There is an alternative to traditional lending from a Bank, debt crowd-funding and peer-to-peer lending. There are risks for the companies doing the borrowing, just as there are for the lenders. Here, we look at 6 key things to bear in mind before you apply.
Credit checks and scores
Traditional lenders require conduct credit checks before lending, and debt crowdfunding is just the same. Having a good business credit score is important for securing a loan, so if a high street bank turns you down because of a poor credit score, don’t assume crowdfunding will be any different. Fortunately, credit reference agencies are more open and interactive than they used to be; before applying for a business loan – at the bank or from a P2P lending site – check your own company credit performance and address any issues affecting your score. Don’t forget: multiple applications for loans in quick succession can have a detrimental effect on credit scores.
Due diligence is the process by which both the crowdfunding site and each individual investor will decide whether your company is worth lending to, and indeed that you are who you say you are. This will include verifying the identity of directors, examining the company’s balance sheets and profit and loss accounts, credit checking for prior repayment history and existing outstanding debt, and other elements of background research. It’s also used generally to mean ‘doing your research’ – just as you should do your due diligence to be sure that alternative financing such as peer-to-peer lending is the right route to take, if other options such as high street bank business loans or government grants might be available, and indeed whether one particular crowdsourcing platform offers advantages over another.
It may seem obvious, but calculating your fees at the outset will ensure you get the best deal from a crowdfunding loan, ensure you’ve chosen the right crowdfunding platform, and perhaps encourage greater due diligence in investigating other funding routes. Most platforms charge a fee when you successfully raise your target loan amount from the crowd, and you’ll be making your capital and interest repayments within a month or so of receiving funds, which could be in as little as a week after reaching target. Always calculate fees plus interest and compare with alternative finance options.
A loan covenant describes certain terms and conditions a borrower needs to stick to; failure to do so may mean that a lender can demand an immediate repayment of the entire loan. Such conditions may include particular professional insurance, maintaining certain cash flow and retaining capital assets, or taking out another loan. Loan covenants are commonly found in bank loans, but can also be found in the terms of some peer-to-business lending. As with any contract, be sure you are comfortable with every condition before going ahead with your loan pitch.
A personal guarantee – or a director’s guarantee - means taking on personal liability for the company’s debts in the event that the business itself cannot make the repayments. Offering a personal guarantee makes the individual more vulnerable than when protected by the legal limits of liability offered by a limited company, for instance. Before taking out a crowdfunded loan, it’s worth taking independent advice from your solicitor, to understand the full extent of liability.
Secured loans vs unsecured loans:
Larger business loans - of more than £25,000, for example - will almost always be secured against a company asset. The security you are asked for may vary depending on the crowdfunding platform; the amount you are looking to borrow; and the nature of your business, the assets at its disposal and their liquidity (how easily they can be sold without loss). Property is a typical security, but other kinds of collateral may also be viable. Unsecured loans are typically for smaller amounts, but may be offered at higher interest rates, because they present a greater risk to the lenders. They will almost always require a personal guarantee, as do many secured loans.
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