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2 Distributed in Publisher Rebecca Trenner Editor Joe McGrath Design The Surgery Managing Editor Peter Archer Head of Editorial Dan Matthews PRODUCTION MANAGER Natalia Rosek cover illustration: The Surgery Contributors ALEX CARDNO Deputy editor of Credit Today, he worked at the Financial Times and has contributed to Insolvency Today magazine. ROB LANGSTON News editor of HFM Week, he was associate editor of Fund Web, the specialist news and features service for investment advisers. MARCEL LE GOUAIS Editor of Credit Today magazine, he was editor of Insolvency Today and has written for publications including Mortgage Strategy. JOE McGRATH Editor of Index Trader and Insolvency Today, he was previously editor of What Investment magazine and deputy editor of Money Management. ELIZABETH PFEUTI European editor of Asset International s Chief Investment Officer magazine, she was formerly at Dow Jones, Financial News and Global Pensions. KEVIN ROSE Co-founder and director of publishing group Best Advice, he has written for the Financial Times, The Independent and Money Management. RACHAEL SINGH Journalist for Accountancy Age magazine, she has written for Financial Director and Although this publication is funded through advertising and sponsorship, all editorial is without bias and sponsored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0) or Raconteur Media is a leading European publisher of special interest content and research. It covers a wide range of topics, including business, finance, sustainability, lifestyle and the arts. Its special reports are exclusively published within The Times, The Sunday Times and The Week. The information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced without the prior consent of the Publisher. Raconteur Media BUSINESS FACES UK CREDIT QUANDARY With so many small businesses finding credit hard to come by from traditional sources, Joe McGrath investigates the alternative commercial finance on offer OVERVIEW ȖȖBritish businesses seeking growth have faced something of a quandary in recent months. On one hand, business-owners are mindful of the continuing tricky trading environment, which is making many hesitant to embrace the borrowing that is on offer. On the other hand, businesses are also aware that failing to take opportunities at a time when the trading cycle may be turning could lead to a loss of market share, forward orders or first-move advantages. The fear of borrowing when the UK economy could yet enter a tripledip recession may be one reason that the banks claim businesses prefer to build their balance sheets instead of applying for further lines of credit. However, the banks are being encouraged to lend to small and medium-sized enterprises (SMEs), and evidence from trade associations and lobbying groups suggests that the high-street lenders are being cautious about the business sectors to which they lend. According to latest Bank of England figures, banks and building societies drew 13.8 billion from the state-backed Funding for Lending cheap credit scheme in its first five months of operation, but actually cut loans to households and businesses by almost 2 billion. For those businesses that are looking for credit to assist their corporate growth, the reduction in traditional lending in certain sectors has raised the profile of a whole new range of finance options. Crowdfunding, equity finance, asset-based lending and other short-term finance arrangements are all viable alternatives and SMEs are becoming increasingly aware of all that is on offer. That said, the coalition government is still leaning heavily on the banks. Business Minister Michael Fallon has led the charge, calling on banks to do more through the government s Enterprise Finance Guarantee (EFG) scheme. In a letter to the banks, Mr Fallon asked them to redouble their efforts to provide finance to viable businesses through the EFG scheme, but critics are taking his The reduction in traditional lending in certain sectors has raised the profile of a whole new range of finance options demands with a pinch of salt. After all, Business Secretary Vince Cable has already made similar calls. At the start of 2013, Dr Cable attacked the banks, labelling them rather pathetic for claiming they are unable to find creditworthy business customers. Instead, the Business Secretary claimed the banks own commercial banking units had been stripped of the necessary skills with which to make accurate assessments. What followed was a request for the banks to provide micro-data on commercial lending at branch and even postcode level. So far this has not materialised. James Benamor, founder and chief executive of Amigo Loans, is one of the entrepreneurs that has set up to provide an alternative lending option. He says many of his business customers were simply declined by the mainstream lenders. Micro-businesses [with less than ten employees] represent a staggering 96 per cent of small businesses in the UK, but are often those that struggle the most to get funding and are forced to look into alternative options, says Mr Benamor. From research we have carried out, we know that a quarter of micro-businesses have been declined a bank loan. For many of these businesses, the real issue is building a credit history to even be considered for a loan. Sink or swim? Finance is the oxygen of business 25% of micro-businesses have been refused a bank loan Source: Amigo Loans 39 banks and building societies signed up to the Funding for Lending scheme Source: Bank of England 2.36bn reduction in lending by RBS between August and December 2012 Source: Bank of England Share and discuss online 03

3 Funding Britain's Supply Growth Chain INITIATIVES AIMED AT ECONOMIC GROWTH As the coalition government is coming under increasing pressure to prioritise growth over austerity, Rachael Singh considers what politicians are doing to prevent the much feared triple-dip recession GOVERNMENT POLICY ȖȖWith the FTSE 100 ascending to the highest level witnessed for five years last month, you could be forgiven for assuming that Britain s economic problems are a thing of the past. However, despite the Footsie seeing its best start to the year since 1989, speculation remains that a triple-dip recession could still hit the country hard in With that in mind, companies and government are seeking protection of the country s most valued asset business growth. One of the most popular initiatives the government has spearheaded is the long-term plan to reduce corporation tax to 20 per cent in line with VAT payments to increase competitiveness and stimulate spending across the economy. Although no date for this rate has been set, the government has given the UK one of the lowest company tax rates in the world at 24 per cent, due to drop to 23 per cent in the next fiscal year and 21 per cent in April This is highly competitive when you compare it with the US (40 per cent), and emerging economies India (40 per cent) and China (25 per cent). Review the venture capital market Pages 08 & 09 Michael Fallon, Minister for Business and Enterprise, has been trumpeting what the government has done to bolster British industry, noting that last year 450,000 new businesses were started higher than any year on record. However, critics say many of these start-up entrepreneurs have done so out of necessity because of redundancy and/or lack of work elsewhere. In reaction to complaints from the business community that banks have reduced lending to near non-existence, the government unveiled the funding for lending scheme. Since August 2012, banks could borrow from the Bank of England to lend to businesses at a lower rate, with 4.4 billion borrowed in the scheme s first two months. Other initiatives brought in since the credit crunch include the seed The government has given the UK one of the lowest company tax rates in the world at 24 per cent enterprise investment scheme designed to offer taxable benefits to investors. Introduced in April 2011, investors pay less tax on any capital gains they make from the company