What To Do If Your Business Or Company Is In Financial Trouble
If you’re struggling to meet debt payments and cashflow is suffering, don’t panic! There are a number of options available to help turnaround the business or company if it is in financial trouble.
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A guide to debt finance and refinancing
Are you running out of cash waiting for the business to make a profit or can't collect money in fast enough? Almost all businesses need to go through periodic refinancing exercises, whether replacing bank facilities, renewing overdrafts, obtaining bank term loans, EFG loan guarantees scheme loans, factoring/ invoice discounting or capital expenditure requirements. This is normal business practice.This is especially important following the Coronavirus Pandemic when companies have had unprecedented changes in their business environment. There are government supported loans in the form of the Recovery Loan SchemeRaising working capital is an important plank in any growth plan. Since the 2008 banking crisis and new rules being imposed raising finance has become more difficult and more hassle.Where a company has encountered a significant downturn event or is under pressure, then the directors must consider whether raising further finance against assets is the solution to their problems. As the current market for business changes and evolves almost daily, we cannot provide an exhaustive list of the financial products available but we give a simple guide to the options available to you below.We assume that the business is not a prime candidate for lending and that it needs working capital. Refinancing Remember, this section is not designed for ordinary business financing solutions, rather it is for companies under pressure, who need to find adequate working capital.Consider the products, weigh them up against the circumstances you find yourself in and decide. If you want help to decide and find the most appropriate suppliers of finance, please contact us. We know and have access to dozens of providers of these products and can point out the pros and cons of each.Bank Overdraft Enterprise Finance Guarantee Loans Factoring and Invoice Discounting Asset Refinance Credit Card Merchant Advance Stock Finance Venture Capital Business Angel Investment Directors Loans (Simply what it says!) Crowdfunding Peer-To-Peer Finance (P2P) Company Voluntary ArrangementAfter all that are you confused? Want help to decide what is appropriate? Contact us - call us FREE on 08009700539 or fill out the contact us form. Bank Overdraft It may be possible to obtain temporary increases in facilities from the bank although due to regulations (BASEL III) banks are keener to convert overdrafts into loans. If the problem can be demonstrated to be short lived the bank will often want to try and help. If the problem looks more deep-seated the bank may want more investment from third parties (you). Prepare good information, your team's arguments and talk to the bank - early enough. Don't wait until you cannot pay PAYE and VAT as this is a sign that the company is probably insolvent. Rarely will banks allow extension of facilities for this purpose.If, however, your business looks like turning the corner you could offer to provide additional personal security such as personal guarantees (PG) secured against your home. If you are not prepared to back your hunch with a PG, then ask yourself why should the bank provide money at increased risk to the bank?Advantages Decision making process is usually short - if you have good information to give the bank. The existing relationship is very valuable - banks don't like losing customers. It may ask for more detailed work to be done on the figures, (despite the cost) this can a be valuable exercise. It may help pave the way to other financial products from the bank in future.Disadvantages If the bank cannot see how its money can be repaid (serviceability) or cannot see how it can get the money back in the event of liquidation (security) they will not lend. Ill-prepared requests for funds will be looked upon less favourably. The bank may want a third view and ask for investigating accountants to examine the business. It may be more costly than existing finance.The bank will probably want more security from the company and the directors - personal guarantees may be demanded or increased if already in place. Enterprise Finance Guarantee Scheme A government backed loan scheme to assist SMEs (small to medium enterprises) with working capital requirements. Typically the DeBIS (Government Business Department) underwrite up to 75% of the loan. Banks vary in their approach to the scheme but the DeBIS is actively encouraging its use.Advantages It can be good value but is never quick to raise this type of loan. The investment criteria are perhaps less stringent than non-guaranteed facilities. Capital and or interest holidays can usually be agreed. For distressed companies this can be a lifeline while they return to profitability.If you need to raise this type of loan remember it cannot be used to service arrears of VAT and PAYE. Being behind with tax payments is likely to lead