B-North: A Q&A with the Founders
B-North: A Q&A with the Founders

Bank lending to small and medium-sized enterprises (SMEs) reached a record high in August. Figures from the Bank of England show lending to SMEs was up 21.8%  last month, the highest rate of growth on record.

Net lending to SMEs grew by £2.2bn in August, the Bank said.

Now, the unprecedented demand for the Government’s stimulus packages and Bounce Back Loan Scheme (BBLS) has further highlighted cracks in the traditional ways banks offer loans to smaller businesses.

Centralised decision making, legacy systems, and bureaucratic processes mean it can take months to complete a loan facility, leaving many SMEs frustrated with the service they receive. 

Challenger Bank and GCV portfolio company are on a mission to address this opportunity, by  building an SME business bank that will deliver quick decisions in a day or two with loans being provided in two weeks. 

Earlier this month, we spoke with B-North CEO Jonathan Thompson and CFO David Broadbent to take a closer look at their plans and the current live investment opportunity on GCV’s Co-investment platform (closing on the 30th October, 2020). 

 

Q: For somebody reading about B-North for the first time, how would you describe what the mission of the business is?

A: Jonathan Thompson:

Well it’s no surprise that the banking market continues to evolve at pace, particularly in the UK, and we’ll be playing our own part in that.

What we are seeing is a lot of disruption in the retail banking market, especially where there’s provision of microfinance to SMEs. 

But the market for lending to scale SMEs has had slightly less attention, and it’s a significant market with a stock of around £150 billion in the UK, most of which still sits with those large incumbent banks. 

So B-North is focused on delivering committed, secured loans of half a million pounds plus, up to around £5 million in the early years, and we’re designing the business to deliver 10x quicker than the incumbent banks. 

To do that we are using the latest in cloud-native banking technology, and combining that with people in a very authentic, regional model. 

We’re going straight for a UK banking licence as well, all of which is purpose built to serve the UK scale up and establish the SME market more effectively.

The outcome is what we believe will be the first genuine, UK regional business bank in 150 years.

 

Read more: Why Growth Capital Ventures Backed B-North

 

Q: How does the experience and skill set of the team at B-North match your plans?

A: Jonathan Thompson: 

Due to the regulatory nature of our journey, the business has a high quality and independent board with a world class spread of skills and experience to match the quality and scale of the opportunity.

Chaired by Ron Emerson CBE who has a real passion for the SME sector. Ron is worthy of a specific mention, having had a blue chip banking career with the likes of Bank America and Standard Chartered, he was also the founding chair of The British Business Bank.

He’s also been a senior advisor to The Bank of England, and that sort of experience is cast across our wider non-executive team as well, all of whom were hand picked for their specific experience, either for the market or regulatory journey or the technology that we are using.

 

Q: Traditionally the target market has been dominated by the larger banks, so what market opportunity does this present for B-North at the moment?

A: Jonathan Thompson:

At the cornerstone of our market opportunity is the significant stock of SME lending in the UK which is worth around £150 billion.

Whilst there’s been a whole lot of competition and innovation in the provision of short term unsecured credit to SMEs from the likes of Starling, Iwoca and Kabbage, B-North is in a different, discreet market but a very significant one.

B-North focuses on high quality borrowers and supporting them with committed, secured debt finance for around half a million pounds plus. The reason for that – well it’s a very significant market, but most importantly it’s one that’s been abandoned by the incumbent banks who simply aren’t set up to deliver economically.

As a result, they are pursuing a strategy of centralisation of those core activities to make up for their outdated infrastructure, the legacy technology they rely on and the clunky processes they have in place. 

As an SME that means you’re more likely to have a relationship with a call centre than with a local lending specialist, and it also means it takes many months to complete a secure loan facility with your bank – 4 months is perfectly normal. 

B-North has been designed from scratch, by experts with extensive SME sector knowledge, and we’re combining those people with the latest cloud-native banking technology, having built a proposition that can deliver 10x faster than the market norm, but always at the pace of the borrower, not at the pace of the bank. 

In doing so from an investor perspective we have created a business with very clear unit economics which is profitable and scalable.

