This week NatWest announced that it will be launching a new online lending platform. The “3 minute business loan” will allow small businesses to borrow up to £35,000 in a process that is expected to take around 3 minutes, with money in accounts within 24 hours. This super quick service is thanks to a pre-assessment of over half a million small business customers who can have access to the platform. The Bank has said that it will be rolling the service out this summer.
If it sounds a little like competition for the Peer-to-Peer market, well perhaps it is, but that can only be good news for small businesses – more competition means more funding options and the opportunity to pick what best suits your business.
The average acceptance of loan applications by peer-to-peer business lending platforms was 22.7% (based on transaction volumes between 2013 and 2015). Awareness of the sector however remains low – just 12% of all the money lent to small UK businesses in 2015 was through alternative finance according to NESTA – which doesn’t mean the sector isn’t lending, it just means many of those who turned to their Banks for a loan and were refused didn’t realise that there are alternatives, of which peer-to-peer is one.
businessagent.com can help small businesses access the right peer-to-peer loans for them. In addition to the peer-to-peer platforms, our site offers visibility of the ‘other’ lenders in this space, such as specialist and challenger Banks and specialist Brokers. One application to businessagent.com is seen by over 70 lenders and platforms and the soft footprint credit rating process means there is no detrimental impact by doing so, saving you time and offering your business full visibility of the loan options available to it. https://businessagent.com/loans
All businesses have one thing in common, they all require investment to succeed. In the past, that often involved a formal meeting with a bank manager to discuss a business loan and overdraft facility. However, since the financial crash of the late 2000s, all that has now changed and peer-to-peer lending and investing has become the new springboard for start-up and grow-up enterprises. In this article we aim to set out our stall, explain why we are crowd funding, what we hope to get from it and, most importantly, what we can offer investors in return! LDE was launched in December 2013, with the aim of disrupting an industry that has operated for a very long time with very high overheads and outdated practices. It astonished me to learn that 65% of traditional jewellers did not even have a website at that time! Whilst competition was mounting in the diamond sector and e-commerce was starting to take off there was, and still is, a gap in the market to be filled by a hybrid, 'clicks & bricks' portal, specialising in coloured stones sourced and delivered from 'mine-to-market.' The genesis of LDE was the combination of low fixed costs (with no stock or retail premises), an adaptable face to face approach alongside a powerful digital channel and online presence, with a network of contacts high in the gem supply chain.
(Hot off the bench: an example of one of our recent bespoke pieces - a fine Colombian emerald ring)
We accomplished much in the early development phase of the business, growing our industry contacts, honing our sales process and balancing our books financially. We were elected to join the National Association of Jewellers (NAJ), British Allied Trades Federation (BATF), British Jewellers' Association (BJA), the Goldsmiths' Company and our hallmark was registered with the London Assay Office. This culminated last year, when we were shortlisted in the KPMG SME Awards 2016 in the categories of "start up - one to watch" and "entrepreneur of the year." It soon became apparent that the popularity of bespoke engagement rings and jewellery pieces was increasing so we began to work closely with one of the most highly regarded workshops in London's Hatton Garden. We can produce CAD (Computer Aided Design) images of a piece prior to fabrication and create any handmade design a customer requires to order in approximately 1-2 weeks. We only use ethically sourced, lab certified natural gems, precious metals and skilled craftspeople working by hand to create unique jewellery. We have an exclusivity agreement to supply Colombian emeralds into Europe from a key supplier in South America and we leverage the power of the inventories of top tier coloured gem and diamond wholesalers, without the need to tie up capital in expensive stock.
Having grown organically for 3 years, the time is right to seek further investment in order to take the business to the next level. This will enable us to hire new staff and ramp up a thoroughly planned and costed, multi-faceted marketing campaign. In May this year Zara will join our team, as a diploma qualified gemmologist, to become our Creative Director. We are also maximising the outreach through our digital channels with a tightly controlled Google Adwords PPC (Pay Per Click) campaign. Allied to this we are promoting our business pages on social media and boosting some of our key posts. We are building a Google Shopping campaign and we are also working on affiliate marketing and banner advertising. Later in the year we will launch our first Sky AdSmart TV advertising campaign, with our web and digital development partners. This will be filmed, edited and finalised in the Autumn so that it is ready to be aired on Sky in November and December, in order to capitalise on the festive sales period leading up to Christmas. Sky AdSmart has opened up the medium of television advertising to small and medium sized enterprises for the first time. The functionality of this method enables specific targeting of audiences based upon detailed analysis of their purchasing power, demographics, geographical location and interests.