to a rejection of any proposal for an EFG loan.Disadvantages Not all applications are approved of course. If the company is clearly distressed the bank and or the DeBIS may reject applications. Can you raise enough to provide a solution and adequate working capital whilst you return to profit? Can you service the loan? Merely creating more debt is not a solution where radical surgery may be needed. Also remember that almost always the loan is backed up by a personal guarantee. If the bank can't get all the money out of you then they can then revert to the government to make up the shortfall. Think of a CVA and restructure the company's fixed and viable costs AND improve working capital. Factoring & Invoice Discounting You essentially sell the debtor book (customers that owe your company money) to a factoring company who then provide the company with working capital advances (effectively a loan) against that asset. They will provide from 50-95% advance against the debtor book and charge around 0.33% to 2% depending on the number of invoices, the quality of the debtor book and how much work is required.Usually all your future invoices pass through the system and this sharply improves cashflow. Not any more seen as "lending of last resort" factoring is a very powerful tool and there are some excellent factoring companies providing multiple working capital products to tens of thousands of UK businesses nowadays.Some companies can now even offer finance based on one invoice! Call Keith Steven if that product would be helpful to you. This can be used, for example, if you are selling some products to one new customer. The provider just looks at the history of the debtor. Talk to KSA if you need a new factor, specific spot factoring or just some guidance.Factoring means that the customers know you are borrowing money against their invoices from you. Confidential invoice discounting (CID) usually means this lending is discrete and the customer doesn't know.Advantages If your debtor control is poor this can help. It is an extremely flexible form of finance - the facility can rise and fall as your needs dictate. If the company is under pressure and your sales are growing it is a vital tool. Finding the right factor can lead to much more efficient use of your assets and the ability to plan production or activity - thereby creating improved efficiency.If your business is growing this can grow with you, if sales are shrinking it can be a flexible facility but see below.Disadvantages Concentration in one or two customers can cause difficulties. It is perceived as expensive - but it is providing the commodity you need - money. Most banks have a factoring division - they may not be suitable for your business - shop around. BUT in the current climate big bank factoring facilities are less flexible than the small more nimble factoring companies. Any bank overdraft is normally repaid from the advance from the factor (the bank's main security is sold to the factor). If you have very low margins or your debtors pay very slowly (more than 80 days) it is not generally suitable.Talk to Keith Steven on 07833 240747 if you need to find new flexible factoring or CID facilities Asset Refinance or Asset Based Lending (ABL) Most companies depreciate their assets faster than the value of those assets fall. Therefore, there are often "unencumbered" assets to lend against. The assets of the business form collateral for the lender to secure themselves against.Assets can include, property, machinery, stock (see stock finance). Used in conjunction with, say, factoring, this method can provide a package of new finance to overcome distress.Advantages It is usually a very quick method, access can be through commercial finance brokers or other contacts. Contact us by email for help if required. Where a short term crisis (say a large bad debt) has occurred this method can help the company round the problem very quickly by efficiently using its assets to raise cash. Better quality assets such as land and buildings can attract good rates of interest. In 2020-21 there are many new players offering refinance and asset based lending at good rates.Disadvantages Raising finance this way is not cheap. Where the company has unencumbered assets it is tempting to raise cash against them but remember NB: If the crisis is longer term can your company service the debt repayments?Call us for a CVA now! Costs vary but rates of interest on refinancing assets (i.e. where previous debts are repaid and fresh advances made) can be as high as 30%. The value of assets is established by the lender - it is never as much as you expect. Stock Finance (very limited availability) A form of asset finance. Where the business carries stocks that are easily value-able and resold (such as retail or wholesale or where manufacturers hold stock for clients) then stock finance can be raised. The value of stock is usually much less than that on the balance sheet and lenders lend according to their own valuations.Advantages As part of a package of measures stock finance can be useful. It can often be flexible and longer term advances can help cope with trade cycle ups and downs. It can