Nicola Horlick: 'I’m likely to be lending a lot more money in a recession'

Anna Jordan meets Nicola Horlick, an investment fund manager and founder of business P2P lending firm, Money&Co. She talks about the slowing economy and why you should never go into the restaurant business.   

Be sure to visit SmallBusiness.co.uk for more articles about peer to peer lending.  

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Hello and welcome to Small Business Snippets, the podcast from SmallBusiness.co.uk. I’m your host, Anna Jordan.

Today we have Nicola Horlick, an entrepreneur and investment manager with other thirty years of experience. She’s the CEO of P2P investment firm, Money&Co, and as such, we’ll be talking about business finance.

Anna: Hello, Nicola.

Nicola: Hi.

Anna: How are you doing?

Nicola: Very well, thanks.

First, I’d like to ask you about moving from finance. How is it becoming an entrepreneur for the first time having worked in that industry for quite a while?

Nicola: Yeah, well originally, I worked for big banks and I was very lucky. I started at a big bank that was going very strongly and after that I was sent to another bank which had a very major problem with one of its businesses and I had to turn it around.

And then I went to the French bank, SocGen (Société Générale) and they asked me to set up a fund management business for them literally from scratch, so it was just me, a Frenchman and a secretary on day one.

That naturally took me to the point of saying “I really need to do something on my own now.” I’d sort of done everything within the banking environment and having literally set up a business from scratch it then gave me the bug, so to speak. The next step after that was to set up a fund management business with no big bank – just me – and getting some backers. I set it up in 2004 and it was approved in 2005 by the Financial Conduct Authority (FCA) that was Bramdean Asset Management.

I’ve set up numerous different businesses since then, mostly around finance. In 2011, I set up a private equity business called Rockpool with two guys who are both ex-3i (an international investor group). I then also set up some film finance businesses and I got involved in the music industry and I listed a vehicle on the London Stock Exchange to invest in alternative investments.

And then I’ve done less successful things like setting up a restaurant which was a very, very bad idea. I’m still trying to extricate myself from that now. But you know, it’s led me to a different world, really.

And then ultimately I set up Money&Co in 2013 and Money&Co is a peer to peer lending platform. So, it’s individuals who want a better rate on their cash lending to businesses to help them grow. Our bad debt experience to date has only been 0.04pc per annum. We’ve actually only had one bad debt in five years. And so with this, it’s not that we’re unique – there are others, Funding Circle is massive – that lend to small businesses. We take a more considered approach. It’s mainly because I’m a fund manager and I’ve been an investor for so long. Whereas a lot of the people running these businesses might come from different backgrounds – they might come from tech or marketing backgrounds rather than money management backgrounds.

What criteria do you look for in the businesses you want to invest in?

Nicola: So, we have some very basic requirements, like you must have three years of filed accounts; the company must have been profitable in the last year of operation; and it needs to demonstrate to us that it’s affordable for them to borrow so we’ll never ever lend to a start-up, for example.

I’d like to talk a bit about the peer to peer lending market. On the retail side, the FCA are introducing tighter rules for retail investors after the collapse of Lendy. How is that going to affect the business investment side and the industry as a whole?

Nicola: Well as far as I’m concerned, it’s a very good thing. Because when it started it was what was known as ‘light touch regulation’. So there weren’t many rules and it did concern me that there were people running these services who often didn’t have a financial services background and I’m not sure that’s the right thing for the lenders. A lot of them are older as well and are looking for income and it’s important to protect them as much as you can.

So I actually welcome the new regime which is going to come on 9th December by the FCA which is going to tighten up on all of this stuff because it’s hopefully going to mean that the right people are lending and that the people doing the lending on their behalf are better qualified to do that and that their money is better protected.

So, Money&Co, as far as you can see, will always exist as a P2P lender? Will you ever introduce other products?

Nicola: I mean we could, but that might confuse people. I think we should focus on that because there are huge opportunities in lending. My own background is very much an equity background, so I’m relatively new. I’ve only being doing lending for five years out of 36 years of being in financial services., so I’m a relative novice.