As the e-commerce share of the market doubles from 5% - 10% over the next few years, at the same time that the number of people consulting their smart phones prior to making a jewellery purchase crosses 80%, the opportunities abound for a nimble player to establish a strong presence. With a focus on coloured gemstones, a far less competitive market than diamonds and with lower advertising and marketing costs, we are able to operate and grow in a niche segment before expanding across more heavily commercialised sectors. One of the key advantages of the digital channels to market is their global reach. This is most clearly demonstrated by the fact we have done business with clients in Singapore, USA, Austria, France and Germany, as well as the UK. The traditional high street bricks and mortar store would not be able to achieve this level of global trade by way of foot fall alone. We plan to take on two additional, full-time, sales consultants in the near future in order to focus heavily on sales generation and aftercare. We will achieve this by hiring young people who have recently finished their formal education and develop them as individuals. This will be done under the government apprenticeship scheme, for which we are applying for grants. This will also enable us to offset up to 50% of the training costs of these new employees.
We're offering 15% of the equity of our business in return for £60,000, via a FCA regulated platform, operating under the HMRC approved EIS (Enterprise Investment Scheme). https://businessagent.com/crowdfundinginfo/diamond-emerald-exchange
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Why all the IFISA fuss?
The Innovative Finance ISA - or IFISA – is gaining attention at the moment for a number of reasons, but here are 4 of them;
So just what is an IFISA anyway? Well it is a tax wrapper for UK investors who want to lend money collectively using Financial Conduct Authority (FCA) regulated peer-to-peer (P2P) lending platforms to individuals or businesses.
What that means is that any income or capital gains that you make from your investment (the money you have lent), that is within the IFISA wrapper is tax free. If that doesn’t sound like much it is worth noting that for every £1 in income that you receive from the money that you lent via a P2P platform you pay 40p tax as a higher rate tax payer, 20p as a lower rate tax payer. That cuts your £1 down to 60p or 80p respectively (and to 55p as an additional rate tax payer). Within the IFISA wrapper you receive the full £1.
Why would anyone want to lend money rather than save it? Well because the rates of interest – the income that you can receive – are much more attractive than those of a typical cash savings account. At present you will struggle to receive 2% annual interest rate for a cash ISA, but IFISAs are offering 5% to 15% annual interest.
Sounds like a good deal to me! It does doesn’t it and therein the nub of the concern that many commentators have about IFISAs. They believe that the high interest rates and the ISA brand will seduce savers looking for better returns for their money without realising that P2P lending is a lot, lot, riskier than a cash investment and that an IFISA is not covered by the Financial Services Compensation Scheme (FSCS) – i.e. if you lose your money you lose it, there is no safety net.
OK so what is P2P lending then? It’s a form of investing where people with money who are looking for an income (interest) lend to credit checked individuals and businesses that are looking to borrow. They do so collectively through the P2P lending platforms, which amalgamate the money of those willing to lend.
The platforms source, credit-check the potential borrower, facilitates the loan and automates (as much as possible) the process of lending and borrowing (inclusive of the legal and regulatory requirements) and takes a fee/commission for doing so.
This is what Banks have done with savers (depositors) money for many years, so there is nothing new about the process. What is new is the technology (platforms) which reduces the costs of lending money and creates visibility to the lending/borrowing process so that individuals with money to lend can do so directly.
As a result the interest (income) rates that P2P platforms can offer lenders are higher than those that a Bank can offer. However, cash in a Bank deposit is protected up to the value of £85,000 per person, per Bank. Cash lent via a P2P platform is not protected – if you lose it, you lose it.
I still think an IFISA sounds attractive. The reason that IFISAs sound attractive is that anyone with cash savings from which they are seeking to receive an income will want to maximise the power of their savings and receive the highest possible income from them. Cash savings have low interest rates at the moment, most below 2%, whilst P2P interest rates are much higher, typically upwards of 5%. However, P2P lending is an investment not a savings account and, as with any investment, a P2P loan comes with the risk of losing some or all of your money, so if you cannot afford to lose it you should think twice about investing it.
If you would like to know more about the rates of return, availability of IFISA and default rates for P2P platforms lending to businesses why not check out our comparison table?
Peer-to-peer lending – also known as P2P lending, debt crowdfunding and marketplace lending – is an alternative financing model whereby people borrow from other people, rather than going to their bank for a loan. It’s actually an approach to borrowing that predates banks, but its resurgence over the last decade is the result of two primary factors: the reduced willingness of banks to lend as freely following the financial crisis at the end of the 2000s, and the near-ubiquitous access to rapid internet service.