be relatively quick to organise.Disadvantages It can be costly and the stock will never be worth as much as you think. The security may be difficult to assign. If the bank has a debenture in place any finance raised may be taken by them to mitigate the exposure anyway. Business Angel Investment The classic UK equity gap problem is getting worse. Too small for venture capital and too big a risk for the bank - where to turn? Angels can provide a mixture of loans and equity to distressed or struggling businesses. Most come from a business background and have lots of experience. They usually take a longer term view and can greatly assist the directors grow the company.Advantages With bags of experience an angel can be just what the growing or struggling company needs. Chose carefully and the relationship can be very fruitful. The funds can be flexible and inexpensive. Further rounds of funding can be available. The fact that an investor is putting money in can also help persuade the bank to increase funds available.Disadvantages Chemistry can be difficult - they are going to be involved long term therefore will take time choosing their investments. Equity: they will want to hold shares in the company and the depth of the distress or pressure will determine how big a slice they require. Paucity: there are thousands of angels but finding an appropriate angel, convincing them to get involved and getting finance can take many months. Control: many angels will want control at board level. BUT isn't it better to own say 75% of a company with value than 100% of nothing?Speak to Keith Steven on 07833 240747 if you think this is a product that you need.Angel investors often want to see debts restructured either through a CVA or a pre pack. Be warned they never want to risk their money to plug a gap for tax payments for your company, if the company fails they may pick the assets up is a common view.So ask yourself should the company be restructured with a CVA and hive out BEFORE any new funding comes in? (click links to read more on these powerful tools). Venture Capital Most small businesses in trouble are NOT suitable for Venture Capital. VCs invest in around 1 in 1,000 applications for finance and unless there is a huge growth potential and an almost unique nature to the business it will not get venture capital. If however the company is unusual in the above regard, then contact us by email keiths@ksagroup.co.uk with a synopsis and we will look at the options with you.Advantages Most directors are aware that equity is "cheaper" than debt. Having a quality non executive director to help guide the board (a pre-requisite of most VCs) is also a big plus. The company's reputation and PR are enhanced. Where growth is achieved and prospects remain good, the ability to raise further finance is enhanced.Disadvantages Classically, shareholder directors see the dilution of their equity as a no-go area. Would you rather have 40% of a company worth £10m or 100% of a company worth £1m? VCs only part with money after thorough due diligence, it is hard work and costly. In the end you may not get the money. Only the best management teams with the best ideas win through. It is very time consuming - in a distress situation do you have 3-9 months to wait?No! Use a CVA or pre-pack to restructure the costs, overheads and debts. Then a business angel or VC investor may be interested. Call Keith Steven 07974 086779 for more details. Directors' Loans It may be possible for the directors or senior people to raise funds privately. This can then be loaned to the firm. Tax efficient repayment may mitigate the PAYE due on directors pay. But if the company is insolvent, repaying your loans in advance of the creditors may contravene the law.In the event of a liquidation, the monies may have to be repaid to the company! This is a possible minefield.Security may be taken for the directors loans - but this is a complex area and needs proper advice.Beware you could create a potential preference (s239 Insolvency Act 1986) if you put money into an insolvent company and then pay yourself back!! Call Keith Steven for smart, expert advice 08009700539 or 07974 086779.Advantages It is cheap, you remain in control of the financial process. It is usually a quick method to raise finance. But be warned, taking out second mortgages will require showing the lender the company's accounts. You can repay the loan as convenient to cashflow. It can carry zero interest (you can however charge interest). Personal loans are now more freely available.In 2019 mortgage providers lent less than 30% of the amounts in 2007. A distressed set of accounts will make borrowing harder. You can of course use credit cards and personal loans (unsecured) but the lending criteria for these product have also hardened. Remember if you lend the money to the company and then take it back out BEFORE liquidation, this is a breach of s.239 Insolvency Act 1986.Disadvantages If you had lots of money it would probably already be invested in the business? Can you afford the repayments personally? If the company fails you still have to repay the loans. The bank may take some of their existing advance