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

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

The elephant in the room; bad debt in lending

I'm aware that I have banged on a bit about my views on Government's rhetoric on 'forcing banks to lend' yet the message from media and Government continues to be confused in the extreme. This article in the Telegraph doesn't break any new ground, but it is unusual in one respect, which is that Angela Knight, chief executive of the British Bankers’ Association touched on the hidden topic - that of risk or - to put in in more raw terms, bad debt.

We all love SME business - they are the lifeblood of our economy and are also proving very cuddly to the media - but, let's be absolutely clear, the risk of bad debt in lending to small business is always present - and is significantly increased in economic downturn; there are 2 reasons why banks are failing to lend - and spite isn't one of them. The first reason is that they simply lack the resource to do so, the second and more enduring reason is that they are in absolute dread of bad debt - which can quite easily push them back to illiquidity.

Bad debt from customers is a real problem to business, but a problem that can be mitigated to some extent. To a lending institution it isn't an external or secondary risk, it is at the very core of lending and pricing policy. If you read the legal section of any business forum or journal, you will often find advice being given to business owners on how to avoid paying out on personal guarantees - it is entirely undestandable that people want to keep what they have worked for but- let's be clear - this isn't about bankers' bonuses or profiteering, the effects are passed directly to small businesses in both price and underwriting.

It is impossible to have a coherent discussion about lending without talking about bad debt, so please - we are all big grown-ups here - lets not pretend it doesn't exist or hide it behind the curtain with the elephant - if you are going to talk about bank lending, lets actually admit what the issues are!

CrowdFunding - The power of the crowd!

3 years into the banking crisis, and still the newspapers carry headlines like this one in a recent edition of The Telegraph indicating that - whatever the veracity of lending statistics - it is abundantly clear that relations between banks and business remain less than cordial and will presumably remain so for some time to come.

One potential White Knight riding onto the non-bank funding scene comes in the shape of 'Crowd Funding' where wealthy individuals can get a return on their money by lending it at commercial rates to businesses or private individuals. The lending might take the form of term loans (typically 1 - 3 years) or equity funding.

On loan facilities the investors effectively bid for each proposal thereby setting the sell rate based on its popularity, whereas equity investors are liable for their own due diligence and will reap rewards based on the performance of their specific investment, just as if they had invested on traditional stocks and shares.

I have been watching Crowd Funding closely for almost a year, really to see whether it took root or whether it was just 'another Internet concept'. Pleasingly it seems that some strong players have emerged and that peer-to-peer loans are rapidly becoming acknowledged as a credible alternative to traditional bank lending.

Moreover, some of the founder organisations have come together to create a code of conduct designed to keep rogues out of the market. Of course there will always be the fear that this will restrict competition, a scenario which should be avoided but applied wisely, should avoid borrowers falling victim to less scrupulous operators who always circle the money business.

The symbiotic relationship between banks and their business customers was simultaneously their greatest strength and their greatest weakness; it was very easy for a customer requiring finance. From a glance at a screen the bank could get a thumbnail of turnover, trends and a snapshot of financial health and make a swift judgment. On the downside, if things started to go wrong this could swiftly knock on to all business and possibly personal finance arrangements in many cases leaving the customer with nowhere to turn. The ease with which these arrangements could be made or terminated resulted in the cliche of banks handing out umbrellas in the sunshine only to take them back when it started to rain. With an external lender they have no up-front knowledge so are reliant on the customer supplying good quality, current information - something which was often overlooked in the hedonistic pre-crash era.

By using an external loan provider, banking lines will be left untouched and as long as payments are maintained there will be no interference with trading or security position. It is early days but common sense suggests that it is more economically intelligent to nurse default cases than to tear in with guns blazing.

Overall, I can see Crowd Funding, or Peer-to-Peer lending as a viable and sustainable business tool - it really is banking without the bank; the lender gets a rate of return well in excess of bank deposit rates, and the borrower gets a commercially sensible borrowing rate - truly a win-win situation! So, what are the pitfalls?

I have touched on issues of integrity, which could range from marginal operators who might be under-capitalised to out and out villains, though the industry is typically good at weeding these out.

More concerning is the issue of bad debt - particularly in equity models - extensive due diligence is not financially viable and simple statistics indicate that as many as  two thirds of investments will not generate sufficient return to cover investment - whist as many as a third might completely fail. This is clearly an inherent risk of share investment, but if investors complain en-mass they might stir the FSA into paying special attention to the sector and potentially strangling it with regulation. The effects will be less with loan products, but it is not yet clear if investors are really fully aware of its impact, or whether they will simply turn away from the scheme when returns are hit by debts.

Overall, my though is that the sector is doing a pretty good job of regulating itself and is worth researching further if you are looking for business loans or capital or, indeed if you have a spare few bob for a mid-risk investment.

If you want to know more about Crowd Funding, or conventional business finance, call me on 07932 075754