Now there is a good selection of well-established crowdfunding platforms dedicated to marketplace lending for business. These bring together thousands of investors on a website which in most cases simplifies the borrowing process and speeds it up. The business loan application itself works much like any standard bank loan: request an amount, explain its purpose, display recent financial figures and await a decision.
With P2P lending, that decision can be made extremely quickly and, in many cases, the funds released within as little as one week. For the most part, credit checks are still required, company accounts still need to be revealed, and the affordability of loan repayments will be assessed, but companies which have been rejected for business loans from their banks may find a more open-minded audience through P2P lending.
It’s no surprise that seeking alternative finance online is still gaining in popularity. The loan amounts available, application fees, terms and conditions and rates of repayment may vary depending on the peer-to-peer lending platform and the value of the loan. Depending on your business financials and the amount you’re looking to borrow, your loan may be secured or unsecured against assets, and you’ll almost certainly need to offer a personal guarantee. If your business loan application is successful, you’ll probably begin making repayments on the loan within a month or so of receiving it.
It’s important to remember that the consequences of being unable to afford repayments can be just as severe as failing to repay a bank loan: as well as penalties and fees, your credit rating may be adversely affected and your business and/or personal assets may be at risk if you fail to keep up repayments.
But from whom are you borrowing?
The P2P lending platforms themselves aren’t the lenders; they provide the marketplace and interface for lending to take place, and a pool of investors willing to lend. Depending on the platform, the investors may be professional investors or high-net-worth individuals, or everyday people with disposable income seeking a good return on their investment. Some platforms set minimum lending amounts of £10,000, while others set a limit that’s far lower. The main criteria for investing in peer-to-peer business borrowing are that you fully understand the financial risks and never invest more than you can afford to lose.
The return on investment varies by platform, but all investors have a 14-day cooling off period during which time they can change their minds. The industry is regulated by the UK Financial Conduct Authority (FCA), but the Financial Services Compensation Scheme doesn’t apply. Not every platform offers a way of selling on the loan, so it’s essential never to lend money that you may actually need; there’s no guarantee you’ll get it back at all, let alone according to the terms of the loan.
‘Due diligence’ is an absolute must for borrowers and investors alike. It is recommended that all would-be business loan borrowers carefully assess their business strategy and the affordability of fees and loan repayments before signing, and that would-be lenders take independent financial advice if they are not professional investors, and research both platform and the business they are considering lending to. If the sums add up, you can apply for a business loan here and search our marketplace for loan-based investment opportunities here.
The financial crisis of the late 2000s made a marked difference to banks’ willingness to lend; business overdrafts became harder to come by and business loan applications met more often with a rejection. Even companies with a respectable credit score and a solid financial history can find themselves turned down because their bank is decidedly risk-averse.
So what other business options are available?
Here we introduce the most common alternative finance routes available to business borrowers.
Asset-based finance for business is the process of borrowing money using companies assets as the security against the loan. Assets may include property, vehicles, equipment or stock, to be stipulated within the terms of the credit agreement. The greatest risk to the borrower is that defaulting on the loan may result in the repossession of key assets. Interest rates and terms will vary depending on the lender and the amount borrowed.
Debt crowdfunding (also described as loan-based crowdfunding and peer-to-peer lending)
The principle of debt crowdfunding is simple: rather than applying for a business loanbu from a single source, a loan application is posted on a crowdfunding website and multiple investors – who combine to become the crowd - have the opportunity to lend varying amounts towards the total loan request. Speed is the greatest advantage to the borrower, with fast decisions and release of funds often possible. Interest rates and terms will vary depending on the crowdfunding platform and the amount borrowed.
Invoice finance is a form of asset-based finance. Of the £20bn+ lent through asset-based lending in 2015, 80% took the form of invoice borrowing, according to the Asset-Based Finance Association (ABFA). Borrowing is funded against unpaid or accounts receivable (the assets, in this instance). This can work similarly to peer-to-peer lending and auctions, where multiple people or businesses bid for invoices, or may more closely follow the invoice factoring model, where factoring companies buy invoices in staged payments, minus fees. Fees, interest rates and terms will depend on the platform or provider, and whether a factoring route or asset-based loan route is more suitable will depend on the amount and commercial nature of the invoices.