back after the funds are introduced. Finally, is the money you can raise really ENOUGH money to solve the company's problems? New Finance products Crowdfunding There are several web based crowd funding sites. Essentially you pitch to the investors and if they like your model they will provide equity or debt to the business. You will need a GREAT pitch, good accounting information, forecasts and a business plan. Read more about crowdfunding here. This particular type of funding has seen explosive growth in the last year with hundreds of companies now offering shares. Peer to peer finance Investors or companies can lend finance directly to businesses in exchange for interest. Those in need of finance can create a pitch which is then passed from the peer-to-peer platform (e.g. Funding Circle) to investors.Call Keith Steven now for a guide to this innovative route to financing your business. Recovery Loan Scheme See this page Short term loan providers Advantages. Quick and easyDisadvantages - only up to £50,000, set criteria and a personal guarantee will be needed. Credit card finance merchant loans This is like factoring above. Effectively you obtain a loan against the future credit card receipts in the business. So if you had sales of £100,000 on credit or debit cards last year; you can borrow £10,000-£12,000 against this. Great for a short term tax problem say, and relatively easy to obtain with no security; but a Personal Guarantee (PG) will be required.If you have a funding requirement have you thought about postponing ALL unsecured debts, collecting in debtors and work in progress and cutting costs? This huge increase in working capital is the impact a company voluntary arrangement can make.If you're concerned about your business, request our free 40-page expert guide for directors, answering everything from personal guarantees to rescue options.
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Dot Dot Loans Goes Into Administration
Dot Dot Loans owner the Morses Club and Shelby Finance has gone into administration with the loss of 101 jobs. 272 staff remain across the two firms whilst the administrators look for a rescue or sale.Ed Boyle and Rob Spence from Interpath Advisory have been appointed as joint administrators.The companies have been under financial stress since the Morses Club is now facing lots of customer redress claims for offering them unaffordable loans.In May 2023, the Morses Club entered into a Scheme of Arrangement which is a system of restructuring used for complex financial companies and trusts and is administered by lawyers.The administrators said; “However, despite management’s best efforts, Morses Club has been unable to complete the refinancing of its existing debt facilities and therefore, the directors took the decision to appoint administrators to the businesses.As a result of the insolvency of Morses Club, the scheme automatically terminates early – further information regarding the impact on customers who submitted a claim in the scheme is available on its website”Shortly prior to the appointment of the joint administrators, all new lending ceased, but the companies continue to collect outstanding loans from customers.Administrators said it was "important that customers continue to make payments on outstanding loans as they fall due, as not doing so is likely to impact their credit rating/profile and their ability to borrow".The joint administrators will be working with the employees affected by redundancy over the coming days to provide them with support.
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What is the Enterprise Finance Guarantee Loan?
The Enterprise Finance Guarantee Loan (EFG) is a loan guarantee scheme to encourage further lending to viable SMEs, whom have been turned down for normal commercial loans due to lack of security or a proven track record. It allows these turned down companies to still borrow money from approved lenders.The lender must be satisfied with the businesses ability to repay the loan, to engage in such a scheme. It is up to them to confirm eligibility. They must believe that the business proposal and concept is workable, with growth and succeeding potential.It is up to them to confirm eligibility. Almost all sectors are engaged in, as are most business purposes acceptable.Other eligibility factors are:Must be UK operating Turnover of no more than £41m Looking for finance between £25k and £1,200,000The government back the lender with a 75% guarantee against the outstanding facility balance – enabling a credit decision against a lender to be approved.Since 2009, when it launched, over 35,000 business loans have been provided with over £3.3bn of finance. In 2017, an extension to the scheme was launched, for a further four years, enabling us to guarantee up to £2bn lending over the period.Look out for companies who are EFG accredited lenders. Some are:Aldermore Finance Compass Finance Group Hitachi Capital (UK) NEL fund Managers Lloyds Bank Metro Bank Santander DSL Business FinanceFor more information on the EFG, see the gov.uk website here
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Has Promontoria Bought Your Business Debt?
