But many businesses are still wary of going down that road. So this week I’ve been researching crowd funding, or peer to peer lending as it’s also known, and speaking to East Midlands experts on the subject, David Griffith and David Marshall of Sterling Capital Reserve to get the facts, the pro’s and the cons.
So what is it? An alternative way of getting a loan for your business, designed to fill the gap where the main-stream banks aren’t able to help.
Many businesses use crowd funding to break the vicious cycle to get their business to a better place and can then go back to their bank, having repaired their balance sheet and improved their figures. Crowd funding loans can also be refinanced with your bank.
It’s an online auction where individuals bid to lend money to your business. You decide how much you want to borrow, they decide if they want to invest and at what interest rate.
At the end of the auction there’s a single loan document prepared, and you make a single monthly repayment which includes interest and capital.
There are many other platforms that help start-ups and younger companies with equity investments, but that’s for another blog.
Key Facts about crowd funding for business loans
- Tend to be for established businesses and not for start-ups
- Usually need at least 2 years filed accounts and recent management accounts
- Loans are for ANY purpose
- Loans can usually be from 6 months to 7 years
- Interest rates are fixed and range from 6% to 12% depending on the perceived risk
- Some platforms can only be accessed by authorised brokers
- Most have no penalties for paying off loans early
- Most platforms have their own underwriting teams
- Most loans fill up very quickly once past the underwriting stage, meaning you get your cash quickly
- Due diligence is effectively done by the pool of potential investors via online Q&A
- The key factor is affordability – can the business afford the repayments
- There is just 1 relationship with the platform, not with individual investors
- There is an arrangement fee to pay; this is deducted from the loan
- Investors get their money back monthly as the loan is repaid
- The loan can be called in if you default on repayments or any other covenants set
- Pros
- Ideal where you’re unable to get bank funding for any reason
- It’s a lot quicker than the bank so great if you need funds quickly – in weeks rather than months
- There are no sector restrictions
- If you have a slightly adverse credit history you have a better chance than with a bank
Cons
- It can be lot more expensive than bank debt
- Arrangement fees can be more expensive than banks
- Be careful of putting commercially sensitive information in your business plan, as it will go public
Getting the best interest rate
If you produce a good plan with over and above the minimum information asked for and if you respond quickly to any questions from potential investors you’re likely to get a better rate.
Popular investments that are over-subscribed will throw out the highest interest rates bid and you’ll get a better weighted average rate.
What platform is right for you?
There are 4 main platforms used for business debt funding. Each has a different approach and is best suited to certain types of business, sector and levels of loan.
The best way to approach crowd funding is to use a broker like Sterling Capital Reserve. They know the platforms inside out and will put you with the best fit, as well as prepare the information you need. They have strong relationships with the platforms, so their applications get priority, and they can speak to them to make sure your application is fully understood.
Here’s a quick summary of the 2 leading platforms, Funding Circle and Thin Cats
Funding Circle
>Thin Cats
Amount of funds
Up to £100 – £150k
£100k +
Security needed
No (just PG’s)
Yes
Personal guarantees needed?
Yes – full amount
Usually, can be limited
Average interest rate
6% to 12%
10% to 12%
Business stage
Established
Established
Underwriting team
Own team
Done by broker
No. of years accounts
2
2
Types of investors
Lots of small ones
Fewer more professional ones
Minimum investor bid
£20
£1k
Sector restrictions
None
None
Reason for funding
Any
Any
Fees
2% to 4% of loan
1% to platform, 2%-4% to broker
Term of loan
6 months to 5 years
6 months to 7 years
Timing to get cash
10 days to 2 weeks
3 weeks +
Access to platform
Can access yourself
Broker only
If you’d like to know more, David Marshall at Sterling Capital would love to hear from you, on 0115 9849800 or email (link sends e-mail). They have tons of experience in this area and can advise you on whether crowd funding is right for you, or introduce to a lender who can help.
I hope you’ve found this useful, I definitely know a lot more about crowd funding than I did on Monday morning!
As ever, if you think this might be useful to anyone you know, please do forward this onto them.