in that fiscal year, with total relief at 78 per cent which includes 50 per cent income tax relief and 28 per cent avoided on the capital gain, although there is a 100,000 cap on returns. A subsidised mentoring scheme, set up by government and delivered by the private sector, the Growth Accelerator, has also been given 200 million. Advice and mentoring is available to companies with turnover of less than 40 million, across the country, with accountancy group Grant Thornton the lead partner taking care of London. The Growth Accelerator, which started in March 2012, is forecast to create 2.2 billion of economic growth and 55,000 new jobs in five years. The number of companies utilising it jumped to 3,200 by Are City markets ahead of the UK business economy? mid-february, up from 2,000 in mid-december. Sector-specific schemes have also been introduced. Infrastructure, for example, has been given a boost with the introduction of the UK Guarantee Scheme where the government underwrites the risk of the private sector with up to 40 billion available. So far Crossrail and extension to the Northern Line have used this scheme. Although large projects are needed, we also need to see smaller projects get off the ground, says Katja Hall, CBI chief policy director. Something the CBI would like to see more is housing construction jobs, jobs in the local economy. Good investment would lead to growth in long-term investment in areas, such as road projects; shortterm filling in the pot-holes is one example, but it will also create jobs. One of the biggest problems with government encouraging growth has been short-termism, however. The British Chambers of Commerce (BCC) believes short-termism is leaving many businesses feeling the government is not doing enough to support growth. Director of policy at the BCC, Adam Marshall, explains: Tax breaks have a lifecycle of just a handful of years, National Insurance and stamp duty holidays have all come and gone. Also, companies may not understand all that is available to them which can leave them disgruntled. The government needs to get on board at protecting growth and inspire a relentless imple- UK annual GDP growth rate Source: World Bank 1.0% 4.0% 1.8% 0.8% mentation of strategies across all departments, and become better at raising awareness of the initiatives which are already available. There is a raft of tax reliefs and mentoring opportunities available to businesses, but what is needed for a stable economy is for those incentives to be better publicised warns PwC partner and head of tax Kevin Nicholson. The government needs to raise awareness and make sure initiatives announced are fully initiated, he says. The UK s largest accountancy firm conducted its two-year review of small business and found many firms are not aware of the reliefs available. Although government sentiment is to introduce reliefs to change corporate behaviour, the PwC report found that few took advantage of them because they were not aware they existed. The fundamental problem with government is that they are not communicating the plethora of initiatives, which is why we need simplification to see what s out there and take advantage, said the Federation of Small Businesses national policy chairman Mike Cherry. Although there are many schemes available more needs to be done, he warns. A freeze on fuel duty rises is top of his list of ways to protect growth. Another huge issue for the country is the struggling retail sector, which has recently seen major collapses, such as Jessops and HMV, at the start of the year. Pivotal to keeping that sector afloat is tackling the tax on commercial property, business rates. It was announced at the end of last year that business rates would increase 2.6 per cent in April. There is no correlation between high-street sales and government-imposed cost rises in five years, says British Retail consortium taxation policy adviser Dan Morgan. We need business rates to be more market-sensitive and that cost to be reduced. More needs to be done to help businesses struggling with business rates. 49% Source: Institute of Directors $ 77bn Source: PwC 4 Source: Federation of Small Businesses (FSB) 3.4% Source: FSB of directors believe UK GDP will grow in 2013 compared with 2012 total tax contributions in 2012 from Britain s largest companies, representing 14.2% of total government coffers largest barriers to economic growth domestic economy, consumer demand, fuel costs and access to finance of small companies expect revenues to fall in the first quarter of 2013 REASONS TO BE CHEERFUL IN REPRISE COMMERCIAL MORTGAGES With more mortgage options coming on to the market, businesses remortgaging may have a reason to be optimistic, as Joe McGrath discovers ȖȖIn the days before the global credit crunch, the multitude of commercial mortgage options was staggering. Small and medium-sized enterprises (SMEs) attempting to identify the most appropriate financing options were spoilt for choice, not just with lenders, but products too with a variety of different rates on similar lowinterest terms. However, that all changed when lenders packed up and left the market as their ability to package and sell on (securitise) these loans ceased. A handful of high-street lenders continued to offer loans, which they kept on their own books, but there was a lot of hoop-jumping required as lenders were now scared to lend as the loan was going to be made from their own deposits. For SMEs, there is now thankfully better news. In early 2011, Aldermore Commercial and Whiteaway Laidlaw Bank (now Shawbrook Bank) roared into the commercial mortgage market. And, as the options returned, so did the hunger from small-business owners. These two were joined in 2012 by Interbay Commercial who returned with brand new owners and bag of cash, ready to lend. What followed was a slow trickle of new entrants, including Metro Bank, which is now beginning to cause a stir. The result of these new market entrants is that SMEs are returning to intermediaries to help them shop around for the best products. The commercial finance broker market had contracted considerably between 2007 and 2009, but it is now growing once more. Tony Sutton is a commercial finance broker and managing director of Imagine Loans. The leisure industry continues to suffer from a lack of competition in the market, mainly nightclubs, gymnasiums, casinos, sports clubs and holiday parks, he says. Development finance can also be difficult with so many lenders concentrating on South-East England, and rates and terms in other areas often being set at 18 per cent per annum, with a percentage of the gross development value also taken. However, Mr Sutton says there are some super deals out there for SMEs operating in more mainstream sectors. But the difficulty for SMEs is that lenders, both high-street and specialist, remain picky when agreeing customer loans. Yet, it does appear that the situation is improving and more lenders are predicting to enter the market later in There are some super deals out there for mainstream SMEs COMMERCIAL FEATURE Learning a positive lesson about alternative funding Jan van der Velde, founder of Fit for Kids As businesses throughout the country battle for finance, one entrepreneur has used alternative funding to expand his company into a UK flagship for growth. In 1993 Jan van der Velde spotted a gap in the children s indoor play area market. He decided to set up his own business, Kit for Kids. Our first real customer was Stoke Mandeville Hospital, then we signed ToysRUs. The rest is history, says Jan. Business grew, with turnover increasing from 100,000 in the first year to 1 million by year four, and so did the intellectual property (IP) value held within the company. Despite this, the business remained chronically underfunded and recession hit just as it needed to improve debt-to-equity ratios. The banks weren t lending, so Jan turned to Clifton Asset Management, the organisation behind They gave me a clear demonstration of pension-led funding, the potential for pension growth and the ability to re-use the fund