Who is Promontoria? If your company, LLP or partnership once borrowed money from Ulster Bank, Allied Irish Bank, Yorkshire Bank, Clydesdale Bank or Lloyds, these banks and other institutions sold much of their debt books, when there was any breach of the loan conditions, to the so-called Vulture funds called Promontoria.We are aware of Promontoria (Henrico), Promontoria Eagle, Promontoria Vantage, Promontoria (Thames), Promontoria Hampton (1) and Promontoria Hampton (2).We have been advising clients recently where aggressive demands for repayment in full have been made to the directors, designated members or partners. This can be distressing for you when you are working hard to drive your business on. The legal sector is particularly prone to this right now. In 2018 we refinanced a law firm who stood to lose their homes. Please see this case study.These Promontoria funds are Dutch or Dublin registered financial institutions affiliated to US investor Cerberus Capital Management. The institutions were in the news because they started to aggressively pursue the debtors for breach of conditions. This does not necessarily mean the borrowers were behind on their payments but were in breach of loan to value limits (LTV). What are the options ;Pay the debt back by re-banking, or refinancing it through our sister business Company Funding Options which is a FCA regulated and authorised corporate finance broker. Challenge the debt demand – it is almost certain that Promontoria bought the debt for 20p in the £1. So it may be worth looking at making a discounted debt repayment offer. To support this ensure you have a business, goodwill and insolvency valuation done by a reputable Chartered Surveyor who might be able to challenge a valuation made by the bank's own valuers. If you are having any problems meeting payments, then KSA experts might be able to help by organising a time to pay arrangement (TTP) with your other unsecured creditors to free up some working capital. If the company cannot pay unsecured creditors over a 6-12 month period, it might be best to consider going into a company voluntary arrangement or CVA. While this is an insolvency procedure, Promontoria is only interested in the secured debt and would probably not vote in the CVA process. This may release working capital and future profitability to repay the secured debts over time. At the very least it would highlight the current inability to repay in full. Most importantly, if Promontoria funds are threatening to put the company into administration or repossess the property, there has to have been a default of the loan conditions and the company, LLP or partnership needs to be insolvent. If you don't think there has been a default, you must contact KSA or a solicitor urgently. Do bear in mind though that the debts were only sold on as they were in default at some point. The question is, are they still in default? This is a matter for you to establish. We can recommend good specialist solicitors who have an excellent track record on taking on the financial institutions where there has been mis-selling.Q: What if we provided personal guarantees to AIB, Ulster Bank, Clydesdale Bank or Yorkshire Bank and this debt has been sold on?As licensed insolvency practitioners KSA is able to advise your business and you with regards to all options; including individual voluntary arrangements, debt restructuring, raising money on your assets to repay debt and avoid bankruptcy etc.
