Client profile: Blue Scorpion
- "We all thought it was a very innovative way of doing the finance and that really appealed to us."
- Used SSAS to put the funding in place
- Five-year loan and also a sale and leaseback of the intangible assets of the business
A business with the potential to generate £1 million a month of gross margin is an extremely attractive proposition.
And when that is based on a single figure percentage of market penetration, the potential is, to quote Tony Kensington, CFO, “incredible”.
Blue Scorpion provide payment card network security and segregation, helping businesses meet a set of Payment Card Industry standards, otherwise known as PCI. In simple language, that means providing security around customer card details when they make a payment.
A subsidiary company, EIT, provides installation and roll-out services to the retail sector, such as secure installations for Chip & PIN machines.
Tony, an accountant by profession, Nigel Tanner, CEO, who has a significant background in the card payments industry, and Nigel Storer, CCO, also with an extensive payments background, spotted a gap in the market to provide network security and segregation to small businesses.
Primarily this was aimed at those card present merchants who were receiving monthly fines for PCI non-compliance; however, acquirers are now realising the benefit of the Blue Scorpion solution even in their compliant merchant portfolios, and a broader remit is now being suggested to speak with all SME merchants to encourage network segregation generally.
The challenge of funding product development and the roll-out to customers is faced by all businesses but the potential payoff of working with the major banks meant getting the right financing in place was critical.
Private equity houses “liked the drive and passion of the people behind the business” but Blue Scorpion were looking for between £700,000-£1.5 million and not the £2.5 million-£3 million deals the private equity firms were suggesting they like to invest.
But a referral to the Alternative Business Funding portal led to an introduction to Pension-led funding and the opportunity to access the £750,000 sitting in their pension pots.
Accountant Tony was aware of the possibility of using a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS) to invest in a business but it was the first he had heard of the company Pension-led funding.
We used a SSAS to put the funding in place in two ways, using a straightforward five-year loan and also a sale and leaseback of the intangible assets of the business.
Tony said: “We were able to use HMRC rules to value an asset that all businesses have but are not typically on the balance sheet and not typically considered when looking at security.
“We all thought it was a very innovative way of doing the finance and that really appealed to us.”
The partners used the injection of funds to buy their EIT subsidiary and recruit a sales director and tele-sales team for Blue Scorpion.
“We have 50,000 more opportunities than we would have otherwise. The potential of that is probably a £1/4 million of gross margin a month, absolutely huge,” Tony said.
“Our plan over the next three years is to have 150,000 monthly licences signed up. That would mean somewhere around £1 million a month of gross margin.
“We hope to get a business valuation of £50 million-£100 million in five years.”
Blue Scorpion are 12-18 months ahead of the rivals in a rapidly expanding market place, which includes the need educate traders and the general public. “They have absolutely no idea of how at risk, their card data can be. It’s a real problem,” said Nigel, their CEO.
That is a message that Blue Scorpion is taking into Europe, the Middle East, Africa and further afield into markets where Nigel, their CCO, has relationships with numerous payments institutions through former roles, such as Turkey where payments generally is very advanced. The US roll-out kicks off at the beginning of 2018.
Tony also has a message for business owners considering using their pension to fund their business growth.
“The attraction initially was that the pension funds were seen as dead money. Its use to us was a long way into the future. Through the PLF option we could actually make use of those funds now,” Tony said.
“Whilst we were putting them at risk, there was no more risk than a normal business risk.
We are actually going to make some use of that money to help grow and develop our business.
When we repay that money, we make bigger contributions and end up with a bigger pot. We are borrowing our own money – ‘The Bank of Us’.
It’s like a warm, reassuring feature. It might be borrowing at a touch higher than commercial rates, but it doesn’t matter because it is going back to ourselves.”
Looking to the future with Blue Scorpion and EIT, Tony said: “This opportunity is ours exploit fully, we are doing all of this with our own money. The opportunity PLF has given us is absolutely immense.”