the return they make as well. So it is investing with the expectation of making a return. The only potential risk would be to look at the default rate, which I think Mr. O'Mahony said was only 1%. In effect, it is without any real risk at all.
Mr. Peter O'Mahony:
My understanding is that it was put in a segregated account and was drawn down as required by the market, based on the bids that were spoken. So the 80% bid would go through and the 20% requirement would be drawn down at that stage. It is was fully within the government's control throughout the whole process. I believe the average return they got on that £20 million was in the low 8% range. I think they got about 8.2% as a return on the money.
To clarify, I know Mr. O'Mahony has submitted plans to the Government and is trying to raise the issue as well. In terms of this year's jobs growth figures and the companies that support it, there would not be a massive increase forecast this year if the Government came on board because Mr. O'Mahony's predictions are the same with or without the Government. As regards the long-term guarantee it is important for the Government to get involved, is it not?
Mr. Peter O'Mahony:
We are at the stage where we feel we will lend somewhere in the region of €4 million to €5 million in the next 12 months. That would be our own growth and we are on target to do that. It is important to remember that this time last year, Funding Circle, which was two years old at that stage, was lending £1 million per week. That changed five weeks later to £5 million, once the government got involved. It was a five-fold increase therefore.
If the Government was prepared to get involved now, that is the type of growth we would see as well.
Mr. Peter O'Mahony:
Exactly. Since day one, we have had a big surplus of lenders' funds. Because we are not like a bank, we do not need capital. The money is coming from our lenders. Where it came in Funding Circle's case, at the time we had 5,000 registered users. At the time they got the government money, they had 30,000 - six times more - but they doubled in the next three or four months. It was not just the government - it also made the public aware that this was a bona fide way of lending to small businesses.
Mr. Marc Rafferty:
I think Mr. O'Mahony covered most things, as he usually does.
For me it is a fascinating way for the Government to invest in small to medium-sized business and get a return as opposed to incurring a cost in time. That is what is happening in other countries and that is the reason we are here to talk about it.
I thank the witnesses for appearing before the committee. For us, they are kicking off the debate. During the next month or two, as I said at the start of the meeting, we hope to look at the whole area of access to finance and alternative methods. Many of the members have met the witnesses briefly in the past few weeks and have been impressed. There is much positivity towards their model which is commonsense. Certainly the committee would be interested in developing the model further with the witnesses. During our discussions in the next month or two, which will end with a report to various Ministers, we might link back to them. Today's meeting was very useful to kick-start the process. Certainly we will do all we can to flag it. In our report we will address the concerns raised by the witnesses and what they need. As I understand it, they have engaged in the Action Plan for Jobs and I hope that works for them. We will certainly add our own reports and link back to the witnesses.
On behalf of members of the committee I thank the witnesses and appreciate their coming in and taking the time to speak to us. I wish the witnesses the best of luck. Being a dating agency, I hope it has a good week.