 

Live investment opportunity: B-North Series A – Bridge Round

 

Q: There’s not many businesses that have weathered the storm of COVID-19, how has this affected the sector and B-North?

A: Jonathan Thompson: 

It’s difficult to overplay the impacts of COVID-19 on the macro-economic climate and the climate in the UK as well. 

It’s fair to say that this, on balance, is largely positive for B-North. What we’re seeing at the moment is a withdrawal of competition, particularly from the SME lending market, as both funds and banks are distracted either by delivering CBILS or by nursing existing portfolios.

We’ve also seen non-bank lenders step back from the market, all of which is serving to leave an element of unsatisfied demand, and there’s certainly strong demand for alternative new sources of capital. 

B-North is ready to lend, we’ve got some fantastic collaboration tools, which will enable us to work through any potential future periods of lockdown and our systems and processes are market-ready. 

What’s more we can enter the market without the shackles of legacy when there’s a real need for competition. My experience in previous roles suggests this is an enduring window, this is not a temporary point in time opportunity. We are entering a market where borrowers are in real need of alternatives, and it is in the view of the management team that this is the best point in time to launch a bank since the global financial crisis.

 

Q: Why will B-North succeed with this technology?

A: Jonathan Thompson: 

We’ve designed what we believe is the perfect delivery platform, it’s only been possible since 2016 to host a bank in the cloud, that’s the point at which the UK regulator became comfortable with that type of technology. Since then they’re actually encouraging banks to leverage this, but it gives us an inherent advantage. 

Our model is a true hybrid, where we combine local relationships, local risk decisioning and delivery through our regional pod model, with technology. 

We’ve invested 5,000 person days into developing our unique loan origination technology platform called BOLT, and that’s designed specifically to enhance the quality and speed of delivery that will take days, rather than months. 

Some of the partners we’re working with, include some real global innovators in both fintech and regtech, at the core of the business were working with Ncino and Mambu for core banking and loan origination capability, but also with innovation from the likes of TruNarrative and Wiserfunding to help us to accelerate and enhance the borrower journey to our business. 

We had a new-joiner come to our business recently who joined from a competitor bank, and they observed that BOLT is lightyears ahead, both in its functionality and in the way it’s integrated, so we’re very excited about the competitive position of our technology.

 

Read more: B-North appoints first Regional Managing Director

 

Q: What are the benefits of being a Bank and not Fundlender? 

A: Jonathan Thompson:

The real advantages mean we can compete across the broadest sense of the market, and combine effectively the buying power of being a licensed bank whilst also being as nimble as some of the smaller, regional fund operators that have been present in the market. 

It’s also a proposition that we’ve been able to tune into the broker channel, and that’s one that’s grown significantly since the last global financial crisis as more and more borrowers have been shopping around when they’re raising debt or refinancing. 

Those brokers are typically regional and they’ve grown to fill the gap created by those incumbents, and that regional stance really suits our pod model. 

What’s more we’ve got a proposition which rewards them for delivering high quality opportunities to us and for working to high standards of conduct. So we’ve designed that broker proposition alongside some brokers who actually invested in our seed capital raise in 2018, and that’s enabled us to create a business which will have a real partnership between the bank, the broker and the SME. 

We’ve done a lot of market testing as we’ve gone along our journey, we’ve effectively done a test where we’ve worked with brokers to validate our proposition against the market, and that suggests we will have a good chance of winning around 50% of the flow through that channel, when actually we need only 3% or 4% to deliver our whole plan. 

We can tailor our support to the circumstances of a particular borrower, we can provide access to decision makers and we can deliver at pace, so we’re very excited about the core aspects of our proposition.

 

Q: What is the progress to date with the Banking Licence? 

A: David Broadbent: 

The first point to note is the banking licence is a very valuable asset. The reason I say that is that it gives us access to the UK retail deposit market as a source of funding, and that’s a very big market, in the UK it’s worth £1.3 trillion.

It therefore gives you a very deep and controllable source of funding that you can use to scale a loan book of size, and obviously our aim is to deliver a loan book of around £5 billion over the duration of our financial plan. 

