Who Lends Wins

With the changes in the economy over the last 5 years, traditional lenders such as banks have been more cautious with their lending criteria. This can put a strain on businesses – in a climate where short term loans and overdraft extensions are not necessarily available to use to ease cashflow.

Insolvencies have been at a surprisingly low level over this period. Is this because of low interest rates or could it be due to the variety of finance options in the market?

Over the last two years we have seen the rise in popularity of various “crowdfunding” platforms such as:

- Funding Circle
- Crowd Cube
- Crowdfunder
- Kickstarter
- Thin Cats

These funders allow the general public to invest in businesses that they ordinarily would never come across. Crowdfunding is offered to businesses for both unsecured investments and equity stakes. So, importantly, there do not have to be assets in the company against which the new investment can be secured (this has been an issue with traditional lending in recent years).

The first place directors tend to look for money is with asset based lenders – securing new finance on (typically) tangible assets such as property, equipment and vehicles, and, most commonly, on debtors and invoices. Invoice discounting and factoring has become a very competitive marketplace. Banks and second tier lenders also operate in this space. This is leading to different products such as single invoice factoring or, in one case, single invoice factoring by auction.

As with all these finance options, the devil is in the detail. Although the requirement for the money can be urgent, it is important to look at the total cost including fees, service charges, limits and termination fees.

Directors often secure finance on their own properties and sign personal guarantees, making them liable should anything go wrong.
This is not new – however, it may be easier for directors to sign up to a costly finance agreement rather than address the underlying issues the business is facing. If they are not making appropriate changes then the new finance could only be a short term solution. This is worth discussing with TMP.

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