Peer to Peer loans

In this post I will cover Peer-to-peer lending, also called “social lending”, is the practice of borrowing or lending money without intermediaries such as banks being involved.

A peer-to-peer exchange site, such as Zopa or Funding Circle will put you in touch with private lenders, who create a personal relationship between you and the lender.

These Websites are set up similar to auction sites like Amazon and eBay, where borrowers and lenders can auction what they have to offer and come away with the highest (or lowest) bidder.

This allows everyone to choose their own terms and interest rates so that the exchange is beneficial.

A number of companies are now well-established in this space, and several offer generous terms.

Zopa waives all fees for loan applications, reduces interest rates for borrowers who make early repayments, and adds only a one-off fee of £130 to the cost of the loan.

The pros of Peer-to-Peer loans are:

•  Elimination of third party makes process quick and easy
•  Choose your own terms and interest rates so that the exchange is beneficial

The cons of Peer-to-Peer loans are:

• Not subject to the same financial regulations as banks, so the loan terms may not be as favourable
• Can damage your personal credit score

Funding your business personally

This posts looks at funding your business personally.

•  Savings
• Pension led funding
• Friends and family
• Personal loans and credit cards

So, there is a good argument that you should use your money before asking anyone else.

There are different types of savings, examples are:

• Cash
• Savings accounts
• ISAs
• Cashing in endowment policies
• House equity

When considering savings it can be useful to think of putting money into your own business as just switching money from one asset to another. It is still your money.

But, rather than in a low risk environment your money is in a higher risk investment; your business.

The great thing about using your own money is you don’t have to go cap in hand to anyone else and it is quick.

There’s also the bonus of not starting out in business with debt, or giving away a large percentage of the business for a relatively small amount of money at an early stage.

There is another advantage too – if you want to pump more cash into the business later on, the bank and investors often like to see you’re committed to a venture by putting your own money behind it.

The pros of using your own savings are:

• You get all the profits and retain control
• You don’t have any interest repayments or loan charges (unless remortgaging your home)
• It demonstrates your commitment, which can influence financiers at a later date

The cons of using your own savings are:

• You are using up cash reserves that could be useful if your business hits a rough patch
• Assets used to raise money, like your home, are at risk if you don’t keep up repayments
• There can be a lack of due diligence and accountability.

Next is Pension led business funding.

This is where a business owner sets up and uses their own pension fund to provide finance to their business.

The two main vehicles for this are Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs).

Business owners can set up their own schemes and transfer funds in from their existing pension fund.

You will need advice and support from an Independent Financial Advisor. And, the fees will usually be around £2,000.

Once the pension funds are in the business owner’s own fund there are two main funding options:

• A commercial loan from the pension scheme to the company
• The purchase of a qualifying asset

The most commonly recognisable qualifying assets are Intellectual Property like patents, trademarks, designs, copyrights, databases and domain names.

Developing an Intellectual Property pension-based funding strategy requires comprehensive pension review and assessment of company accounts, track record and business plan.

The pros of using your own savings are:

• There is control because it is funding by the directors for the directors
• As well as injecting fresh capital into the business, the Intellectual Property is now held within a creditor-protected pension environment.
• Any increase in the value of the Intellectual Property, or income derived via lease/licence agreements, is free from direct taxation.

The cons of using your own savings are:

• Pension-led funding is not generally viable where available accumulated funds are below £50,000.
• If a business owner doesn’t have a large enough pension pot available to make the process viable, then this form of funding is a non-starter.
• If the business is not successful the business owner can be left with no or very minimal pension provision
• The fees and loss of pension growth can be an expensive way to fund the business

All small businesses are family affairs, when you go into business on your own you family actually comes with you.

Support and encouragement from family and friends is part of our culture. And, for small businesses, family and friends are often a good source of funding.

Funding from family and friends is a cost-effective, popular source of both short and long-term finance. According to the Family Business Network up to 75 per cent of UK businesses are funded in this way.

While family members tend to be more flexible on interest rates and security than the banks, they shouldn’t be seen as a ‘last resort’ funding choice.

If the bank won’t support your idea, are you really prepared to let your family invest?

Be honest with them about the potential risks involved, if your business fails your family may lose their money.

Produce a full business plan and perhaps pay for an independent accountant to critic it.

Keep in mind that funding from family can be a way to reduce Inheritance Tax. This can be a gift, a loan which is written off over time or buying shares in a company which are exempt from Inheritance tax.