for additional finance at a later stage if required, he says. Jan was initially nervous about using his pension to fund his business. I had just reached 45 and was beginning to think about my own mortality. But the pension-led funding structure was very attractive, particularly because we could use the IP residing in the Kit for Kids name, which by now had a 15-year reputation, as an asset that was considered quasi-capital, even by the banks. After an independent IP valuation, a company pension scheme was established, based on 165,000 of Jan and his co-directors accrued pension assets, and using 125,000 to purchase the IP on a sale-and-lease-back basis. There were no personal guarantees involved, which is great news, Jan adds. It s your own money you re risking. I had to have confidence in my own business to invest in it, but I certainly wasn t risking my house. Having partially repaid the lease, the directors went back to the pension fund for a further 60,000. It was great, because we didn t have to go back to the bank to ask for more, we could just reborrow some of what we d put back into the pension fund, he says. Despite the re-finance, in four years the pension scheme has grown from 165,000 to 210,000, along with a 28 per cent increase in IP value. That s a pretty impressive return by anyone s standards, says Jan. Now, Kit for Kids has been awarded a place on the Government s Growth Accelerator Scheme, for the UK s fastest-growing private companies. The company has a new 250,000-Middle East contract, a US office and eyes on the Asian market. In many ways, I couldn t have done this without the pension-led funding we received between 2009 and It was the ideal solution at a time when we most needed help to give the business strength, he says. The most important thing I have learnt and this is a message for all finance directors is to consider every single scheme available and approach them with an open mind. The reality is that we need every financial weapon available in this day and age to keep our businesses growing. 1m turnover after four years 28% increase in IP value over four years I couldn t have done this without pensionled funding 04 05 5

4 FLOAT, DRIFT OR POWER INTO RICH NEW WATERS With share prices bucking the trend, a stock-market launch could bring in cash for growth 1,068 to 828 in the five years to the end of December, but this decline may be about to turn around. Simon Stilwell, chief executive of Liberum Capital, says that, for the first time in five years, there Recent history bodes well, however. Figures from Deloitte showed the share price of ten firms that listed on the main UK market between rose by 19.2 per cent to the end of Share and discuss online at Private businesses have resisted the temptation to float on the stock market in recent years, but they could be missing a trick. Elizabeth Pfeuti reports PREPARING TO GO PUBLIC ȖȖNapoleon s claim that Britain is a nation of shopkeepers was more an accurate description than a disparaging insult. The power and economic backbone of the country lie with its small and mediumsized enterprises which keep citizens working and finances strong. Businesses with an annual turnover of 10 million to 500 million account for just 1 per cent of UK companies, but they contribute 22 per cent of economic revenue and provide 16 per cent of the country s jobs, according to the Confederation of British Industry (CBI). It is through these companies that true growth spreads throughout the country and there has been little growth of late. The solution lies with how these businesses can afford to grow. Bank lending has fallen each year since the onset of the financial crisis. Project Merlin, with which the government wanted to restart loans to the small and mediumsized sector, fizzled out with a net contraction in lending over GLOBAL IPOs: NUMBER OF DEALS AND CAPITAL RAISED Capital raised US$ Number of deals Source: Ernst & Young 339 $9 385 $ $29 $ Bank of England figures show even less capital was lent to UK businesses of all sizes during Along with the reluctance of banks to lend, some small and medium-sized businesses preferred to use their own cash reserves to fuel future growth, while larger firms tapped capital markets. But, as personal cash piles are not a sustainable method for growth, should smaller firms take the lead from the giants of industry and is now the right time? Since mid-november, the FTSE has been on an upward trajectory, and confidence in European and US markets has returned, despite some mediocre payroll and manufacturing data. Unlike the erratic movements over the past two years, markets are on a relatively even keel, yet so far very few businesses have sought to take advantage. By the second week of February, there had 457 been just one initial public offering (IPO) on the UK market, raising 100 million and marking an 81 per cent decrease in volume year-on-year, according to data from Thomson Reuters. As 2012 was not a vintage year for equity capital markets, this year s figures are even less impressive. Overall, equity capital markets have seen their slowest start to the year since There is a general reluctance among smaller businesses in the UK to raise finance through equity, says Hayley Conboy, principal policy adviser at the CBI. This reluctance means 88 per cent of them have never sought equity finance. Some business owners are fearful they may lose control of their business if they sell stakes on the open market. If they finance through a bank, their personal finances may be on the line, but at least they have control, she says. They may also have to release information, 452 includ- 327 $ $39 $38 $ $39 ing margins and produce development, to the open market, which is something they may not have done before and may feel uncomfortable doing, says Ms Conboy. The challenge is to combat the bias against equities by many of the smaller firms. The CBI has launched a network of M Clubs around the country, where businesses considering new ways of accessing capital can speak to those who have explored different avenues, and learn the potential advantages and disadvantages. If they decide to list, the London Stock Exchange (LSE) has created a new structure to better suit their entry to the UK market. 473 $ $ $ $ $95 The High Growth Segment is an entry point to the main market, says Marcus Stuttard, head of UK markets at the LSE. It aims to support companies that are bigger than the usual AIM-quoted firm. They usually have had venture capital backing and have grown quickly; they therefore want to enter the main market. However, the regulations to do so are too restrictive for some. For example, the minimum 25 per cent free float necessary on the premium section of the main market is not suitable for some new companies whose founders do not want to sell down at this early stage of development, says Mr Stuttard. 442 $ $ $ $39 The new structure only requires 10 per cent. The initiative could solve not just the capital worries of businesses, but also the dearth of stocks available to investors in smaller companies. As personal cash piles are not a sustainable method for growth, should smaller firms take the lead from the giants of industry and go public? The decline is shown in figures from Liberum Capital, a mid-size investment bank, that worked on the largest IPO in UK history Glencore. Between 2000 and the end of 2012, the number of listed smallcap companies, with relatively small market capitalisation, fell from 438 to 135. The number of AIM-listed stocks also fell from 164 $ $10 $ $67 is confidence to list at the smaller end of the market. So many small-caps have delisted, there has been a lack of companies in which to invest, says Mr Stilwell. Fund managers have seen good inflows to equity funds the much-mooted Great Rotation seems likely to happen in some form and at least some of this will flow into small and mid-caps. The pipeline is not ready yet but it is filling, he says. Listing a business is a massive distraction for any company, so they have to be sure it is what they want to do there are other options available. Companies imagining markets are back in the golden age of the IPO may have a surprise though. Many equity fund managers have experienced good returns over the past 18 months with very little new issuance, so a convincing story is needed for them to hit buy in Robert Churchlow, head of equities at Legal & General Investment Management, says: More companies listing bring more investment opportunities, but new companies have to understand that fund managers know all the stocks they have in their portfolio very well and they are in there for a reason. To sell them in order to buy something else, $132 a fund manager would 484 have to be convinced it was a very good business and being sold at a good price. 