This is why debt finance just isn’t the right way to build a business

You know that general complaint? That UK banks don’t lend to new businesses? That they should? That entreprenurialism cannot thrive without a radical change in Britain’s banking industry?

There’s a reason why debt isn’t perhaps the right way to finance such things:

Mind Candy, the developer behind the children’s online game Moshi Monsters, is seeking a delay to loan repayments over fears its future is threatened by mounting losses.
The company said it was in negotiations with its lender, the technology start-up specialist TriplePoint, to push back the first repayment on a loan it took out in 2014.
The bill is due in July and Mind Candy said that if it is forced to begin paying the £6.5m at an interest rate of 12pc there may be “significant doubt over the company’s ability to continue as a going concern” if sales do not improve.

Debt has to be repaid you see, equity doesn’t.

26 thoughts on “This is why debt finance just isn’t the right way to build a business”

  1. Bloke in North Dorset

    And modern retail banks haven’t got a fucking clue when it comes to technology businesses.

    Maybe they’re OK with financing a local plumber’s new van expansion of their business but I’m not even convinced about that given they hide behind their glass walls and do everything via tick boxes on a computer screen.

  2. This could obviously be solved by courageous action by the Courageous State, who should give grants to start up businesses, except that businesses exploit their workers and avoid paying taxes, so the Courageous State should harshly tax them to discourage their development, and have grants awarded on the basis of Social Value by a person of great moral standards and personal integrity.

    I suggest the awarding of a “Socially Valuable Enterprise Mark”, which may be obtained (cheques and postal orders only please) to Mr M Murphy, Quaker Cottage, Much Wittering, Berks.

  3. @Bloke

    All loan decisions are now made in the bank’s loan bunker far away from the “local” plumber. Bank branch management have no say in the matter (but they can help with the form-filling) and cannot reject or query the bunker’s decision.

    The banks say they did this in response to the banking crisis, which of course wasn’t caused by bad local loan decisions but by disastrous decisions by centralised top management and head office.

  4. As Tim rightly says, loans to businesses are risky: that’s why the risk weighting attached to business loans under the new Basel rules is DOUBLE the weighting attached to mortgages.

  5. The banks say they did this in response to the banking crisis,

    The move of loans approval away from branches considerably predates the “banking crisis”.

    It is noted that the “banking crisis” was a loss of liquidity due to a loss of market confidence, due to an inability to properly value securitised loan products, due to a significant failure of certain high-risk loans.

  6. Banks shouldn’t be lending to business in the first place. Apart from short term loans secured by realiasable assets. With investment, the risk should be on the investor. But as 2008> showed, with banks the risk is ultimately carried by the taxpayer.

  7. Indeed the 12% interest rate reflects that, and arguably they were right, since the company can’t pay even the first repayment after a year trading.

  8. Mad lending to Mind Candy in the first place. Social gaming is like boybands or young adult novels. 12 or 13 year old kids don’t want what the 12 or 13 year old kids were into 3 years ago.

    The bloke running Minecraft did it right – he’s sold it at the peak for a couple of billion. He’s never going to make a game that ever does anything close to as well as Minecraft. In fact, he’ll probably make games that lose money. You can have multiple hits with PC gaming, but social gaming seems to be much more of a lottery.

  9. My question is: How the ruddy hell did they get a loan that large for an online game, especially a simple-by-necessity kids’ game?

    That’s stuff you can float for 10-20k and see how it runs….

  10. Forget the craziness of getting a loan to fund a game. You should see how many computer games namecheck European state funding in their credits. Treble power-ups all round!

  11. the technology start-up specialist TriplePoint
    …is not a bank but presumably a venture capital outfit and hence this, with the concomitant risks and rewards, is a feature of the business.

    Boo hoo

  12. The banks say they did this in response to the banking crisis, which of course wasn’t caused by bad local loan decisions but by disastrous decisions by centralised top management and head office.

    I think it well precedes the GFC. Back around 2006-7 I remember going back to the UK and heading into a Barclays branch to solve a major, long-running issue over my account and was absolutely staggered to discover the “branch manager” (age = 23, in regulation flammable suit of the type seen outside Manchester crown court) had no individual email account or a direct phone line. When I was in the branch and he needed to call somebody higher up the chain, he had to call *the exact same* customer service number that I am expected to use, and wait in the queue, same as me. He was as much a “branch manager” as the cash machine outside.

    Contrast this with a grandfather of an ex-GF who was an old-school bank manager somewhere near Sunderland for Lloyds, probably around the 60s-70s. He was the one responsible for making all loans, mortgages etc. and was therefore accountable if any of them went wrong. But he also had to make money for the bank branch. The secret was knowing people in the town and the local economy, hence you knew whether somebody was a pisshead/chancer, etc.

    It’s hard to see how things have improved.

  13. Banks shouldn’t be lending to business in the first place

    They should: one of the biggest challenges to a business in the first few years is cashflow, a bank loan helps with this.

  14. It’s interesting because last year (and before) Mind Candy was a great British success story, with a tale of how Moshi Monsters was a last ditch attempt after multiple failures.

    Yes, Minecraft chap has done extraordinarily well.

    I know a guy who does fairly well out of a solitaire clone on mobile, which has left him comfortably off and able to fund each of his successor projects, all of which have done poorly.

    Games are high risk.

  15. It’s like the Rubik’s Cube. Everyone has one, then suddenly it’s over. What did they spend all the money on, advertising?

  16. Ian B,

    Developers, graphic designers and testers aren’t cheap. Also, London offices (and staff in London, so London rents).

  17. I’ve always felt you need a really, really good reason to site in London. Drawing from a cluster of coders isn’t one. Why not Reading or Bracknell or Swindon? Cambridge? Edinburgh? Those are clusters too, or were last time I was paying attention.

    With London you’re paying to compete for scarce resources you just don’t need.

  18. The clustering isn’t really about programmers, although there’s a bit of that. It’s about finance and support services. So is silicon valley, so is why the most recent pottery opened in the UK was in, yep, Stoke on Trent.

  19. Finance is global. You don’t need to live next to a bank. What support services do you need to write a game? Starbucks?

    These games are pretty simple entities. They’re not cutting edge Triple-A coding; it’s the kind of stuff a teenager can write in their bedroom. In Swindon.

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