Platform-based lending has undoubtedly opened up the UK’s corporate finance market. Five years ago, a small company seeking debt funding would have – almost by default – gravitated towards one or more High Street banks, or perhaps a specialist business lender, recommended by a broker.
The rapid growth of the platform lending market has changed the game. Small and medium sized businesses can now look beyond traditional sources of debt finance and borrow instead from communities of investors who are prepared to collectively lend cash. And with the memory of, and regulatory fallout from the financial crisis still depressing bank lending policies, many businesses are able to access funds that wouldn’t otherwise be available.
Thus, you could argue that, thanks to peer 2 peer and other platform lending models, it has become much easier for businesses to borrow cash. In one sense, that is undoubtedly true. Investors who use debt platforms are in search of higher returns than would be available from, say, savings accounts and are, therefore, prepared to commit cash to support viable businesses. The availability of a hitherto untapped reservoir of funds has by extension made it easier to borrow.
The Verities Apply
But that does not mean that a business should regard borrowing via a platform as an ‘easy’ option. Private individuals – be they mainstream or sophisticated High Net Worth investors – do not want to expose themselves to undue risk. And the verities that apply to bank lending still apply here. Not only should a borrowing company be viable and in a good position to repay the debt, plus interest but he prospective borrower should also be able to demonstrate its viability. All platforms carry out checks and some degree of due diligence before exposing members to risk.
Along with their advisors, businesses seeking to borrow should prepare themselves for those checks. Making such preparations will make it easier to attract support from lenders.
Up to Date Accounts
Lending platform operators are the eyes and ears of their community of investors. Or to put it another way, the platform takes responsibility for carrying out all the necessary checks on the creditworthiness of a prospective borrower. This provides investors with the assurances they require.
Typically a platform will seek evidence of the company’s trading record and as such will ask to see filed accounts for a specified number of years. However, the platform may also ask for the latest management account figures. Thus, before approaching a platform, the business should ensure that its management accounts are as up to date and accurate as possible.
Depending on the size of the loan, the platform may require security. This may take the form of a specific item being put up as collateral or the lender/platform taking a charge over all the business – or over an personal asset, such as a home. The key for the business and its advisor is to ensure that ownership of assets can be verified.
The Business Plan
Before borrowing, the business owner or manager should be clear about why the capital is required and what it will be spent on and how the specifics of a particular funding event relate to the wider business plan.
Articulating, and therefore defining, a clear reason for borrowing will also help the business make a platform choice. For instance, if what is required is a solution that fills in gaps in cashflow, one option might be an invoice trading platform. If the purpose is to buy equipment, then a term loan will be more appropriate. If a company is dealing with a special situation – such as the loss of a big customer – then the best course of action might be platform where the associated investor community is made up of sophisticated investors with experience of assessing risk.
When a business borrows from a bank, it will often be asked to sense test the figures, particularly in terms of the ability of the business to repay the loan. Typically businesses will be asked to look at ‘worst’ as well as ‘best-case’ revenue scenarios and their impact on repayment.
A lending platform may or may not ask for a formal sense test, but it is a good exercise to carry out.
All loan applications will require a degree of due diligence as outlined above, but depending on the sum required and the nature requirement, the process might require little more than the submission of key details and assurances (uploaded to the platform) or a more stringent process that will require direct contact with the credit specialists of the platform in question.
Research represents a key component of the preparation process. Once a business has looked at its own requirement and established how much it needs to borrow and why, it is important to look at the options in terms of platforms, their lending criteria and the types of loans they offer.
The Alternative Finance universe offers a broad range of lending solutions for businesses and no two providers are the same. To help brokers and businesses identify appropriate providers, the Route – Finance has published The Alternative Finance Guide 2017. Download here.