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Mis-selling claims continue against banks over swaps and fixed rate loans
Between 2000 and 2014 many banks and financial institutions mis-sold complex financial derivative products and fixed rate business loans with hidden swaps to individuals and small businesses. Many businesses face challenges in bringing claims due to a lack of financial resources or because their claim is time barred. However, such claims can be extremely valuable and may be worth pursuing. Time bar or limitation may be less of an issue if LIBOR derivatives were mis-sold or if fixed rate loans or tailored business loans were sold. Recently, legal action reportedly worth £1bn was commenced against Clydesdale Bank and National Australia Bank (which also traded as Yorkshire Bank). Each individual is seeking damages between £100,000 and several million. It is far easier for the defendant bank to settle each case individually and there may be a higher settlement offer in individual cases rather than group action. Special thanks to Lexlaw who wrote this articleLEXLAW Solicitors & Advocates is a boutique City of London litigation law firm that partners solicitors and barristers and is the only law firm based in Middle Temple (an Inn of Court). In recent years, the firm has conducted and settled more derivatives litigation for SMEs than all other law firms in the UK combined. Call us on 02071830529 or email contact@lexlaw.co.uk. Visit www.lexlaw.co.uk or more information about our litigation team and our successes.What are interest rate hedging products and how were they mis-sold to businesses? Interest rate hedging products (IRHPs) are complex financial derivative instruments sold by banks to business and individual customers that are designed to protect them from future rises in interest rates. However, banks failed to explain the massive costs and risks of these IRHPs to their customers properly or at all.As a result, when interest rates fell during the global financial crisis, businesses were locked into costly unsuitable IRHPs and were unable to exit the IRHPs without paying substantial breakage costs (which the banks had calculated before sale and then deliberately concealed from their customers).In addition to the substantial breakage costs of IRHPs, the banks also secretly used the credit limit of their customers to protect themselves from any liability for the undisclosed IRHP breakage costs. This credit limit utilisation by the banks created considerable borrowing difficulties for their customers. Most customers still do not understand that the bank-predicted contingent liability risk was quantified and attached to their credit limit. The deliberate concealment of this CLU process may allow customers to bring claims outside of the usual time limits. Fixed Rate Loan Mis-selling Over 60,000 fixed rate or tailored business loans containing embedded derivatives or ‘hidden swaps’ have been sold to SMEs by major UK Banks and Building Societies such as RBS, Barclays, Lloyds, HSBC, Santander, Clydesdale, Yorkshire, Nationwide and West Bromwich. These ‘loan contracts’ are in fact regulated ‘contracts for difference’ and are open to legal challenge as they were thereby often mis-sold, for example, due to inadequate warning of break costs. We have litigated more cases than any other law firm in the UK and are settling cases constantly including cases involving ‘hidden swaps’. We are able to challenge the adequacy of the sales process via complaints to the Financial Ombudsman Service (FOS) or via the Court and often obtain settlements with major banks for clients.Case study – RBS pay £1m to LEXLAW clientA London-based businesswoman who provided social support services to disadvantaged families was sold two complex IRHPs by RBS, which caused substantial unexpected financial losses to her business. RBS failed to provide satisfactory redress in the IRHP review scheme (a bank-led internal review scheme cloaked by purported independent regulation; LEXLAW has highlighted questionable banking practices) and, undeterred, she proceeded with High Court litigation against the bank.In July 2016, she settled her High Court claim with RBS. While RBS denied any liability, it still agreed to bear a total financial cost in excess of £1 million in the settlement, which included repaying over 90% of her direct financial losses. What did GRG and other bank BSUs do to customers? The Global Restructuring Group (GRG) was a business support unit within RBS that was supposed to assist businesses in financial trouble. Following the credit crunch, GRG took control of 16,000 SME customers with a combined £65 billion of assets before reportedly being disbanded in August 2014.In 2013 the UK government’s entrepreneur-in-residence, Mr Lawrence Tomlinson reported that GRG’s West Register, a group of unregulated subsidiaries set up by RBS, took advantage of struggling businesses to secretly boost RBS’s profits. Under threat of foreclosure of loans, often for technical covenant breaches only, the banks seized control of customer assets cheaply from businesses they claimed were failing even though often they had not defaulted on any loan repayments. West Register was therefore able to acquire assets at discounted prices.In October 2017, the FCA indicated that RBS failed to support small companies and did