Feb 21 2013 By Mike Parkinson
Not all businesses can go to the bank if they want a loan, but many do not realise that they have an alternative lending source on the doorstep: their customers.
If you offer certain kinds of goods and services, particularly leisure and hospitality, you are well placed to raise money by issuing a corporate bond. They can be considered by any business with a wide, loyal customer base.
Corporate bonds are an excellent alternative way for restaurants, bar owners and club operators in particular to raise money and avoid banks.
What is surprising is just how few businesses that are well placed to issue them are so far taking up the opportunity, despite the slow traditional lending market.
A corporate bond is simply a fixed term loan from a customer to the business, but with a twist: the customer receives goods or services rather than money interest.
In other words, the 'interest' is payable in what the business trades in, which means that the interest rate is measured by the worth of what is being given. This probably exceeds what a customer could get from a bank or building society in the current climate.
The benefits are not just one way, because giving a free meal or heavily discounted gym membership, for example, to the investor that would otherwise cost them £40 to buy may only cost half that to produce.
Bonds are ideal for businesses turning over between £5 million and £25m a year, but unwilling to let private equity muscle in and whose banks either cannot or will not lend to them.
Although the principle is straightforward, the practicalities do need preparing for. Bonds are not easy money, just sometimes easier.
There is also no guarantee that you will reach your target.
There are also important questions to answer before setting off down the path of asking your customers for support, a checklist for suitability.
Here are the main ones: does your brand inspire sufficient loyalty for customers to want to do anything other than buy its products? If you borrow £1m from your customers, will you be in a position to repay it in three or five years, the typical length of a bond?
Do you have enough customers with £1,000 to £3,000 readily at their disposal which they would be happy to lend rather than put into a deposit account or ISA? What can you give them that will excite their interest?
There is little point in trying to sell a bond to strangers, but every point in capitalising on the people who know you well and value what you do already.
It really is important not to underestimate the work involved in setting up a bond, and actually illegal to do it without taking professional advice from someone authorised by the Financial Services Authority.
Bonds also rely on your energy and originality to sell to investors, so it is important not to be shy about taking every opportunity to make the opportunity stand out, including publicising it through local media, producing flyers or even publishing a newsletter spelling out the offering.
But caution aside, the economic and cultural climate could not be better for bonds. There is disillusion with banking, and uncertainty even with traditional investments.
A bond can be fun for the holder, not least because people like to feel part of their favourite restaurants, gyms or shops, particularly in an age when businesses are learning the value of interacting closely with their customers.
Bonds perform another valuable function, too: they lock in your core customers. If they are using their 'interest' to buy your product, there is a good chance that they will buy more than the interest they are due.
They will also probably want to show off their investment to friends, who in turn will also become customers.
In other words, bonds can be very good public relations as well as good fund raising sense.
Mike Parkinson is a partner in London accountancy firm Barnes Roffe in Cowley Mill Road, Uxbridge.