People Money: Our Vision for the Future of Small Business Funding

on April 5, 2013

rebuildingsociety.com was born from the financial crisis…

After the banks were bailed out by the government they were instructed to re-capitalise. Unfortunately, this meant the withdrawal of credit lines to many UK businesses, who found that overnight their overdraft facilities were removed and loans were being called in.

Simultaneously, the suppression of record low interest rates with the stimulation of inflation (through quantitative easing) has essentially taxed savers and those with a pension who struggle to fight the attrition of their savings.

Banks serve their own interest, they create money out of accounting entries (read how banks create money here) and do little to help the economy.

So we acted…

We felt it was time to avoid dealing with banks and deal directly with people through a debt funding arrangement. But there’s more to be gained through a relationship between a lender and a borrower. We call this ‘people money’.

There comes a time when any entrepreneur needs funding to start or grow a business. Start-ups often begin with friends and family finance, to create a prototype / concept which they can pitch to angel investors who may offer advice and support as well as cash.  Equity finance with advice and experience from past entrepreneurs is often called smart money. Banks, VCs, AIM and OFEX offer varying forms of institutional finance.

People money is more useful than institutional finance, but less expensive than smart money. It works on the notion that people choose to lend to companies they like, in a way that allows them to passively promote and support the business.

We summarise ‘People Money’ as the 3 Ps:

  • Patronage – Lenders are invited to become customers. There is no customer loyalty programme like being invested in a company.
  • Participation - In the business community, such as joining their social media groups, focus groups, events, mystery shop feedback and more
  • Promotion - Being an ambassador for the business and part of the communication channel, by passing on word of mouth, forwarding email newsletters, retweeting messages etc.

Not every lender will be active, so borrowers are encouraged to give feedback on those lenders who prove to be more useful. Akin to an amazon rating, new borrowers can read reviews left by others and form an opinion of the benefits of one lender over another.

Institutional finance is still welcome onto the platform and may contribute to the loaned funds, but this is clearly marked and the borrower has the choice over which lender to accept their funding from.

In the beginning it will be difficult for borrowers to attribute value to the actions of their lenders. Lenders who want a good rating will need to ask their borrowers for feedback. It may be a long time before ‘interest’ is seen as a service, but lenders don’t need to do much to be more useful than institutional finance.

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