not adopt adequate procedures in customer relationships. Despite vigorous efforts by us and many others, the complete version of the report remains secret. The FCA are abdicating their regulatory role by hiding the potentially damning report and we continue to call for its public release.Case Study – GRG West Register takes 80% equity in family-owned bowling business which cost owners £50m while RBS profited £9mBowlplex Ltd was established in 1976 by husband and wife Tony and Verna Standish in Poole, Dorset. The business grew steadily through the acquisition of additional sites over the years, and by 2007 Bowlplex was operating from 16 bowling sites nationwide, making it the UK’s third largest bowling operator.In late 2008 and 2009, the whole UK bowling industry suffered a downturn as a result of the recession. Bowlplex expected to trade through the recession with appropriate support from its bank, RBS. Unfortunately, despite never missing a single repayment, Bowlplex was transferred to RBS’s notorious Global Restructuring Group in June 2010.Within a short time it became clear the bank was out to take control of the firm. This was communicated by RBS West Register, who said they would take 80 per cent of the client’s equity to maintain support. RBS, through GRG and West Register, obtained 80 per cent of Bowlplex’s equity. It wrote off £4.45million of debt. West Register received almost £14million on the sale of Bowlplex. The former owners of Bowplex, the Standish family are now pursuing litigation against RBS. Do I need specialist advice? The major banks are legally and financially sophisticated and employ an army of in-house lawyers as well as also instructing city law firms and senior counsel. We are well positioned and experienced in dealing with the bank and their legal teams. We have acted for hundreds of claimants in disputes worth hundreds of millions of pounds against most major law firms in the UK that regularly represent major financial services institutions. Our legal cases often garner national attention and our successes have helped hundreds of SMEs against major banks.
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Purchasing a loss making business
An example of a client enquiry RE purchasing a loss making business
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Partnership Refinancing
Where a company has encountered a significant downturn event or is under pressure, the partners must consider whether raising further finance against assets is the solution to their problems. As the market changes and evolves almost daily, we cannot provide an exhaustive list of the financial products available but we give our own view of the various methods below.
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What is Crowdfunding?
Crowdfunding is equity investment-based and is usually a way to raise capital for new businesses, start-ups or projects. Money is raised by asking companies or individuals to invest using an online platform. Benefits of investing can include receiving rewards like free merchandise, tickets to events and shares in the business.Those seeking funding can create a profile to promote their idea or project as well as set a target of how much they need to raise on the crowdfunding website (see examples below). There is usually a time-limit to reach the target so if this target is not reached, the project won’t go ahead and investors won’t put in any money. The platforms may extend the time to reach the target.If you do list a project or business on a crowdfunding website, you are effectively selling your company on the market for others to share.Current UK Crowdfunders include:Crowdcube Seedrs Angels Den Crowdbnk Buzzbnk Crowdfunder Zequs GrowthFunders Bloom Venture Catalyst Bank to the FutureWhat is peer to peer lending? This is often referred to as loan-based crowdfunding and is usually targeted at experienced investors in businesses who are looking for decent interest rates, risks and return.With many small companies finding it difficult to borrow from banks, peer to peer lending is an alternative route, allowing businesses to lend to a number of other businesses and seeing better interest rates than many ISAs and saving accounts out there.It’s worth noting that these lenders do not hold shares in your business, therefore the business continues to stay as your own.Current UK peer to peer lenders (in no particular order) are:Funding Circle Ratesetter Zopa Thin Cats Assetz Capital RebuildingSociety eMoney Union FundingKnight Folk2Folk Wellesley & Co Funding Secure Archover MarketInvoiceThe FCA has recently confirmed new regulations for crowdfunding to ensure consumers are protected and aware of the risks. See here for more information. Peer to peer lenders are now also regulated by the FCA
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Commercial funding for start-up businesses
