Wonga.com has publicised that it is offering loans, which can run to 4,000 per cent annual interest rate, to small businesses, and enquiries are going through the roof. That’s scaring the banks who hold their grown-up debt and who are driving them into the arms of payday lenders by not coming up with funds
But do you love your bank? Probably not too much. They seem to charge you fees for everything and only deliver advice if you ask - rather than coming to you with good ideas. Then, when you want what banks are supposed to offer - a source of money - they are not so keen to deliver. The old phrase that banks give you an umbrella when the sun is shining and take it away when it rains remains true. Right now, it’s truer than ever. Even if your credit rating is pistol hot, an overdraft, or an extension to an existing deal, is proving increasingly difficult to get. They want a secured loan instead.
Unfortunately, some small business owners are watching the TV ads and seeing money available within 15 minutes and failing to recognise the dangers involved. They are also failing to do the necessary research.
It’s not as bad as it looks. You can change banks. More to the point, you are not constrained just by the big five high street operators. Unless I’ve been asleep at the wheel, switching from one to another in that group delivers little if any change. Be grown-up and look further afield. Start with the National Association of Commercial Finance Brokers (NACFB). They have access to 75 funders which operate across the whole of the commercial market.
The basic message from the NACFB is that rejection from your traditional, mainstream method of funding is not the end of the story. That’s so important to bear in mind: the bank says ‘no’ and makes lots of businessmen hunch unhappily over their desks. Instead, it should be the start of a hunt for a better bank. You’d do that with mobile phone contracts, vehicles and trade suppliers. So why not your bank?
Small businesses can access one of the association’s 950 brokers across the UK. They can often source funding where it has been refused by mainstream sources and, quite often, repackage existing facilities in a way that saves money. You might also look at smallbusinesssfinancedirectory.co.uk. It covers brokers, funders and equipment finance specialists across the UK.
There are other routes to funding and much of it, as you will see, is a function of the internet. In its infancy, and even 10 years ago, many business owners would have fought shy of looking on the web for sources of business finance. No longer - it’s now a mature route to information of even the most important kind.
The credit crunch might have reduced available bank funds but it has also reduced interest rates. In particular, returns for savers are tiny, or, if you’re one of them, derisory. That has created a commercial opportunity: one-to-one financing. Private individuals who have cash effectively lying fallow are looking for a decent return and are finding it by lending direct to businesses.
The massive investment errors in the City and on Wall Street preceding the crunch have made people wary of traditional investment, far readier to apply and trust their own judgement. It could well be that the biggest loss to the banks in future years will be that business finds one-to-one financing a better deal and stays with it, even when we’re back on the sunlit uplands.
Funding Circle has been in existence for less than two years, but has already leant over £30 million to small businesses. It is a simple, straightforward way to connect people who need a loan with those who have cash available - no intermediaries, no long delays. Your business has to have been established for more than two years. Then you have to be approved by Funding Circle’s team of credit assessors, all of whom are ex-bankers. Once you are approved you can borrow between £5,000 and £75,000. The interest rate varies between seven per cent and nine per cent. The process is quick, too - borrowers get their money within two weeks of approval. The backers include some seriously big players such as Charles Dunstone of Carphone Warehouse fame.
You may have looked at factoring. Naturally enough, the banks and their factoring divisions are only interested in a long-term arrangement. But the principle of invoice discounting (which is what factoring represents)might well suit you, albeit not for years.
Take a look at MarketInvoice. Similar to Funding Circle, the facility was created by bankers. Their on-boarding team does due diligence which could take seven days. Then your invoice or parcel of invoices goes into an online auction. The minimum value is £5,000. The auction is based on payment of value, usually between 70 per cent and 90 per cent with a fee of maximum two per cent.
This is a flexible solution to waiting for debtors to pay. As tough as you might be about cashflow management, any unpaid invoices are robbing you.
Would you use a pawnbroker to solve a short-term cash issue? My attitude was simple: no way - it’s like a payday loan, isn’t it? Then I went and spoke to one. It’s actually a far better deal than I possibly imagined. In the first place there is the National Association of Pawnbrokers with over 1,800 members and their trading is governed by the 1974 Consumer Credit Act (who knew?). It’s a more responsible and mature business sector than its outdated Dickensian image. A typical charge is seven per cent per month and different pawnbrokers will lend against a variety of items, although jewellery and watches form the bulk of their business.
Take a look at borro.com, the online version of pawnbroking (although they prefer to be referred to as personal asset lenders). They lend up to a maximum of 70 per cent of valuation with a typical monthly rate around five per cent - it varies with amount and percentage of value. They have a far wider variety of items that they will lend on than the majority of pawnbrokers.
The virtues of this form of borrowing are several. It’s fast: you get your money within 24 hours. There’s no upfront arrangement fee. You don’t have to explain what you want the money for. It’s flexible: a standard contract is six months renewable but you can repay the loan in one week without penalty if you wish. -
No comments yet