The first small business to receive a loan through Linked Finance’s crowdfunding initiative was a bakery. “We had to go looking for a butcher and a candlestick maker,” says Peter O’Mahony, who founded the company in March this year. “The butcher was easy but the candlestick maker was harder. We found them though.”
Linked Finance is an online marketplace that matches small businesses looking for loans with private individuals who are willing to lend money. Rather than a one-to-one pairing, the total loan is made up of many smaller investments – O'Mahony gives €100 as an example – from a number of different people.
Businesses can submit requests for anything from €5,000 to €50,000, which is repayable over three years. The rate of interest is determined in a 14-day auction where prospective investors submit bids specifying how much they're prepared to lend and at what interest, and priority is given to cheaper bids. "It took three years to get the technology off the ground," says O'Mahony. "It's a real-time market so when someone makes a bid it adjusts the whole market. The most important thing was to build a credible team because we're dealing with people's money."
Bypassing banks
During the auction, would-be lenders lodge the amount of their investment into a dedicated account so that if the full amount is raised then the borrower can receive it immediately. If, at the end of the 14-day period, only a proportion of the money has been pledged then the loan request is rejected.
In addition to bypassing the banks, O’Mahony says the attraction lies in the interest rate, for both borrowers and lenders. “The average interest rate is 8.9 per cent; that’s 30 per cent cheaper than the banks. Lenders are getting six or seven times more than they would with the bank. It’s a three-year loan and it’s fully amortised so capital and interest is paid every month in 36 equal payments.”
There are four criteria for businesses applying for funding: they must have been trading for at least two years, be tax compliant, be able to supply accounts via a third party and have a turnover of at least €100,000. Most of the 35 loans granted to date have been for expansion, taking on new people or buying machinery.
“The issue with the banks is not that there’s no money for lending,” says O’Mahony. “The money is there; they don’t want to lend it or they have unreasonable terms. Borrowers are disenfranchised. We’re fair, fast and affordable. Everything is transparent.”
Borrowers are also vetted by Linked Finance before they can make a loan request. “We do everything a bank would do. We run credit reports and physically view the last six months of accounts.”
The fact that Linked Finance takes the current health of a business as its primary focus means its assessment of creditworthiness may differ from that of a bank. O’Mahony offers the scenario of a business being refused a bank loan because it encountered financial difficulties in 2010. If the same company had since demonstrated its ability to recover from a difficult period, Linked Finance would view this turnaround as a positive indicator.
O'Mahony, the brains behind the Laughter Lounge comedy club and the 1980s' board game Insider Dealing, came up with the idea for Linked Finance in response to Martin McAleese's 'Your Country, Your Call' campaign. "I thought that small business lending could do with help."
Angel investors
By the time he'd done his research he had missed the deadline for funding but his resulting business plan and reaction from friends convinced him it was a runner. Naturally, financing has come not from the banks but from angel investors and Enterprise Ireland.
He has also secured support from some financial heavy hitters: Kingsley Aikins is chair and both Bobby Kerr and Senator Feargal Quinn are active lenders.
As for the future, O'Mahony would like to see the Government use the site to fund small businesses, pointing out that the UK government pledged to lend £20 million through the UK crowdfunding company Funding Circle. "We have met with Richard Bruton and he was really supportive. We hope the Irish Government might consider using the platform."
One side-effect of crowdfunding is that a large number of individuals suddenly have an active interest in the success of a small business, a fact some enterprising borrowers have used to their advantage.
“There’s one guy who owns a sushi bar and every time he makes a repayment he sends a thank you email to his investors. He announces a new product and gives them a discount and so he has got to meet his lenders. That’s great motivation to keep up to date with payments.”