There are huge areas of lending that you can bring into the P2P arena. So for example, leasing is an absolutely vast industry. There’s £100bn a year of leasing contracts in this country, 25 of which is business critical leasing. So that’s the printing press for the printing company or the trucks for the trucking company or the dental suite for the dentist: things that those businesses can absolutely not do without. There is absolutely no reason you can’t put those in a P2P environment, those types of loans.

And housebuilding is a very good example of where banks are reluctant to lend – there’s a shortage of housing in this country. There’s no reason why we can’t devise a product and in fact we are in the middle of doing just that, for that industry to build more houses. And that’s taken us to the point of thinking that prefab has never properly taken off in this country. It’s much more of a thing in countries like Germany and Austria, but that’s a way of building them much faster and in a much more eco-friendly way, because you can insulate them in the factory and you can put the houses up in a couple of weeks. You can fast-track the build so that instead of having men standing out in the rain putting one brick on top of another, which is crazy in this day and age, you can assemble them really fast and you can make much more interesting developments architecturally.

It’s a bit like LEGO; you can have all different shapes and you can make it more interesting. So, we’re looking at ways of raising money from institutions to actually fund housebuilders. Now these would still in effect be P2P loans but from an institution lending to a housebuilder rather than an individual lending to a housebuilder.

Coming back to you as an entrepreneur, I understand that Money&Co has suffered a significant financial loss [£1.4m going into March 2018]. You have said there’ll be a substantial profit going into March 2020. What are your recovery plans and how will you go about setting them?

Nicola: Ugh, this is such a typical Daily Mail story. If you actually look at how much money we’ve lost in the last five years and compare that to Funding Circle, it’s a fraction of the amount. Funding Circle in 2018 lost £50m in one year. Money&Co has made very small losses relative to Funding Circle.

My aim is to make the business profitable as soon as possible because I don’t really believe in building businesses that make losses and losses and losses. And we could’ve lent an awful lot more money if we’d burned more money, but that’s not our approach. Our approach is to build it in a very steady way and I do expect to make a profit… well, certainly break even in the year to 2020.

In fact, we may not because it depends how much we spend on marketing. And you know, if we really want to accelerate the growth of the business, we may decide we want to spend more on marketing. If we spent less, we could make a profit; if we spent more, we’re going to end up with a bigger business the year after. It’s a fine line.

How do you make that decision of whether the marketing is worth it?

Nicola: Well, just before I spoke to you, we were having a meeting about that and just going through our marketing strategy and trying to decide how much we should spend. It’s quite formulaic, really. We sort of know.

Of course, we’ve got this problem – not really a problem – but the fact we’ve got the FCA which is tightening up all the rules which makes direct consumer marketing a little bit more complex than it was previously. But it’s a bit binary, you know – if you spend this amount of money on Google in its various forms, you’re likely to get a certain number of clients. So it’s really a matter of how much we want to put into the hopper and how much we’re going to get out at the other end.

And also, how many loans we’ve got that we think need to be funded? But assuming we are able to get the institutional money that we need to get to help us fund housebuilders, we’ll certainly be at break-even and probably make profit by the year to March 2020. But I don’t make any apology – it’s a start-up fintech business. That’s what fintech businesses do, make losses.

You started up in 2013, correct?

Nicola: So the company was formed in 2013 and then we launched the business in 2014, April, the site went live. And we completed the first loan in July 2014. 

Right, OK. Normally with a start-up company, it’s usually the first year or so that’s a bit crackly but then it starts to even out after that.

Nicola: What, in terms of profitability?

Anna: Yeah.

Nicola: Yeah, well not in fintech. If you look at all the people with fintech businesses who have been running them over the last few years, you’ll see that they’ve all made big losses. It’s sort of accepted that when it’s a new industry, you’ve got to establish the industry and you’ve got to throw money at it in order to create it. It’s not like setting up shops – well actually, shops are a pretty bad example because they’re not very easy to do these days – but there are more traditional businesses where somebody might have been working for an engineering company and then sets up on their own.

Usually the rule is that companies move into profit in year three, in its third full year of operation, that’s what I’d normally expect. But you know, with this, there’s a discretionary element to it which is the marketing spend. We could just run a business that is profitable and keep it small, or we could decide to make it to make it a lot bigger and in order to do that we need to spend a lot of money on marketing.