293 $ $47 $53 January this year. The rest of the market rose just 8.8 per cent. There are still pockets of growth in the UK, so if you have the right business model and the company directors understand the changes in their sector meaning even if there is limited growth they may still take market share they should do well, says Mr Churchlow. Once the 2008 numbers have been shifted out of the five-year figures, we will see that small-caps have been some of the best-performing indices, says Liberum s Mr Stilwell. Jane Reoch, investment director at the 10-million Cass Entrepreneurship Fund at City University, praises the LSE s move to aid the sector, saying it could help keep valuable, high-growth companies in the UK rather than see them list elsewhere. Accessing capital markets is a question of timing for each individual business, she says. New investors will be looking for both rapid growth and a robust business model. They will also need genuine liquidity to have confidence in a smaller market. Mr Stuttard at the LSE concludes: The UK has a public market ecosystem for small and medium-sized businesses that is unrivalled. There are many stakeholder groups that want to protect and support that. 296 $ $ $29 $29 $2 $1 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q 07

5 25,000 20,000 15,000 10,000 5,000 0 VENTURING INTO CAPITAL MARKET FOR UK GROWTH VENTURE CAPITAL INVESTMENT In a climate where smaller businesses are overcoming a lack of mainstream finance, Joe McGrath assesses the venture capital market ȖȖWith bank lending volumes slashed since the global economic crisis, businesses are sourcing other means of funding growth. For small and medium-sized enterprises (SMEs), availability of affordable finance is often the difference between success and failure. A recent European Union report found that around 50 per cent of new businesses fail during their first five years due to a lack of an appropriate ecosystem to help them to grow. So with traditional avenues often exhausted, businesses are increasingly looking to venture capital (VC) investment. Traditionally overlooked by many, VC investment is a source which is witnessing something of a renaissance with government initiatives raising the profile of the VC investor. A VC investment allows a business to access cash from a highnet-worth individual or a VC fund which pools investors cash. In return for investing in a business, the VC investor will typically be seeking a high percentage return from the company s profits and, in many instances, will look to play an active part in the management of the company. And business owners may be surprised to learn of some of the brands which have benefitted from growth as a direct result of this form of investment. Among the success stories is internet calls and conferencing business Skype, and software company Autonomy which was recently acquired by HP. According to statistics released in February by the British Venture Capital Association (BVCA), UKmanaged VC funds currently back around 3,800 companies and are responsible for employing more than 500,000 people across the country. What s more, 90 per cent of the businesses backed in 2011 were SMEs and funds from this type of investment have channelled 40 billion into British businesses over the past five years. Paul Latham, managing director of Octopus Investments, says the support offered by the venture capital industry to UK smaller companies should not be underestimated. He says: With access to funding still a challenge for most small businesses, venture capital trusts [VCTs] can continue to play a vital role in helping UK businesses grow to become market leaders and world beaters. A recent survey we conducted demonstrated our investors like to feel like they re playing a role in the recovery of the UK economy, thanks in no small part to their VCT investment. For those looking at VC funds as a potential avenue to raise finance, there is good news. There are numerous VC funds in the UK looking to invest in different types of businesses in a wide variety of sectors. The bad news, however, is that competition for financing is tough, albeit not impossible. The recent BVCA Growth Initiative report found that proprietors may find VC investment bettersuited to where their companies are in the growth cycle. The report notes that bank lending in whatever economic environment, but certainly the current one can be limited because businesses may be pre-profit or even pre-revenue and unlikely to suit the risk appetite of a bank s regional loan manager. In these cases, the risk profiling tools employed by banks and commercial finance providers can be quite rigid, unlike the private equity and VC market. Private equity and venture capital is a leading provider of patient capital and half of all Europe s activity comes from the UK. So if a business is genuinely innovative, VC investment may offer more options that your local high street bank. Companies such as Albion Ventures, Maven and Downing all have long track records in VCT investment and also have decent figures for the returns they have secured for their investors. There are also other, more specialist investors, such as EC1 Capital, which invites applications from those operating in the tech start-up space. There are numerous VC funds in the UK looking to invest in different types of businesses in a wide variety of sectors Andrew Ferguson, a partner at Maven, explains why competition is so fierce in the VC market at the moment. The UK is full of good quality SMEs, with strong management teams that warrant investment and support, he says. We focus on backing those teams which run market-leading or market-influencing companies and have a clear strategy for continued good performance. Mr Ferguson says that Maven prefers to work on a local level in order to get involved with the businesses in which they invest. Our regional presence allows us to develop strong relationships with both company management teams and their advisers, and then to provide the ongoing support, both financial and strategic, that companies need in order to deliver their business goals, he says. Like any type of investor, VC investors seek areas which they believe are ripe to flourish over the coming years. This means that SMEs in certain areas may find it easier to secure backing than others. Chris Allner, a partner at Downing, says there are certain areas which are more appealing in the current climate. We see particular opportunities for investment in the leisure and education sectors, and have undertaken a number of buy-and-build strategies in health clubs, schools and children's play areas, he says. Share and discuss online at With the recent focus in the media on childcare provision, we are also investors in children s nurseries and see this as an area of future investment, working alongside established reputable operators. VC Trusts continue to be a prime source of equity funding for SME companies, which the government recognises offer growth prospects for the economy and employment opportunities to mitigate the impact of the reducing public sector. In January, EU policymakers recognised that small and growing businesses are hungry for more VC investment and laid down the first draft of the Entrepreneurship Action Plan (EAP). This is a Europe-wide project which aims to improve SMEs access to finance. Specifically, the aim is to develop financing programmes with the VC industry to establish a credible new finance mechanism. It is hoped that SMEs will then be able to use the capital markets more easily with a new trading platform exclusively for SME shares and bonds. However, the plan is still in its early stages and may take some time to come to fruition as EU member governments are now looking at areas of their own financial legislation which need to be adjusted for this to happen. That said, the initiative has been earmarked as a priority. 08 09