Secured commercial funding for start-up businesses One of the biggest hurdles for a fledgling business is raising the required capital. The traditional small business loan can be expensive and inflexible, and even with the Funding for Lending Scheme (FLS) helping to coax high-street banks into granting more loans to SMEs, it remains notoriously tricky to get an application approved.The commercial finance market has ballooned in the years since the financial crisis. The bridging loan market in particular has gone from strength to strength, as short-term lenders have been able to fill the rift left by mainstream lenders reluctant to expose themselves to post-crunch risk.With new entrants into the market jostling for business, products invariably become more competitive in terms of cost and flexibility. Products have even homogenised to a degree, with specialist buy-to-let and commercial lenders offering short-term options and bridge-to-let loans allowing borrowers to ‘term out’ to longer-term finance once the loan comes to an end.Here we will take a broad look at these two types of commercial funding. Bridging loans Bridging loans are so named for their ability to bridge the gap between a debt becoming due and credit becoming available, and can be turned around within a matter of days. The funds can also be raised for any legal purpose, meaning that anyone who can offer suitable security for a loan can use one to get cash fast.This makes bridging loans extraordinarily versatile; they can be used to circumvent property chains, expand business premises, purchase additional stock, convert or renovate property, plug cashflow gaps and take advantage of short-lived investment opportunities such as auction purchases. Terms can be as little as one day, and it is possible to find bridging loans with no early repayment charges from which you can make a quick exit with no additional cost.A bridging loan is either ‘open’ or ‘closed’. This refers to whether or not the loan has a fixed end date and exit strategy (such as further credit or the sale of the asset) in place. Whilst open loans – those without a fixed end date – are riskier and, as a result, more expensive, rates for either option are far cheaper than they were pre-crunch, ranging from around 0.65% to 1.50% per month.Although not every bridging lender will fund every type of deal, across the entire market it is possible to secure funding against almost any kind of property, including undeveloped or agricultural land, uninhabitable property, non-standard construction and commercial or semi-commercial property. The funding can be secured as a first charge – meaning the lender has first or sole priority for repossession if you default on your debts – or second or subsequent charge.It is also possible to secure a bridging loan against more than one property; indeed, by offering additional security, you can increase the LTV (loan-to-value) ratio of the loan to 100% or even higher, removing the need for a cash deposit.Most bridging loans are not regulated by the Financial Conduct Authority (FCA). However, if 40% or more of the property is intended for occupation by the borrower or borrower’s family, this will be classed as a residential bridging loan and will therefore be regulated. Commercial mortgages Commercial mortgages are intended to finance the purchase of commercial or semi-commercial property, with loan terms lasting from 3 years to 30. Commercial mortgages can be used to fund up to 75% of a property purchase but, like bridging loans, it is possible to increase this figure by offering additional security.Many commercial mortgage borrowers are looking to rent out their property to commercial tenants, rather than run the business themselves. In these cases, most lenders insist that the rent charged covers the interest repayments by a minimum of 125%. Either way, it may well be a requirement that you have some hands-on knowledge or experience in the industry you are targeting.Commercial loans are extremely flexible and tailored to the borrower. It is not uncommon for customers to finance entire property portfolios, worth millions, with a single commercial mortgage. Mortgages are underwritten on the basis of both the strength of the borrower and the viability of the asset; in short, lenders are not always beholden to rigid criteria. Like bridging loans, the FCA does not regulate most commercial mortgages. Key differences DurationBridging loans are short-term loans, rarely lasting longer than 18 months. Commercial mortgages typically last for a minimum of 3–5 years, and as long as 30.Application processMore information is usually required for a commercial mortgage application than for a bridging loan application. A lender will request borrower credentials – income and expenditure, assets and liabilities, proof of income, tax returns, company management accounts and a summary of the borrower’s relevant experience – as well as details of the property or properties to be mortgaged. Bridging loans generally require just an application form from the applicant and a valuation of the property, meaning the process is far quicker.CostWhether or not the interest charged on a bridging loan will be higher or lower than a commercial mortgage will depend entirely upon the individual circumstances of the borrower and the nature of their application. Commercial loans do tend to have lower interest rates; however, because the loan terms can be significantly longer, it is likely that you will still pay more interest in the long run.Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.Written by Ben Gosling for Commercial Trust, a dedicated broker for bridging loans, buy-to-let mortgages and commercial mortgages. For more information visit www.commercialtrust.co.uk.
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