It is quite a rare asset at the same time, to demonstrate that I think the last official statistics that were released by the PRA who issue banking licences, is that over the last 7 years around 110 companies have started the process for applying for a bank licence, but only 31 companies have actually been invited by the regulator to submit an application – so it is a process where you need to be invited. 

The good news is that we’ve been working hard on that journey over the last few years and the regulator has told us that they’ve been impressed by the quality of our documentation and the interaction they’ve had with us. 

In September of last year (2019) we were formally invited to submit our application, so we are one of the 31, as I mentioned, and what the regulators have told us is that the only remaining condition that we need to satisfy is the regulatory capital that will be provided by our Series A fund round later this year.

 

Q: What investment has there been to date and how has this been put to use? 

A: David Broadbent:

So far we have raised £6.9 million across 2 seed rounds so far which were facilitated by Growth Capital Ventures. The first investment round was in December 2018 just after we came together and founded the team, and then we had a topup round earlier this year in January 2020. 

I think it’s probably worth noting that over £1.5 million has also been invested to date by the founders and management team, who will also be investing in this round as well. I think we’ve put that seed investment to good use, we’ve just been talking about the bank licence and we’ve invested a lot of time into that process which is in very good shape.

We built a very high calibre executive team which currently stands at 20 with great experience of banking, start-ups, scale-ups and other complimentary skills, and then we’ve made significant strides from a technology perspective.

As Jonathan mentioned, the intellectual property that is contained within our BOLT platform has now been successfully built and market tested and is now ready to start lending. 

Sitting alongside BOLT is the deposit taking platform in conjunction with Newcastle Strategic Solutions Limited who will be our outsourced provider of deposit taking activity.

 

Read more: B-North Announces series of Key Milestones

 

Q: Now open for investment until the 30th October 2020, what will the current Series A Bridge Round enable B-North to do?

A: David Broadbent: 

When we set out on the journey we had very clear plans about what we wanted to achieve, Jonathan and I have been delighted by the execution of that plan and what we have delivered in that timeframe. It’s fair to say we have a very clear plan of deliverables of the plan over the coming 2-3 years which will start with the banking license and securing the Series A funding.

The next round of funding will ultimately unlock the banking license and then our intention is to start lending thereafter with the first lending pod opening in Manchester.

The next key milestone will be to bring retail deposit taking online which will be the trigger to start scaling up the business and the balance sheet. 

The main ingredient for that is the build out of our regional pod network, and that is done in 2 phases. Phase 1 will open the first pod in Manchester and from there we will then open up the next three locations of Leeds, London and the Midlands. 

Once phase 1 is completed we will then move quickly onto phase 2 which will involve opening pods in locations such as Bristol, Scotland, Ireland and Wales. 

That pod network is key not just to build out the loan book but building out profitability, so our financial model indicates that each one of our regional pods should move into profitability within just 16 months of opening. 

As we build out that network, it means that the bank overall is targeted to move into profit around 3 year of trading and then to build profitability of £150m by year 7 of trading. 

 

Q: What’s on offer for investors in this current Series A Bridging Round ?

A: David Broadbent: 

The purpose of this round is to provide us with the bridge funding required to give us sufficient time to complete the Bank license process and Series A Round. 

The funding for this round is geared to taking our cash runway out towards the end of Q1 next year. We originally targeted £1m (now overfunded) which is in return for 5.7% equity of the business. The target returns are money on money return of 19.3x.

 

 Capital is at risk and returns are not guaranteed. 

 

Live investment opportunity: B-North Series A – Bridge Round

 

Q: When might there be an exit or liquidity event for investors? 

A: David Broadbent:

The intention ultimately is that this will be a business that is capable of listing on the stock exchange in the UK, the timeframe for that is not prescribed but there may be other exit opportunities for investors, whether be by trade sale or other MNA activity, however our intention is that within 5 years we are looking at an exit event.

 

For more information about the current B-North Series A Bridge Investment Round, which is open for participation until the 30th October, view the opportunity on the GrowthFunders platform.
Alternatively you can download a copy of the investment memorandum here.

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