6 COMMERCIAL Funding FEATURE Britain's Growth A new alternative to standard loans FACTORING ALTERNATIVES IN WAKE OF CREDIT CRUNCH Rightly or wrongly, major high street banks have been criticised for their perceived reluctance to help businesses with easy loans. David Abbott, managing director of Boost Capital, believes he has a new alternative to bank lending that could be just the thing for ambitious SMEs Business owners in Britain, especially those in need of funding to grow, will be aware that getting a standard loan from your local bank manager is a long process that has no guarantee of success, even if you prove your business is viable and hungry for growth. They are also likely to be aware of popular alternatives to bank loans asset finance, equity finance and invoice discounting are examples among many. But these are not suited to everyone, and Boost Capital has a suite of financial instruments aimed squarely at solid, established businesses with proven sales and ambitions for growth. We take a holistic approach to clients needs and work with our customers to find a solution that is tailored to their specific circumstances. A great example of Boost Capital s drive to provide new and innovative ways to fund businesses is its merchant cash advance, a product established in the US for 15 years, but still brand new in the UK. This method doesn t rely on complex due diligence or a detailed business plan and funds can be approved in 24 hours rather than weeks or months. If your business has been open for at least nine months and processes 3,000 or more every month in card transactions, then it s likely we can help. When you partner with us, we ll review your monthly sales volume and, depending on how much you need to borrow, purchase a proportion of your future card transactions. When it is time to repay the advance, we take a small, fixed percentage of your daily transactions until the debt is settled. How you spend the the capital is up to you and repayments can be tailored to suit your cash-flow model. And because repayments are set up automatically, there are no deadlines, no late charges, no APR and, best of all, no need to write a big cheque every month. It s really just an agreement to buy and sell. To take a simple example: a pub owner might want to do some refurbishing work; we buy 15 per cent of his future receipts over the following six months and he pays back the money advanced by Boost Capital during that time. The idea isn t for everyone. For a start you need to process a fair amount of card-based sales every month, so customer-facing businesses, such as restaurants, bars and shops, are more likely to benefit than some others. But card-based cash advances are a neat solution that fits easily into many business plans. We re actively on the look-out for clever, creative small and medium-sized enterprises (SMEs) that can use our model of funding to build their businesses faster and more sustainably than they would with a bank loan. We re looking for the business who currently pays a 5 or 6 per cent charge for a 30 or 60-day credit agreement with a supplier. After our advance, that SME owner could pay cash on delivery and make the charge go away as well as secure an additional discount maybe 10 per cent for paying immediately every time he or she purchases a month s stock. If you can figure out that simple maths, it quickly becomes a nobrainer, and a growing number of business owners are waking up to the idea. It becomes less about banks being reluctant to lend and more about strategic decisions that can grow your business cost-effectively. The card sales-based lending model also works because it s short-term; in other words you don t have the problem of borrowing money for years on end, buying the thing you need but continue paying back for a long time after. Meanwhile, because we make a careful assessment of our clients debit and credit card receipts, we don t need assets upon which to base the loan. All the security that we ask for is a strong contract and an agreement from the client they will do their absolute best to pay back the advance. It s a relationship that works so well for both parties that, to date, all of my clients have gone on to re-book with us after their first arrangement expired. We ve been operating in the UK since July 2012, so it s a pretty impressive achievement. That said, this is a tried-and-tested formula and not some lightning bolt out of the blue. In the United States this form of funding has been established for over fifteen years and in 2012, hundreds of millions of dollars changed hands in this form of transaction annually. Our parent company, Business Financial Services, is based in the US and started advancing money in 2002, even before the global credit squeeze caused major banks to tighten up their risk profiles. 1:5 Source: Financial Times More than Among those seeking finance, working capital was more likely to be required by 58% 48% Micro-businesses Small businesses Medium-sized businesses Working capital was most likely to be needed in 67% Construction services 66% of those seeking finance in Business services 62% London and the South East needed working capital Of those unable to gain finance in 2010 (5% of all small businesses) 47% Access to capital in 5 days Boost Capital provides financing solutions you can rely on to help grow your business of SMEs found access to finance is a major barrier to growth 18% The point was that even in the good times, financial institutions did not look upon restaurants, bars and small chains of shops favourably when it came to credit arrangements, particularly if these businesses had few tangible assets or impaired credit. Boost Capital launched in the UK because businesses here are, if anything, struggling even more to secure funding than their counterparts in the US. America has bounced back more quickly from the downturn and so this kind of funding is likely to be even more sought-after here than it is over there. 8% 9% 6% 47% experienced serious financial difficulties put plans on hold deferred plans but eventually went ahead with them experienced no impact were unsure of the consequences Source: Department for Business, Innovation & Skills For this reason we are committed, both financially and in terms of our vision, to be the leaders in providing financial solutions to ambitious enterprises in the UK as well as the US. We want to be the first port of call for businesses in hard-tofinance industries that have funding needs and a strong business underpinning a solid story of growth. The biggest obstacle to growth is obtaining the capital to make your plans a reality - that s where we can help Business credit has contracted, but asset based lending is bucking the trend, as Alex Cardno reports ASSET BASED LENDING ȖȖThe brutal economic climate may have constricted business credit, but asset based lending is one area which continues to grow. The industry suffered a major downturn in 2009 and members of the Asset Based Finance Association (ABFA) saw the turnover of their clients fall to 190 billion, down 9 per cent on the 207 billion recorded in However, the sector has rebounded strongly, with client turnover hitting 211 billion in 2010 and 240 billion the following year. Kate Sharp, chief executive of ABFA, says one of the reasons for this rebound is the rising demand for the product from larger firms. In the good times, when banks are freer with their funds, you see a lot of smaller firms going towards invoice finance. In the bad times, more large firms use it, she