Starting a business is often a daunting challenge and for many a time of relative austerity is not best suited for that challenge. I myself began my own food business in the seventies, a time not dissimilar to now in terms of its economic climate.
My tiny business was successful and grew. When it outgrew its premises in Aberaeron in west Wales, I moved it to Tywyn in Gwynedd. There it became Halo Foods and I built it up to be an award-winning company, with an impressive client list including Boots, Nestle and Cadbury. Over some thirty years, my employee numbers grew from five to five hundred.
At one point, its success led Rowntree to buy the business. However, after Rowntree was itself acquired by Nestle, the business was threatened with closure. The special culture of Halo Foods and the loyalty of the employees inspired me to buy it back. After owning the business for a further twelve years, I sold it again in 2004 and was able to become a ‘business angel’, helping others build their own dreams from scratch.
And what became of the company I spent many years building up? It was very disappointing for me that just under a decade after I sold Halo Foods, it closed its door in Tywyn. After the Welsh Government awarded the company a grant to restructure its operations and create a so-called ‘centre of excellence’ in Newport, none of the workforce chose to move with the business. This left many people without jobs, creating a devastating impact on a small community.
Naturally, the wide-scale job losses in Tywyn have hit the local economy. Skills are being wasted and confidence has been shattered. The town, as with so many communities affected by the closure of a major employer, has been left feeling abandoned and isolated, with little direction.
In times like these, often morale is destroyed and the idea of having to start a new job again is a daunting prospect. People who have suffered redundancies need support and guidance, and an insight into what options are available to them.
As an entrepreneur, I see great value in people responding to redundancy by starting a business. So-called ‘necessity entrepreneurship’, where people start businesses because of involuntary job losses and scarcity of vacancies, is certainly on the rise.
In fact, at the height of the recession, 2009 was declared the year of the ‘necessity entrepreneur’. With a record number of small businesses starting in the UK last year, it seems entrepreneurship is becoming a viable alternative option to traditional employment for many people. In Wales, 13% of the population is self-employed.
But is there enough of the right support available to people looking to start up a business in Wales? We know that access to finance is a barrier to many.
This is because the banks, financial institutions and government are essentially risk averse, and the cost of assessing and administering small loans is disproportionately high. Quite simply, high fixed costs have to be recouped from small scale lending.
In his two-part ‘Access to Finance’ review on behalf of the Welsh Government, published in June and November 2013, Professor Dylan Jones-Evans found that around 20,000 businesses, which equates to around 11% of the Welsh business population, have been unable to obtain funding from high street banks.
The review concluded that localised community-based solutions – such as micro financing or mutual investment bodies – may be required to address the major issue of the lack of funding to micro-enterprises in Wales.
It is my belief that micro enterprises in small communities are often refused funding because the decision makers within financial institutions and even high street banks are distant from small, rural towns. As a result, these bodies lack the local knowledge sometimes needed to inform lending decisions.
We know that the requirement for personal guarantees and complicated application procedures can act as a deterrent to many budding entrepreneurs. Even the thought of dealing with a bank or a financial institution can be daunting to many.
So what if there was an alternative to the traditional funding routes? Small scale, straightforward funding models that have accepted the risk, but want to provide ease of access to local communities?
My charity, The Peter Saunders Trust, likes to support projects and ideas that others might find hard to support, perhaps because they break new ground, involve risk or lack popular appeal.
Having recognised the need for a localised microfinance project in Tywyn, we have launched The Tywyn Upstart Scheme in partnership with Purple Shoots Business Lending, a charity focussed on start-up businesses in Wales. Having already established a service in south Wales to help new businesses, Purple Shoots was invited to bring its service to people in the Tywyn area, to build their confidence and help turn their dreams into reality.
As we have recognised, a micro-finance scheme needs to be reassuring as possible, and nurture talent in people, rather than frighten them away. Programmes like ‘Dragon’s Den’ create the illusion that business is all about greed and aggression, when in reality, it is often about achievement. We hope The Tywyn Upstart Scheme will encourage people to develop ideas that allow them to achieve and to create an income stream from their endeavours. These could involve anything from opening a fishmonger to becoming a computer coder looking to build the next Microsoft.
The application process will be simple, especially when compared to those used by bodies such as high street banks and government agencies, and applicants will be guided every step of the way.
Qualifying businesses will be offered microloans of £500 to £3000 for a period of one to two years and the interest rate will be charged at 9.5% per annum (18.5 % APR), a competitive rate in relation to similarly socially motivated business loans which, for the Bank on Dave, for instance, range between 8.9 and 14.9% (17.4 and 29% APR). Crucially, there are no arrangement fees or monitoring charges as these are absorbed into the interest rate.
Importantly, the repayment plan is carefully explained to each borrower as part of the process. Purple Shoots have found that people often prefer talking about familiar terms – “real money” – rather than interest rates.
Whilst large lenders may believe ours to be a risky model, we recognise that not everybody with a great business idea has the security needed for a bank or government agency to lend. In my experience, sustainable businesses grow from talent and dedication and sometimes people just need a helping hand.
There is no doubt there are risks in our approach, but I’m no stranger to risk and the pilot scheme neatly contains it. The pilot model also ensures that any difficulties or problems are addressed before consideration is given to it becoming a wider scheme.
Interestingly, similar approaches have proven to be successful in communities abroad. Karen Davies, director of Purple Shoots Lending, recently spent some time with a communities in India that have benefited from microfinance in self-reliant groups (SRGs). SRGs are people from a poverty stricken community that have come together to provide mutual support and solidarity in order to improve their economic situation. When starting the initiative, the organisations supporting the communities recognised the need to remove boundaries and instead, nurture confidence. Originally a pilot project the SRG scheme has become an attractive proposition to Indian banks, which have had payback rates of 100%. It is now a powerful movement for social and economic empowerment and has built business leaders in local communities. By taking a risk and breaking boundaries, both the banks and communities have benefitted.
Although the economic context is different, we have many communities in Wales that continue to suffer from long-term unemployment and low confidence. Whilst we don’t want to compete with existing schemes, I believe that the Tywyn Upstart Scheme offers something different and something complementary to those.
When setting up a micro-finance service, it’s important to ensure a partnership will add sustainable benefit to the community.
Our partnership works particularly well as Karen is a former investment manager with Finance Wales, and has invested significant time working with small communities across Wales, offering her expertise. I have lived in Tywyn for over thirty years, and, along with my fellow Trustees, have deep knowledge of the area and community. In addition, we hope Karen’s experience of working with self-reliant groups will help to establish sustainable business models based on best practice.
In its Policy Statement on Skills, January 2014, The Welsh Government acknowledged that microbusinesses often struggle due to limited skill sets within a small area. The benefit of self-reliant groups, is that they allow people to draw on one another’s talents and establish a business that otherwise wouldn’t have been possible.
Although the Tywyn Upstart Scheme is a pilot, short-term project (funding will stop in December 2014), we are hopeful the scheme will give a boost to entrepreneurial activity in the area and inject confidence and morale back into the community. If it is successful, it may provide a blue print for other communities.
While by no means a panacea for all of our economic problems, boosting entrepreneurial activity in our hardest hit areas can make a valuable contribution to improving the wider economic health of our nation. And perhaps more importantly, it can help change lives, and offer hope to the people and communities that need it most.