Speculate to accumulate

Loan finance can be a risky business

Arts Council England recently launched a new venture: Creative Industry Finance. In partnership with various specialist agencies (such as Crafts Council, Cockpit Art and UK Music) ACE is offering packages of small loans (£5,000 – £25,000) and business support to small to medium scale enterprises. This is great news and I’m glad to see ACE trying a new funding approach.

I’ve long advocated better awareness of and access to loan finance for the arts sector. My experience (and unintentionally I ended up with rather a lot of experience of loan finance with charities and social enterprise at one stage of my career) suggests the real barrier to uptake of finance is not availability of funds as much as awareness and understanding of how loan finance can help with business development, and the appropriate finance and commercial skills to build the confidence to take the risk of borrowing to invest. Twelve months ago I wrote a short article for Arts Professional about loan finance for arts organisations, highlighting some of the reasons why arts organisations should consider loan finance:

• Loan finance tends to be more flexible in terms of what it can fund than grants – lenders are mainly interested in whether you can repay, not what you’re using the loan for.
• It can usually be accessed fairly quickly – rather than having to wait for grant deadlines and decisions.
• The process of applying for loan finance requires you to take a longer-term approach to developing your business that can bring other benefits.

It’s great that ACE is working with partner organisations with experience in loan finance for creative and small organisations and in providing business support. The experience of social finance providers in the Third Sector tells us loans with business support simply won’t work.

However, looking only at the practical issues (i.e. leaving aside policy questions as to the effectiveness of this as a funding intervention for supporting creatives industries and arts development) I have a few concerns.

Individual artists are eligible to apply (as long as they are set up as a ‘business’ and ‘trading’ – although it’s not clear what is meant by ‘a business’ – perhaps a ltd company?). However, outside of the crafts sector which has specific capital needs and has long benefited from extensive business support and start-up grants and loans courtesy of both Crafts Council (more historically via it’s ‘Setting Up Scheme’) and more recently via Cockpit Arts I am skeptical about the scheme’s relevance to visual artists. Research I undertook for Artquest a few years ago suggested a very limited market for loan finance among visual artists, with micro-finance emerging as the most appropriate option for that sector (loans of less than £1,000). With the average annual income of artists being less than £20K their ability to repay even a £5,000 loan in 3 years, the maximum term under this scheme, is very unlikely.

More widely, the scheme’s interest rate of 10% APR also looks pretty steep. Traditionally social finance has had to charge slightly higher APR than High St banks but 10% is a lot more than you’d pay for a normal loan. Interesting, the research I did with Artquest showed visual artists who did access loan finance often did so via their personal banks (overdrafts, credit cards etc) rather than specialist sector finance.

Anyway, despite these reservations, I wish the scheme well and hope it is quickly rolled out beyond London. It’ll be very interesting to see what kinds of projects they support and how they fare – I look forward to some new examples of how finance can support business development.

By way – if you’re interested in finding out more about loan finance but Creative Industry Finance isn’t the right scheme for you – then you might want to check out Funding Central which has information about using loan finance and a searchable database of providers. Artquest also has some specific advice for visual artists considering loan finance.