says. According to Andrew Charnley, global head of open account product at Barclays, changing patterns in trade have also been good for the industry. The opening up of new trade with growing economies has led to an increase in trade done on an open account basis, he says. Chief financial officers want greater control and flexibility over cash receipts, borrowing and liquidity management, which has led to a greater attraction for asset based finance facilities. It is arguably a product suited to recession, because in uncertain economic times it follows that lenders want greater security for the money they advance. Lenders can often only take a floating charge on standard loans or overdrafts, whereas asset based lenders can obtain a fixed charge on a business, giving them control of the sales ledger and making them the first creditor in line if things go wrong. This discrepancy has encouraged lenders towards offering this product instead of overdrafts. A move to asset based lending could help business growth It is arguably a product suited to recession, because in uncertain economic times it follows that lenders want greater security for the money they advance It follows that all the UK s major banks now have large asset based lending divisions, which compete with dozens of well-capitalised independent firms. Supporters of asset based lending say it is a flexible and convenient financing method, which allows firms to borrow in line with their growth at a low cost. For firms of any size the basic principle of asset based lending is that a business uses an asset, typically an invoice or its sales ledger, as security for an upfront loan. With factoring, which is designed for smaller firms, invoices are handed to a factoring firm, which will typically lend up to 90 per cent of the invoice value upfront, then pursue the balance from the debtor. Invoice discounting works on the same principle for larger firms but, crucially, it allows the borrower to retain control of its sales ledger. There are issues to consider with this type of finance, particularly for smaller firms, and the product does have caveats which can create a fine line between a business succeeding or going bust. Factoring involves authorising a third-party firm to pursue a client for debts, so there is a risk to the client relationship in outsourcing credit control in this way. There is also the issue of pricing and fees. Alongside the fees charged for the service, there is the issue of termination fees, which kick in if a business ends the contract prematurely, either by switching provider without notice or going into insolvency. From "rags" to riches in Stockport Page 14 Asset based lenders have received bad press about their use of termination fees recently, but ABFA s Ms Sharp says the issue is exaggerated. I cannot say no firm has done something unacceptable, but the number of complaints is incredibly small. she says. Tracy Ewen, managing director of asset based lender IGF, warns businesses to make sure they understand the terms of the service before signing up. All asset based lenders operate 16.5bn lent in business funding by ABFA members in September ,429 businesses used asset based finance, September % 7.5% Source: ABFA increase in funding through asset based finance between June and September 2012 increase in invoice discounting, June to September 2012 different charging structures, she says. To ensure there are no surprises, prospects should read their agreements carefully at the outset and, if necessary, take independent legal advice. While the industry is in good shape, lenders and trade bodies acknowledge this is partially down to renewed demand from larger firms. Among the small and mediumsized enterprise (SME) community the desire to borrow is not as strong. Chris Hawes, of RBS Invoice Finance, explains: Our clients are borrowing less on average and looking for other ways to finance their business strategies. Our own view is that borrowing appetite is generally cautious. ABFA statistics confirm this. As of June 2012, asset based lenders had advanced 16 billion to businesses, an annual increase of 2 per cent. The funds available also rose from 22.5 billion to 23.3 billion in the same period, but total sales figures of clients showed little change. So the funds are available, it simply depends on whether businesses can be convinced to opt for asset based lending instead of other forms of finance. 10 5 11

7 HOW FAR WILL BANKS BE CROWDED OUT? Crowdfunding is gaining popularity, but is it a credible alternative source of commercial finance? Kevin Rose asks a lender and an entrepreneur WHEN QUICK WONGA IS SHORT-TERM CROWDFUNDING 30, ,547 investors in Crowdcube during 2013 businesses funded $ average investment 6.4m total investment Source: Crowdcube With some traditional financing routes currently unavailable, Marcel Le Gouais assesses the value of short-term borrowing options THE LENDER ȖȖThe growing awareness of crowdfunding is no flash in the pan, if lender Andrew Mullinger is to be believed. The co-founder of Funding Circle, one of the UK s prominent peer-to-peer lenders, is confident that the amount lent in peer-to-peer loans (business and consumer) will double by the end of this year, increasing from 360 million in 2012 to more than 700 million. The British public is investing its money directly into the bloodstream of the British economy, says Mr Mullinger. Firms such as his, which operate in the lending sphere of crowdfunding, have sought to fill the vacuum created by the reticence of traditional high street banks to lend to many businesses. At present 90 per cent of all lending is conducted by the five main banks, he explains. It s an incredibly concentrated market and small-business owners have suffered as a result. Even if such banks deigned to return to sensible business lending, Mr Mullinger argues that things could never be the same again. With the introduction of new regulation rules, such as Basel III, banks cannot lend at the same levels they were previously, he says. Therefore, new entrants are stepping up to ensure businesses can access the finance they need to grow. Worryingly, last year s government-backed Breedon Report estimated a funding gap emerging of 26 billion to 59 billion for business finance over the next five years. With small-business lending Share and discuss online at worth approximately 70 billion a year, Mr Mullinger believes Funding Circle could, over time, account for a significant proportion of this market. At Funding Circle, the average loan is made up of small investments, as little as 20, from more than 500 different people. The average business borrowing through Funding Circle is 15 years old, employs about eight people and turns over between 100,000 and 40 million. What s in it for investors? Funding Circle is advertising an average gross yield of 8.9 per cent, making this area of crowdfunding attractive to savers fed up with terrible rates of return brought on by record low interest rates and the knock-on effect of quantitative easing. While awareness of crowdfunding is increasing, there is not yet a robust regulatory framework around the sector to protect borrowers and investors. Despite this, Mr Mullinger stresses that business owners who become involved in crowdfunding are quickly convinced of the model. Once a business borrows through us, they tell us they won t go back to their bank for a loan, he says. Crowdfunding has sought to fill the vacuum created by the reticence of traditional high street banks to lend THE ENTREPRENEUR Serial entrepreneur Barry James, who co-authored an Information Commissioner s report on IT security for small and mediumsized enterprises (SMEs) in 2010, is evangelical about crowdfunding. He is so confident that crowdfunding is here to stay that he has just staged the UK s first national conference on the subject. The fact that such diverse stakeholders as venture business angels, platform providers and government met to discuss the burgeoning sector suggests that crowdfunding is a major, sustainable development in business finance, he says. Mr James