More about Crowd Funding loan models.

As a brokerage we have fully embraced Crowd Funding as a concept and will actively promote it in the right circumstances.

We are enjoying particular success with unsecured peer-to-peer business loans for applications as diverse as stock purchase, VAT repayment and dilapidation costs on leased premises.

In another post I used the analogy of the new pub in town - When a new landlord comes to town all of the banned and alcoholic population are miraculously attracted; this always holds true with any lending model - launch a new product and you will be bombarded with spurious, hopeless or plain bizarre applications; our role as broker is to manage expectations and to gently steer the dreamers in a more appropriate direction.

The first rule in understanding peer-to-peer lending is in the term 'Crowd Funding' - this is basically offering from a crowd of people and as such carries the hallmarks of common human traits; in particular:

1. They are fairly conservative and somewhat risk averse.
2. They tend to herd, and will follow the lead of others.
3. They will cast blame when things go wrong.

The crowd funding model very clearly illustrates 1 and 2 - 3 is the medium term cause for concern.

How does it work?

The business loan model has a very strict front-end, which involves a pre-qualifying check I don't know full criteria, but it will disallow proposals with less than 2 years accounts, losses, insolvency, late filing or significant CCJs.

Having passed the check you are asked to present good, up to date information (including management figures not more than 4 months old) and details of other borrowings - so it certainly isn't a soft touch!

Now, here is the good bit! You get the chance to 'sell' your proposal to investors using script, photos and even voice. Some will see that as just more paperwork but my view is that you should take the best advantage of that facility - most banks and lenders (whatever they say to the contrary) will pay scant attention to your story or product but will to varying degrees of sophistication credit score your application.

Now you can deal with people who actually want to know about what you are doing.

From this point on, human nature starts to intervene, as the proposal is put on a notice board and investors start to bid, which is a very interesting process.

First come auto-bids, which tend to be high rate but are very useful in creating interest in the proposition. Then the individual bids come along; I was initially surprised at how low bids were - often as little as £15 against a £50K lend (human caution - spreading risk) however they do accumulate fairly quickly.

Individual investors will ask specific questions - mostly intelligent and providing the borrower further opportunity to promote their prospects. Sometimes the questions are plain silly, but you are not obliged to respond.

The bidding term is 14 days, and it is quite a nerve-wracking process watching the investment grow. If Target is not reached you can take amount achieved or withdraw the application - no silly 'all or nothing' rules here.

It is very early days for us in the equity crowd finance model, but it appears to follow a very similar pattern without the front-end firewall, and with a far longer bidding process. I will report on this as our experience grows.


If you have money to invest I strongly recommend becoming an investor on one or more of the Crowd Funding platforms, not only is it fun and interesting, but it will provide you with a unique insight into the issues and problems faced by banks and lenders.


As a borrow - be aware that this is not easy money, nor is it suitable for start-up or struggling business - it is however and engaging and constructive way to raise business finance at competitive rates. We can help with the process and scripting, but the hard information must still come from you.

Finally, the tendency to blame? This is a young model. Default is inevitable, but actual levels of default are hard to ascertain at this point. People will lose their investment. Some will accept that was part of the risk they took (which is made entirely clear, whilst others will jump up and down, start campaigning forums are run to the FSA.

The FSA might decide to intervene and legislate the whole thing out of existence.

This fear is more for the equity model, where failure rates are likely to be much higher and which exists on the edges of FSA regulation.

Only time will tell.; In the meantime, use them and benefit!

Unsecured finance - the Holy Grail?

If you want to stimulate enquiries in the world of business finance, can I suggest that you ignore financial incentives such as 'interest free' or 'low cost' and plump instead for the ever friendly 'unsecured'.

In its purest - and literal - form, unsecured means exactly that - a loan, overdraft or other facility which stands on its own 2 feet, relying entirely on the customer's ability to repay. Should the business fail then the lender licks their woulds and carries the loss.

From a borrower's perspective this is as good as it can get  but in reality these facilities, whilst available, are not available to all and do require in-depth information to get underwritten.

So, the logical next step is to consider how lending can be secured to the satisfaction of all parties.

The main anxiety of 'secured finance' is a second (or third) charge over the home of the borrower; quite apart from the marital discord this can cause (it is best that you don't forge your husband/wife's signature - the courts take a dim view) it is problematic for both lender and borrower, since mainstream banks really aren't keen to put families out on the street, so negotiations are long and protracted, which can add to stress and disharmony.

Whilst we do write a small number of these loans, I am at pains to point out the very real downsides to hocking your home against a business venture.

From an internal/lender perspective the concept of security is somewhat different; what we are really interested in are assets which can be realised relatively quickly and easily; classic examples are invoices, cars, plant and machinery and freehold business premises.

With the emergence of a whole new raft of lenders, sourced from amongst the crowd or private enterprise, the range of eligible security is growing ever wider and can now include:

- Confirmed orders / finished goods.
- Works of art.
- Listed stocks and shares.
- Boats /aircraft.
- Gold / jewellery
- Credit card receipts
- Classic vehicles.

The list is extensive and growing, so the examples given above are simply a starting point.

With a properly set up deal, the much disputed director's guarantee becomes a secondary consideration - as long as the car you have offered hasn't been trashed or salvaged, there should be no financial liability.

And let's face it, your wife probably won't leave you if you lose the Aston!