What do you think about the state of business in the UK, especially in the light of Brexit?

Nicola: Nobody seems to have noticed that the economy has slowed down very significantly. And we do see it – though a lot of our loans are property-backed loans, we do have some engineering businesses, for example, that we’ve lent to, that are beginning to see a slowdown. And that is Brexit-related in that uncertainty means that people don’t make decisions.

So, businesses have not been investing because they don’t know what’s going to happen and there is evidence that car manufacturing companies, for example, are beginning to move things out of the UK. And the number of cars being manufactured in the UK is down 20pc so far this year on the same time last year. These things are beginning to impact on the economy, and they’ll have knock-on effects on all of the businesses we lend to, which is one of the reasons for being very cautious and one of the reasons why I have been so cautious about growing our book.

But yeah, I have found generally, during my investing life, that I make a lot more money in bad times than in good. Because in good times any fool can make money, because everything is going up. In bad times, your skill comes into play. It sounds counter-intuitive, but I’m likely to be lending a lot more money in a recession than when things are booming because I will be taking on less risky loans.

It’s just that lenders tend to withdraw; they react to recessionary conditions. The banks react during recessions. So, during a recession, there are more opportunities for people who have money to lend. I expect there to be a recession and I expect to build the loan book faster, rather strangely, than I was when things were going really well. When things were going really well, you had Funding Circle throwing money at these borrowers, you had banks, you had international banks, you had vast amounts of money sloshing around. We had quantitative easing – a lot of money being printed. If it’s being printed you’ve got to do something with it.

All of that will come to an end and it’ll be much harder for borrowers to find lenders and that provides us with the opportunity and means we’re more likely to find better-quality borrowers during that period of time.

And one last thing I’d like to talk about. So the restaurant, Georgina’s, that you used to run, went bust. What are the toughest lessons you learned as an entrepreneur?

Nicola: Well, it’s not quite true to say that it went bust. What we did was we closed it down and we moved to a different location. Although it wasn’t called Georgina’s – we called it The Walrus Room – and it was in Battersea Rise. It’s more a bar with food rather than a restaurant.

And we’ve just got a new manager to come and manage it. I’m still involved in it, but it’s a nightmare industry and I absolutely recommend that nobody should go into restaurants. I think it only works if you’re a really talented chef and it’s your restaurant. Or if you’re Pizza Express. Anything in-between doesn’t work, so just a vanity thing where you open a restaurant because you like the idea of owning a restaurant, that’s a very, very bad idea.

What are the toughest parts of running [a restaurant]?

Nicola: Well, the costs are just ridiculous. The rents on the high street are still ridiculously high. A unit on Georgina’s – the original unit – the annual rent was £65,000 a year. The Council Tax was £28,000 a year, I mean it’s outrageous: £28,000 a year?! Then one-sixth of your turnover goes to the VAT man, plus we had 14 employees because it was a full-service restaurant. So, we had to pay 13.8pc of the wage bill in national insurance. You’re basically in business to pay tax and rent – that’s it. And the idea that you’re going to make a profit, unless you’ve got some really big-name chef behind it, is pretty much impossible, in my view.

And finally, coming slightly back to my first question, what tips do you have for entrepreneurs – or want to be entrepreneurs – starting their own business for the first time?

Nicola: You need to make sure you’ve got some proper funding. A lot of people end up funding their business through credit card debt or getting loans from loan sharks, I mean that’s just absolutely not the way to do it. The Seed Enterprise Investment Scheme (SEIS) is a very, very good thing because it allows you to raise £150,000 and the people who invest can get 50pc back as long as they’re UK taxpayers.

And so I think people need to put in the work at the beginning to make sure they’re raising the money before they’ve actually started the business and they shouldn’t be putting their life savings at risk and they shouldn’t be putting their money on credit cards or going to loan sharks. It’s really important to make sure that the business is financed properly from day one. 

Anna: Great. Thanks ever so much for coming on the show, Nicola.

Nicola: Not at all.

Anna: You can find out more about Money&Co at moneyandco.com. You can also visit smallbusiness.co.uk for more on alternative investments. Remember to like us on Facebook @SmallBusinessExperts and follow us on Twitter @smallbusinessuk, all lower case. Until next time, thank you for listening.