sees crowdfunding as a business finance alternative for perfectly viable businesses that don t fit the mould. Various forms of crowdfunding each have their own selling points and so will appeal to different people. For him, crowdlending is just like bank lending without the bank. The upside is you re likely to get a decision more quickly, he says. Theoretically, the downside is that the loans are often traded and so you won t know who you might owe the money to. But is that practically a problem? Mr James sees crowdlending as a way to help existing SMEs move into a new area or product. Crowdinvestors are more motivated by proposition and objective than anything else, he argues. They are people who like the idea of taking a risk on a start-up and also don t like to go through brokers. Presales and rewards-based crowdfunding will continue to be the largest of the three crowdfunding forms, he says. It is popular with the arts and third sector as well as start-ups and is likely to continue to grow. It s popular because you re not giving away any equity and you don t have loans to pay. In his opinion, the main driver for crowdfunding putting aside the necessary technological infrastructure has been social media. As social media has risen from the web and internet, crowdfunding has risen from social media, he explains. Businesses can build a transparent relationship with a community or tribe. For him, those familiar with social media are more likely to make moral and emotional connections with others, whether backers or businesses. And participants are generally willing to go with the flow while the business model finds its feet. Those involved in crowdfunding have proved to be relatively understanding and patient, he says. You ll often find a we re all in this together feeling. SHORT-TERM BORROWING ȖȖIt s a question for every politician: how do you ensure that small businesses have the means to grow? Business Secretary Vince Cable has taken this quest on with messianic zeal. In a bid to support fledgling business lenders who threaten the banks traditional hegemony, he is launching a state-backed, wholesale business bank with 1 billion to lend to small firms. With funds matched by the private sector, it will support innovations, including peer-to-peer lending through which organisations lend to each other. Commercial peer-to-peer lenders, such as Funding Circle, demonstrate the rise of alternative, short-term funding options for small and medium-sized enterprises (SMEs). Since launching in 2010, it has funded more than 77-million of SME loans. Its website shows how transparency borrowers and bad-debt levels are listed clearly works in its favour. Peerto-peer lending, however, forms just a piece of the puzzle. Many other solutions have emerged despite a slight lack of awareness about them. The Bank of England wants high-street lenders to boost loans to business doesn t suffer from this problem. A campaign to promote Wonga for Business has sparked the latest provocative debate surrounding the company. Only limited liability businesses or partnerships can apply for a Wonga loan, although there are plans to expand this. SMEs can borrow a maximum of 15,000 for up to 52 weeks with no early repayment charge and the cost of borrowing is displayed on the website. For example, if a company borrows 10,000 over 30 weeks, it will repay each week, including fees and interest during that period, with a total repayment of 11, Foreign banks, including Sweden s Handelsbanken, are prepared to lend competitively to UK firms Wonga for Business has experienced no defaults, but declines to say how many loans have been issued, or their total value, since its May 2012 launch. Russell Gould, head of Wonga for Business, addresses the question of allowing customers to rollover loans. If a business has a gap in trade and talks to us, then we re relaxed about letting them skip a payment, as long as they can demonstrate that next time, payment will be made. The idea is to be flexible, he says. Mr Gould says the perception of cash-strapped SMEs approaching Wonga as a last resort is not the case whatsoever. But Tony Murphy, partner at business recovery specialist Harrisons, says: All Wonga offers is a sticking plaster a short-term fix to a deeper problem that can t be solved by throwing expensive short-term cash at it. Wonga for Business popularity can be partly explained by the difficulty for firms to extend overdrafts. Bank regulations, including Basel III, have put pressure on lenders to reduce balance sheets and therefore restrict overdraft facilities. Mr Murphy adds: It s extremely difficult for SMEs to fund growth through bank overdrafts. Banks are being extremely cautious, with narrow criteria and preferred clients drawn from that hallowed turf of vanilla deals - companies with strong balance sheets and net assets in excess of 2 million. Peter Black, managing director of Snowball Consulting, which helps firms access finance, says delays in getting a decision from banks on overdraft extensions are the biggest problem. Some SMEs fear that if they ask for an extension, the bank may pull the plug or cause upheaval by rifling through the books, he says. While overdrafts remain timeconsuming, commercial bridging loans offer a faster route. Available for up to 12 months, they present an interim solution for SMEs before longer-term financing is secured. Borrowers usually pay monthly interest, with rates starting at about 0.75 per cent a month and rising to 1.5 per cent. Fees should be carefully considered if an SME is borrowing only for two or three months; they could be more relevant than the interest. Along with bridging lenders, foreign banks, including Sweden s Handelsbanken, are prepared to lend competitively to UK firms. Mike Cherry, national policy chairman at the Federation of Small Businesses, adds: Reserves and retained profits are the best way to fund shortterm cash requirements. While both are precious commodities in a recession, SMEs might take encouragement from a forecast rise in short-term lending. Members of the Association of Short Term Lenders had 974 million of bridging and short-term loans outstanding by September 2012, a figure the trade body expects to increase. But it might take several years for burgeoning lenders to take market share away from the banks. Vince Cable is staking his reputation on them doing so. 12 13

8 T-SHIRT PRINTERS TAKE OFF WITH CASH BOOST Stockport-based clothing brand Creative Apparel last year received a six-figure cash injection from Barclays and has since witnessed sales growth of 50 per cent. Managing director Phil Millar explains how businesses should seek out funding PROFILE ȖȖCreative Apparel is a screenprinting, embroidery and transfer clothing business from T-shirts and hoodies to work shirts and blouses. In addition, we offer computer-aided designing, labelling and branding services. Traditionally a business-tobusiness (B2B) enterprise, we launched a consumer website last year and secured a 400,000 contract for the Olympic Games. Having recently signed a deal worth 165,000 with a supermarket chain for Comic Relief, we are now looking to get further bank lending for expansion of the business in the first half of this year. It is undoubtedly a difficult time for small businesses at the moment. In the past, I have usedvarious sources of finance, including overdrafts, business loans and invoicing finances. For Creative Apparel, business loans have been the best finance option to grow the business as it allows me to forecast better and manage my cash flow. I know exactly where I stand on my loan repayments and I m happy to have secured a good interest rate. The six-figure cash injection we received from Barclays in 2012 really helped us to grow the business. Above all, it gave us the flexibility to invest the money instantly, into the areas we knew would generate the highest level of returns. We used the money to build a new consumer-facing website and buy new equipment, which has enabled us to diversify into new types of printing. However, it s not only the cash injection