Peer to Peer (P2P) Lending
P2P lending has only been around since 2005, it’s a virtual market place that facilitates the matching of individuals with borrowers, both business and individuals.
Generally offers a better return for savers than banks, though there is more risk involved, with a lower interest rate for the borrowers than they could get elsewhere.
– Interest rates can be fixed for the duration.
– Requires a lower level of security and personal guarantees than banks. When applying for P2P lending, businesses can opt out of offering security, though there is a premium for this.
– Applicants with an adverse credit history have a better change of obtaining a loan with a P2P lender than from a mainstream lender. You are not relying on a banks risk-adverse credit committee.
– Covered by the FCA.
– The Government has announced that peer-to-peer savings will be permitted to be held within ISA’s. (for the lender).
– Rigorous checks, only a small percentage of applications are accepted.
– Not protected by the Financial Services Compensation Scheme.
– Still a relatively new market.
– Returns from lending via peer-to-peer are currently paid without any tax deducted, you’ll need to declare this income to HMRC on a self-assessment return, for the lender.
There are an ever increasing number of providers in the market. A few of the more established provides include Funding circle, RateSetter Marketinvoice
Suited for longer term finance requirements say for capital purchases.
– The interest on business bank loans is tax deductible.
– Fixed-rate loans are easy to budget for as repayment stays the same. Helps when producing a cash flow forecast or budget.
– Difficult to obtain.
– May be required to provide personal guarantees, or security in the form of assets.
– Interest rates for small business loans can be high.
You don’t always have to go to your own bank there are a number of financial institutions that offer loans to businesses.
Enterprise Finance Guarantee scheme (EFG)
Scheme brought in by the government many years ago to encourage banks to lend. The theory is if a business was turned down by conventional banks the business could if it met the criteria reapply using the EFG as security.
The reality is the banks hardly ever lend against the EFG. Have a look at this HMRC link for more details on the scheme and banks that have signed up.
Good for short-term borrowing to get over immediate cash flow requirement.
– The interest is calculated only on the amount of funds utilized. Great savings on the interest cost compared to a fixed-rate loan.
– Payable on demand.
– There are set up costs to consider
– May require guarantees against the business and the owners
Sales invoice factoring
This is where the business sells its sales invoices to a third party for an immediate inflow of cash. The factoring company gets paid when the invoice becomes due. Generally they will pay a percentage once the invoice is presented to them and the balance when customer settles their account. This could be a 70/30 split though could be negotiated down depending on the credit worthiness of the customer and their location.
– Great for cash flow
– Maintains relationship with customers
– Able to pay suppliers, may be negotiate better terms
– Doesn’t affect your credit score
– Could be costly, set up fees, transaction fees, standing monthly fees
– Often tied into a year contract
– Factoring company has charge over the assets of the business
– Could affect the business ability to get additional credit
– If dealing in foreign currencies you often have to use their FX rates
– They have tight credit check criteria that may exclude some of your customers.
– Personal guarantees are often required.
All the high street banks offer this service as well as independent providers. Set up can be anything from a month to three months depending on circumstances.
A Business Angel
This is an individual who invests in start-up businesses and offers their expertise to help the business grow.
– The capital investment does not require repayment unlike a bank loan. If the business takes off, then both the owner and the investor benefit.
– Your chances of success increase. Angel investors typically offer years of experience and expertise when it comes to successful start-ups/SME’s.
– Angel investors expect a higher rate of return than borrowing funds.
– Angel investors always want an exit strategy usually within five years.
– The owners’ equity in the business is diluted, giving away your future net earnings.
– You will lose an element of control of your business.
Business owner/ Family & Friends
The business owner reaches out to their personal network in the hope they will make an injection of cash or other resources. Funding is emotive often there is little consideration of risk.
– The motivation to invest may not be purely for financial reasons. They will allow time to build the business and may not incur the pressure to repay as urgently as other forms of finance.
– The finance available from family members and friends is often said to be limited.
– Money is often a sensitive subject; it could cause disagreements with close relatives and friends.
Be careful when choosing somebody to approach, it may have consequences on your relations far beyond the initial request. Its advantageous to put any agreement in writing and have both parties to sign to avoid any misunderstanding down the line.
Niall O'Driscoll is the Founder and Principal of OD Accountants a leading accountancy firm based in Bethnal Green in East London. Niall is a Fellow of the Chartered Institute of Management Accountants, and a patron member of the Irish International Business Network. Follow Niall on Twitter @NiallO_Driscoll