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!

Business finance - 3 more myths dispelled

Like any business, there are many 'urban myths' surrounding the world of business finance - never moreso than in these tough times.

Whilst mostly harmless, sometimes these myths can hinder the legitimate chance of funding applications.

Here I look to dispell 3 of the most common myths presented to me:

Myth 1: Start Up Loans:  there is no such thing - and never has been such a thing as a start up loan, 

Whilst, for a period the banks used secured loans (loans charged against property) as a uniform facility for start-ups, the relevance of the facility was secured, not start up.

Like any business, a start up will have a number of different requirements and different facilities which may be appropriate. does the business nee to buy equipment? To fund forward orders, or simply a 'dip in' facility to accomodate the peaks and troughs of trading.

Understanding business needs will help us to evaluate viability and to suggest the most appropriate options.


Myth 2: Crowd Funded Loans:  crowd funding is an interesting and positive response to the banks' reluctance top lend. It is NOT, however in any way an easy or soft option. The 'crowd' consists of any number of people who have worked hard for their money - they are understandably reluctant to lose it on random projects.

Before they let go of their money, the Crowd will want to see good, comprehensive & current financials as well as a compelling story to persuade them.


Myth 3: Equity finance: This old chestnut! Dragon's Den isn't real! In order to attract equity investment you need to do much more than chat to a prospective investor for a few minutes. even once they have agreed to invest there is a lengthy due diligence process.

In addition, investors will want an ongoing relationship with your business an a degree of influence over key decisions - they won't just give you cash and walk off.


we have spent several decades understanding the market - trust us - we now more than the bloke in the pub!

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!

Factoring - myths and facts.

Business finance is seldom a source of great contention, certainly not outside the inner sanctum of those offering services, seeking loans or aiming to differentiate their offering.

However, mention the word 'factoring' and a whole myriad of opinions will appear; the Bloke in the Pub will have more views on factoring than traffic wardens and tax collectors combined. They will invariably include 'my mate whose business went bust because he used factoring' (this 'mate' is probable a relative of the apocryphal mate who only survived an accident because he wasn't wearing a seat belt, and a distant relative of the one who smoked 100 full-strength cigarettes a day and lived to be 140).

Factoring is often used as a generic term for any facility involving advances against receivables; though in reality true factoring will include an element of collection and credit control.

It is of course utter nonsense to suggest that borrowing money against invoices or using third-party collections (unless they are truly incompetent) will drive a viable business into the ground, though there is some tentative statistical truth behind the assertions.

Myth 1. Businesses which use factoring usually go bust: Cast your mind back to the last recession, (not the one we apparently emerged from, but the last real one in the early '90s).

Whilst we complain now that banks aren't lending, the behaviour of banks in that recession was utterly deplorable. Your friendly bank manager was transferred to another branch and your new manager rang to introduce himself & invite you to a meeting. In high hopes of some support and perhaps a spot of lunch, you rolled up to the meeting to meet a stony-faced character who swiftly got to the point and advised you that the bank were not comfortable with you sector/business/utilisation and were - with immediate effect - withdrawing your overdraft facilities.
I kid you not - in the mid '90s these were commonly known as 'hatchet managers' and any business person you spoke to was adamant that they would never use an overdraft again.

The factoring industry stepped up to the mark, and became a refuge for many of those businesses who, under extreme pressure, made a move without much research and in the quickest possible time. Inevitably, in a recessionary climate and against a backdrop of forced moves, many of these businesses ultimately failed.

Factoring wasn't the cause of the failure but it was their last visible financial act prior to their demise. (Other, less visible moves might have included running up vast credit card debt, remortgaging the family home - often without their partner's consent - and refinancing every solid asset) however there has never been an urban myth that businesses who remortgage always go bust - factoring is highly visible so carries this stigma alone.

Myth 2: Your customers will stop paying / ordering from you if you use factoring: 
Very hard to quantify this one, however it might be true that some of your customers will have bought into Myth 1 above. Good communication, as ever, can allay a lot of worries on this score (as can a wise choice of factor).

When it comes to payment terms, you can divide customers into 3 categories:

1. Close customers who pay you promptly out of respect and perhaps mutual dependency: These are presumably customers with whom you are in close contact and you should have the opportunity to discuss your decisions and to reinforce your working relationship.
2. Customers who 'play the game' and pay according to a pecking order: These will certainly need to be managed, and the choice of factor or factoring product should pay close attention to this area.
3. Large customers who pay on their terms: are highly unlikely to adopt different terms for direct or non-direct payment - their policy will be, for example, to pay on the last day of the month following invoice, whoever the invoicer might be.

There will naturally be exceptions to the above, which need to be borne in mind during the negotiation or exploration process.

Factoring is not a product, it is a range of products and services, some of which may suit you whilst others may not. Most important, it is crucial that - like any service - it is bought on value and relevance and never on the basis of price alone. There are approximately 100 factoring companies out there, each of whom has specialities, market niches and strengths and weaknesses.
A good factoring broker (like ours!) will ask a lot of questions before assessing the best facility and home for your needs. They will also be prepared for you to ask a lot of questions (and to provide you with coherent answers!).

Should you choose not to go the broker route, here are some pointers for you:

DO:

• Be prepared with a detailed list of questions, and expect coherent answers.
• Have a 'beauty parade' of 3 or more prospective suppliers.
• Take time to evaluate the full package being offered.
• Seek recommendations and testimonials.
• Consider as many variables as possible.

DON'T:

• Buy on headline price.
• Be persuaded to sign documentation before you have had time to read it fully.
• Accept verbal promises.
• Listen to people in pubs.

Factoring (or invoice / debtor finance) might be the best financial tool for your business. Only with some detailed exploration will you be sure.

For more information contact Business Funding Portal