which has helped us to grow. We worked closely with the bank, which helped us restructure our finances, re-focus future growth plans and provided specialist advice. The combined effect of this help enabled us to enter into new markets and take the business to the next level. Phil Millar with Barclays Bank corporate manager Trish Conroy We worked closely with the bank, which helped us restructure our finances, re-focus future growth plans and provided specialist advice The one form of commercial finance I wouldn t use is factoring. While in some ways factoring is similar to many other forms of business financing, and businesses can reap the benefits of a faster payment cycle, it also poses risks, which I personally wasn t prepared to take with Creative Apparel. Through factoring, you turn over your collections to a third party, which could affect your business reputation and your business relationships. I think they also have high management charges which can cut into your profit margin. If other businesses are thinking of going down this route, I would urge them to think very carefully before proceeding. Despite what you may read in the press, there is a range of commercial finance options available to small businesses that want to grow, but business owners should know that they need to plan fully in order to secure this funding. Moving into this new market has instantly grown our customer base and significantly helped our cash flow, as consumers are paying upfront for orders online. This is quite a contrast to trade sales which make payments up to 60 days after invoicing. Throughout 2013, we are looking to expand further into new markets, now we have both a business-to-business and directto-consumer offering. We d like to diversify even further and offer products in new areas, such as fashion and sportswear, instead of just promotional T-shirts. WHEN A TREE FALLS NEW GROWTH FOLLOWS Small businesses should take advantage of smaller lenders, says Adam Tyler, chief executive of the National Association of Commercial Finance Brokers OPINION Adam Tyler has been NACFB chief executive since 2007 after joining the organisation on secondment from NatWest; previously he worked at the Royal Bank of Scotland and as a regulated financial adviser specialising in the commercial finance industry ȖȖMembers of the National Association of Commercial Finance Brokers (NACFB) generated almost 9 billion of new lending facilities in 2012, including a 100 per cent increase in leasing and asset finance. But there was also bad news as the biggest player in the market, ING, withdrew at the end of October. The resulting 1.2-billion funding gap has hit a sector where the NACFB was expecting strong growth. At a recent NACFB asset finance seminar, the funding gap was described, unexpectedly, as a positive thing. Positive, because when a tree falls in a forest, it s the small plants that flourish in the sunlight. For example, Aldermore has doubled the number of brokers it works with since the end of October 2012 and Investec has shown a similar expansion. And that has happened very quickly. The overall flavour of the market, then, is changing. If the removal of one large funder leaves room for lots of smaller funders to expand into, the result is more choice and increased competition. Increased competition inspires development and innovation. There are some very innovative lenders out there. Shadow Business Minister Lord Mitchell has named the online marketplace Funding Circle as just one example of the lender of the future. Speaking at the NACFB seminar, he talked in forthright terms about the poor health of the banking model just the day before RBS s 5.2 billion losses hit the headlines saying banks must innovate or become unviable. The banks are lending, but the money isn t being spread around enough. They are favouring those businesses that fulfil the most rigorous criteria, splitting the market in two the haves and the have-nots. And yet small-business owners simply aren t helping themselves. They are not taking advantage of the opportunities offered by the wealth of smaller lenders. This isn t a matter of smaller alternative funders throwing an advertising budget together. It s a matter of grass-roots awareness and the NACFB is seeking to get government support for this through the Business Bank. According to figures quoted by the Department for Business Innovation & Skills, some 80 per cent of small businesses start thinking about sourcing funding only three to four days before the money is needed. Generally speaking, busy owners of small and medium-sized enterprises (SMEs) spend less than an hour researching their options and end up dealing with their usual bank. That helps to explain how 85 per cent of lending last year was through the same big four banks, (arguably just a big two in Scotland and Northern England). All of which leads to the conclusion that what we have is not so much a funding-gap problem as a perception problem. If the first step a business owner takes is to solicit the services of a commercial broker, they ll benefit from the aggressive, competitive lending that s on offer right now. If only people know to go looking for it. When a tree falls in a forest, it s the small plants that flourish in the sunlight COMMERCIAL FEATURE Tackling the funding challenge in Birmingham Set up in the wake of the global financial crisis, Finance Birmingham was created to provide a new channel of funding, filling the gap left by riskaverse high street banks. What has emerged is an enormously popular and growing public-private partnership, says Sir Albert Bore, leader of Birmingham City Council Sir Albert Bore, leader of Birmingham City Council Finance Birmingham was set up by Birmingham City Council as a public-private partnership, using private-sector experts to lead the provision of funding solutions for growing businesses in the Birmingham area, without relying on the taxpayer to fund it. The organisation provides a series of funding streams targeting the small and mediumsized business market across all industry sectors. Originally, it provided loans to established businesses that had nevertheless been turned down by mainstream sources of funding. The Business Loan Fund the name given to the pot of money controlled by Finance Birmingham in conjunction with Birmingham City Council is commercially driven and focused on furthering the interests of businesses and their employees. At its launch in 2010, the fund was worth 10 million, which continuously recycles as businesses borrow money and pay it back so new businesses can borrow. Typical loans range from 100,000 to 1 million and are charged at market rates. From these founding principles sprouted further branches of the fund, including equity funding or cash investment in exchange for part-ownership of the business and mezzanine (combination of debt and equity finance) solutions. The Business Loan Fund s solid performance gave us the confidence to scale the funding pot to 25 million, giving standard loans, equity investment and support which is specific to Birmingham s diverse range of industry sectors. Recent beneficiary businesses include Whisk, an online food app combining recipes with instant food shopping, set up by The Apprentice TV contestant Nick Holzherr, and WAA, a creative and communications agency in Sutton Coldfield. Finance Birmingham has extended its reach to the Solihull Business Loan Fund and is the delivery partner for programmes totalling 150 million in current funding rounds, including the Advanced Manufacturing Supply Chain Initiative and the Growing Places Fund. The Finance Birmingham initiative and the Business Loan Fund have safeguarded or created at least 1,200 jobs in the local area. Now the fund is looking to build on strong foundations to further bolster Birmingham s reputation as a thriving city with a suite of innovative fast-growth businesses to rival the credentials of those in London. The initiative has safeguarded or created at least 1,200 jobs in the local area 14 15 1


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