Short term funding - the new overdraft.

About a year ago I spent a jolly hour in my local pub laughing quite loudly at the APRs quoted on Payday loans (or MicroLoans) - the highest I have seen to date is 16,000%.

How we laughed that people would pay those rates; surely it couldn't be legal?

In the cold light of day I felt it would be interesting to do a cost comparison between, say, setting up an overdraft and getting a 3 week loan at (what appears average) 4,500%. Obviously there are very many variables to take into account and crucially, many 'typical' customers are unlikely to be forthcoming with real detail on circumstances and requirements (this discretion being part of the attraction of online lending), however over a range of circumstances it is apparent that in many cases a loan at 4,500% can actually work out cheaper than an overdraft at 14%.

Couple this with harsh current realities - that banks are not keen to lend on overdraft and that the financial circumstances of borrowers might be weak - and there is a whole new cost angle - the real and reputational cost associated with bounced cheques - charges for bouncing are up to £50 per item, plus 'unauthorised borrowing fees' whilst the 'bouncee' might also levy a charge - all of which can add up very quickly to far more than 16,000% interest if they came within APR calculations.

PayDay loans are the heavy cost end of short term finance which, seen in the above light suddenly becomes a very credible alternative for businesses looking to take up an opportunity, fulfill an order, or simply to resolve a short-term problem. The beauty of most facilities is that they leave existing facilities intact and in some cases, are invisible to other parties.

In most cases, information required for short term facilities is not onerous, often hinging on the security offered moreso than the underlying financial of the borrower so, for example, if you want to hock your classic Aston for 3 month and can prove ownership, you can probably raise about 60% of its value in 24 hours. Legal complexities on property or transactions can take a little longer.

Like most forms of funding, terms and turnaround improve with repeat business.

Crucially (with the specific exception of MicroLoans), most short-term facilities hinge around specific security which might be:

• Debtors (individual or small groups of invoice).
• Confirmed orders for finished goods.
• Freehold property (commercial or residential).
• High - value personal assets (shares, jewelery, artwork, cars, boats etc)
• Solid business assets.

By taking the time to understand these products, and putting cost in to context, it is clear that short term finance - used wisely - is a real and valuable resource for business in today's climate where overdrafts are rarer than hens' teeth!

If you want to know more, drop me an email mark@fundingportal.co.uk