Merchant cash advance
This alternative business finance model uses a card terminal as the basis for lending. The lender’s relationship with the card terminal provider allows them to take a percentage of the revenue paid via each card payment; it’s taken at source. These percentages form the loan repayment, rather than a fixed monthly sum. For this reason, it may be more suitable for businesses with seasonal or variable monthly revenue; it’s also one of the few areas of business borrowing which may not require a credit check. Percentage rates and terms of repayment will vary according to the lender and the nature and turnover of the business.
Businesses can apply online here at businessagent.com for crowd based lending, but please do be aware that borrowing can entail significant risk – for the business and for the directors if offering a personal guarantee – and that if you are unsure of the obligations or finances it is recommended that you seek advice from a qualified independent financial adviser.
How closely do you read the small print in the contracts you sign? People have been skim-reading terms and conditions for decades, often ignoring or failing to understand important information, and it’s possible that the box-ticking necessary to agree to various websites’ terms and conditions has made the average person even less attentive to the details.
But the fine print tells you what will happen if making loan repayments becomes challenging. And as banks have been more reluctant to lend following the fallout from the recent crisis, applying for business loans from online lenders has grown in popularity.
When you borrow money for your business from a reputable loan crowdsourcing platform, there’s little reason to think that the terms and conditions will be anything unusual or onerous, or anything but transparent. But that doesn’t mean that the details aren’t important, or potentially damaging to your business if you fail to make repayments. Business owners are deemed to be responsible for their own financial decisions, or to have the good sense to involve an independent financial adviser, so the onus is on you to protect your own interests.
With that in mind – and stating loud and clearly that we recommend any credit agreement be read and understood in full before signing – we’ve highlighted 7 common small print terms in business loans to read up on carefully.
It might seem obvious, but bear with us. Arrangement fees and APR (annual percentage rate) ought to be transparent from the outset of any application; they’re the basis for your comparisons between lending providers – but they’re not the only financial figures to factor into your calculations. Look for additional fees and charges within the terms and conditions to be sure you’re aware of any extra costs for overpayments, early settlements or missed payments. If repaying early is a real possibility, you want to be sure your loan is flexible enough that you won’t be punished for doing so.
Your loan agreement should set out due dates for each segment of loan repayment; if you miss or are late with a payment, it’s possible that default interest will be charged. This is additional interest charged on the amount you have failed to pay, and it’s usually calculated daily from the date you should have made the payment to the date you do make the payment. The rate of interest will be set out within the terms of the loan – make sure you check what could be in store if you miss a payment.
You’ll need to pass credit checks, meet repayment assessments and provide company accounts in order to qualify for a business loan – but that may not be the only time you need to give lenders a look at your finances. Further assurance clauses can require borrowers to demonstrate to lenders, investors and/or the peer-to-peer lending platform that the business is in healthy financial shape at any time during the loan repayment period.
The majority of loans taken out will involve the borrower offering a personal guarantee against the loan. A personal guarantee is much, much more than a promise to do your best, and the word ‘personal’ hints at the real risks associated. It isn’t just the business that would be liable in the event of failure to repay, it’s the director offering the personal guarantee and his or her personal assets. If your contract stipulates a personal guarantee, be sure that you understand that your family assets may also be at stake.
Taking out a loan is a risk. How great a risk depends on the amount, the affordability and flexibility of repayment terms, and the extent of your liability in the event of failing to make repayments on time or defaulting. The reliance clause is there to protect lenders, investors and online lending platforms against any claim that you didn’t understand all the risks involved in requesting a loan. Quite simply, by signing, you accept the reliance clause stating that you have not relied on the words of the lender or platform in assessing the loan – you take responsibility for appraising and investigating the risks yourself.
These are the limitations of your loan, sometimes known as the loan covenant. These special terms set out certain things you agree to do or not to do. Typical examples include taking out additional loans which might take priority over the loan you’re signing for in the event of default, or loans over a certain value – or perhaps any loan at all. Be sure to check the special conditions of any credit agreement to make sure you don’t risk contravening the agreement in the months and years ahead.
Loans are typically either secured or unsecured. A secured loan means the money is offered against certain assets – property, investments, vehicles, stock or other items – known as security. If the borrower defaults then the security may be sold to repay the debt. It’s easy to assume that an unsecured loan means that the possessions of the company or owners of the business are safe from repossession in the event of default, but that’s not always the case. Do your due diligence and take advice on your exposure to risk.
As ever, if you’re in any doubt at all about the meaning, implications or risks of any loan and its terms and conditions, we strongly recommend consulting a suitably qualified independent financial adviser before you sign.
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