This concept of lending is growing rapidly both in the UK and abroad, there are several providers at present and we expect the numbers to increase. All will undertake an initial assessment and due diligence process. Thereafter, funds are secured via a pool of private individuals and financial institutions. This type of lending benefits the investor as the rate of return can be competitive compared to a traditional savings or pension pot. The business also benefits as the loan is often unsecured and the rates are sensible. The loan can be repaid at any time without penalty. This lending model also transfers well to other markets including equity loans, property, purchasing of sales invoices, plant and machinery.
This type of product remains in its infancy but is growing quickly and there are numerous loan products now available, they all have their differences and may be tailored to the needs of the business. Short term loan products ranging from 1-12 months are typically used to provide a quick injection of working capital. We have had a number of clients who own seasonal businesses, therefore the purchase of stock has been a challenge when sales are at their lowest ebb. A short term loan has given the business the purchasing power it needs to buy stock, negotiate discounts and payment terms. We focus on those loan products modelled on a traditional bank overdraft facility, where there is no fixed repayment term. Like an overdraft, the facility can revolve up to a pre-agreed credit limit and interest is charged daily on the balance outstanding. We are expecting the loan market to grow more quickly than any other product providing interest rates remain at sensible levels.
Since the economic downturn, we have seen a change in the mindset of many business owners when considering the purchase of a business critical asset. Purchasing assets using cash reserves may not always be the most sensible option. Even those businesses which are are cash rich, sometimes have a preference to finance assets over a fixed term – there is often no need for additional security as the finance is secured on the asset. Interest can be competitive and in some circumstances, repayments can be offset against profits, therefore minimising the year-end tax bill. Many of our finance house partners will now offer funding for a range of assets from machinery and vehicles (hard assets) to office desks, chairs and even software (soft assets). In the case that a business has capital tied up in assets, we may advise selling these assets back to a lender which will, in turn, release capital back to the business.
Historically, banks would have been the only provider of funds that a business needed to pay overseas suppliers for goods and services. Typically, the bank would raise a Letter of Credit or Promisory Note to the supplier’s overseas bankers to help secure the purchase. Independent trade finance houses now exist and their high levels of expertise and experience with overseas trading often add value to the transactions. Trading with overseas suppliers and customers can be risky, but the independent trade finance houses that we refer to are able to provide peace of mind and ensure that payments are made safely and within the terms agreed with the client.
Transaction Based Finance
Otherwise known as ‘Purchase Order Finance’. The principle criteria is a confirmed purchase order from a creditworthy customer. There is little focus on the actual business itself in terms of it’s financial strengths or weaknesses. For example, we have worked with several fashion designers and fashion houses that required funding on receipt of a purchase order received from, e.g, Selfridges. Once the lender had purchased the pre-ordered goods and they have been delivered to the store, a sales invoice is raised. At this stage, the lender will advance up to 80% of the invoice value enough to repay the balance owing from the initial purchase of goods. Any residual balance is credited back to the business. Thereafter, once the customer’s sales invoice is paid, the business is credited further monies less the lender’s charges. A small business could, in theory, receive a £1m purchase order from a major retailer and use this type of funding to fulfill it when usual cashflow would not allow.
This product has been available and supporting the cash flow needs of businesses for many decades. The objective is to unlock cash tied up in sales invoices that are subject to credit terms. Typically, the lender will advance 80% of the gross invoice value on the day it is issued. The remaining 20% is paid once the invoice has been settled by the end customer. The market is evolving and is able to offer a range of hybrid options. The market has also become very competitive, therefore, if used correctly, the cost to a business can be negligible. The stigma that once existed for this type of financing is disappearing quickly as more flexibility and transparency is introduced. Identifying the best-fit product and provider can be a challenge. The invoice finance market has not grown much in recent years and I am seeing less and less need for a traditional invoice finance facility. Instead, funding against one, two or three invoices and on an ad hoc basis, is being preferred.
What To Consider Before Applying
If alternative business finance sounds attractive to you, we advise that you consider the following before committing to an application:
What type of finance will best suit your business needs?
Do you require funding for your business to survive or does your business want to develop, expand or consolidate?
Do you need cash flow or working capital, or both?
Speaking to somebody that understands your business and the business finance options that are available will help you to avoid a bad decision
The Pros and Cons of Alternative Finance
The unwillingness of banks to offer quick and sensible lending propositions, means that alternative providers are becoming a more a popular route with business owners. However, be mindful of the following before proceeding:
The application process is fast and allows for quick access to finance
Your application is more likely to be approved based on a commercial attitude to lending
Payments terms can be fixed, variable, short-term, long term or linked to your sales
The benefits should outweigh the cost
Some products require limited forms of security
Rates of interest can sometimes be higher than a tradition form of bank lending
Some products and some lenders are still evolving as business models
Limited personal contact or customer services
Current regulation may prevent lending to unincorporated businesses