Business funding review

Are you in?

On 28th of March the Chancellor announced to the Federation of Small Business potential plans to force banks to release details of declined proposals to a platform of alternative lenders featured in this article.

Small business, big order - The breakthrough

It is a common business phenomenon and in many cases the moment you have been working towards ever since you started.

You have invested all of your time and effort into developing your product, marketing and getting yourself in front of the right people and yes! It has paid off! You have landed the first big order!

Not only that, but if you get this right the order will be rolled out throughout the group/industry/world.

You knew the customer would want payment terms and have already spoken to some factoring companies.

And now comes the tricky bit: You have to buy stocks, or components. You have to run around a lot before fulfilling the order. You have to fly to China - this all costs money - money you have already spend developing your fledgling business to this stage.

What now?

The AAA guide to applying for finance

Before Making your AAA application - ask yourself this question

Am I applying for finance or do I just want to explore possibilities?

The reality at this moment is that the majority of 'applications' are actually just exploratory discussions.

We have absolutely no problem with general chats about the market, different types of funding or how to put a proposal together, but it is best that we understand what is happening - otherwise we just waste each others' time!

When you have decided that you want to get finance rather than just wondering, our AAA guide will maximise your chances of success.

AAA = Attitude, aptitude & application.

Debt and alcohol - why they are the same

For many years I have used the analogy that when a new lender opens, it is exactly like a new pub opening in a town centre

From day one you will be busy and the business will give every appearance of success - until you stand back and take stock - at which point you realise that the core of your early business consists of either those drunks, fighters or freeloaders who have been barred from every other pub, or simply the not-terribly loyal who will try something new for a few weeks and move on.

Getting funded -The three-legged stool

Many people will be familiar with the three-legged stool philosophy in life - the most common manifestation being in the well known toast 'health wealth and happiness'

The general principle is that of a milking stool. Ideally all 3 legs will be complete and intact.  In reality we will often be on 2 legs with relative comfort - however by the time we are one one leg, things are starting to look a little shaky.

In the commercial lending/borrowing environment, the 3 legs will mostly comprise past performance, future prospects and security available.

Crowd lending - one year on..

My relationship with crowd lending is just over a year old - though the concept has been out there for much longer

The 'crowd finance' concept has received big media coverage and is conceptual awareness is very high - though there is much misunderstanding of its nature. A typical forum introduction to crowd funding will go along the lines of:

Original post: 'I'm struggling to raise finance for my start-up due to bad credit history, does anyone know where I can get funding?'

Reply 1: 'Try Crowdfunding - it is an easy way for start-ups to raise cash (link to crowdcube)'

Reply 2: or you can try these people (link to fundingcircle) who do the same thing'

No, no, no and no,..

Absolute facts about crowd funding it is NOT an easy route to cash, in fact the information and underwriting requirements are generally higher than those of commercial organisations. This comes down to the finance provider - Jo Public (more of whom later) - who really isn't easily parted from his hard-earned cash.

Without a detailed knowledge of equity finance, my observations here relate entirely to crowd loans, the key player by a wide margin being Funding Circle. The fact that the name Funding Circle is known throughout the commercial world is a result of significant media coverage and a stratospheric marketing budget - a budget which seems to be deployed with the reckless abandon of a drunk lottery winner.

It has often been said that the best place to be in business is second - immediately behind a competitor with a silly marketing budget; this is currently what the market lack. Smaller players are emerging including Funding Knight in the south and RE Building Society in the north - both take key influences from Funding Circle but have added their own twists to create individuality and flexibility. The competition is welcome but, in my opinion the post of second place remains wide open and in desperate need of filling both the keep Funding Circle on their toes and to provide alternatives for customers.

Like any new business Funding Circle have made mistakes and their model has evolved to compensate; the downside is that they (understandably) don't want to shout about their mistakes so the outward message is that nothing has changed - as a regular user I can state with certainty that it has changed - I just wish I knew what and how.

The great strength of crowd lending is also its greatest weakness - the afore-mentioned Jo Public. There is a vast amount of static capital sat in Jo Public's bank accounts and, with time and exposure crowd-lending will become a mainstream investment vehicles.

However Jo Public is also temperamental and unreliable. Whilst commercial lenders will create bad debt provisions and live comfortably with those provisions, JO Public is less stoic and doesn't like losing money (even if it the risk was made clear). He will sling mud, blame the platform for low standards and ultimately there is a risk that JO Public en masse will turn their backs on crowd lending. The platform operators are well aware of the sensitivity and importance of this investor relationship, hence the high information bar; before investors even get to see a proposition it has passed several tiers of checking, from the initial eligibility check to what one operator endearingly calls the 'sanity check' and a final pre-underwrite which requires a good deal of quality information.

As the industry matures so systems improves. Crowd lending will never be a soft option, but it is a credible and valuable alternative to bank funding - please, someone fill the post of second player!

Why are you still leasing?

We are all of us guilty of doing things 'just because we do' - perhaps because we were told when we were young or perhaps just because we have got in the habit of it.

Sometimes it is interesting to step back and ask why we do things the way we do so I did that with our customers - more than 80% of whom opt for leasing when financing equipment.

The responses were interesting with the vast majority citing tax as the main criterion and most of the rest saying it was cashflow - in particular not having to stump up VAT.

We are not tax advisors and would never take it upon ourselves to offer tax advice, but if tax is really uppermost on your agenda I strongly advise that you take professional advice here.

A little bit of history; in its heyday leasing was the funding tool of choice for sophisticated businesses for a variety of reasons:

• Tax: Both lender and borrower benefited from tax allowances (with the borrower passing theirs back by way of reduced rentals).
• Cashflow: Whereas hire purchase agreements required largish deposits and full VAT to be paid in advance, leasing agreements often required just 3 payments in advance (often less than the percentage deposit on HP) and VAT on rentals.
• Accounting treatment: There were many mechanisms by which a leasing agreement could be dressed as an operating lease, thereby making it off balance-sheet lending.
• Perception: Hire purchase still carried the stigma of poverty and the 'tally man' whereas leasing was seen as a sophisticated business tool for shrewd business people.

Based on the above it is hardly surprising that leasing became popular; however the world has moved on and it is probably time that the world of finance did too.

Continuous changes in taxation have eroded the difference between lease & purchase options -  you cannot get a true tax computation without taking into account the individual's (businesses) tax situation, the timing of the purchase, and the life of the assets - however, as a generalisation most long-life assets will be more beneficial on hire purchase or asset loan agreements.

Deposit criteria have relaxed (an HP agreement often has rentals in advance rather than percentage deposit stipulations), plus it is often possible to defer VAT, or even obtain a 100% asset loan.

Less than 10% of agreements now signed are qualifying operating leases (car finance excepted) so must be treated the same as HP for accounting purposes

Perception? Well are you really bothered about HP and asset loans?

Leasing might be the answer - but don't take it for granted! We don't give tax advice, but we are happy to talk it through!