The pros of funding from family and friends are:

• It can be easier to get the attention, time and money from family and friends.
• They may require less security, lower interest and more flexible repayments than a bank
• You keep the profits within your family

The cons of funding from family and friends are:

• There is the potential of family conflict if the loan details are not clearly understood
• The whole family may lose money
• Family members may want involvement with the day-to-day running of the business
• Investors may need to request access to their money sooner than you had both planned

The next source of personal funding for us to consider is personal loans and credit cards.

Personal loans can be easier to obtain than business loans or overdrafts. And, the interest charged on personal loans or credit card when the money is used in the business is tax deductible.

It’s not the ideal way to start your business but many entrepreneurs have successfully funded the early stages of their venture this way. The most famous in Google who used credit cards in the mid 1980s.

The pros of personal loans and credit cards are:

• The ability to retain maximum equity means the less you need to give away when you take large funding.
• The ability to escape interest for over a year on either upcoming purchases or funding expenses already incurred would certainly help your business’s bottom line.
• Credit cards are unsecured and allow you to draw down money when you need it.

The cons of funding from family and friends are:

• Start ups are inherently risky, and when you use personal loans and credit cards you are gambling with your personal credit score.
• Debt collectors will after you personal income/assets to recoup what you owe.
• The potential to spend more than you can afford to pay back is not unique to credit cards.  But misuse of any small business funding vehicle can put you in the hole, which is why you should handle them with extreme care.

That brings us to the end of funding the business personally, next we will look at a range of other options.

Funding from customers and suppliers

With customers you can ask for:

• Deposits
• Full or part payment with order
• Stage-payments

All three will ease cashflow and eliminate or significantly reduce the need for funding.

If this seems like something you couldn’t do then it can help to take a moment to work out the value to your customers of offering credit.

If you offer 60 days credit on say £3,000 the value to the customer is less than £40.

£3,000 x 8% x 60/365 = £39.45

This is less than one and a half percent of the total price, is this really the difference between someone choosing you over another provider?

If it is, then the customer could be a highly price conscious (and unlikely to be an ideal long-term client for you) or they may value the credit because they do not have the money to pay you!

The other way to get funding from customers is to ask them for support. Golf Clubs do this with debentures.

An example of an established business doing this is Hotel Chocolat. They raised money for expansion for their business from customers by offering a Chocolate bond.

Not only did they raise money, but they got extensive press coverage.

They offered bonds of £2,000 to £4,000 which gave the investor different packages of chocolate.

The process took six months, cost £50,000 in fees but they raised £3.7m.

This maybe much more than you need but can you use the principle?

Once again, we see the value of creativity in business. Remember, there are no rules.

As well as customers there may be suppliers who are able to help you.

This could be with very generous credit terms, stock on a sale or return basis or a cash investment; especially if you sign a long-term contract to buy from them.

Pubs do this with new tenants who want to spend money to refurbish and re-launch a pub. The tenant ends up buying stock at higher prices than what they can buy in the supermarket but they have the cash they need to launch.

That covers the basics of bank funding and getting support from customers and suppliers.

In the next post we will look personal sources of funding.

Bank funding

This is the first in a series of posts about business funding.

Ever since the world’s bank stopped lending to each other in August 2007, many small firms have found it very difficult to get the finance they need.

There are two types of facility offered by the bank, an overdraft or a business development loan.

It is best to use overdrafts for temporary funding. For example, if the cashflow forecast shows a shortfall for 6-9 months.

If you require a longer-term facility then consider a business development loan. This is because the rates are lower for a loan, and with an overdraft you’ll need to rearrange it every year which takes time and energy.

Bear in mind that the money you need could be a mixture or short and long term funding so consider splitting this in the cashflow forecast.

Whether you apply for an overdraft or a loan the banks will be looking for five key things:

First, there is serviceability. The question on the banks mind is “can the business generate cashflow to cover the repayments?”

This will often come down to a sales forecast so it helps to have extensive market research, a detailed marketing plan, letters of intent from prospective customers or better still signed orders.

Second, the bank will be looking for security to back the lending.

If the business cannot afford to repay the debt how will the bank get its money back? Banks will usually ask for personal guarantees.

Are you prepared to risk your home to fund the business?

Third, the bank want experience; a proven track record and being involved in the industry will go in your favour and against you if you launch a business in a sector you have not worked in.

They will also value business experience of running a company and will like to see a strong management team.

A bank will like a business to have an accounting system, budgets and management reporting in place. Often the bank will insist on management accounts being completed as part of the condition of the facility.

Fourth, the banks are keen to see other funding which they can match.

So, if a business needs £20,000 they are more positive about lending £10,000 if there is £10,000 coming from elsewhere.

Banks like to see other investors or grant funding because it shows other people are backing the business.

Fifth, a bank will required a comprehensive business plan with cashflow, profit and Balance Sheet forecasts for three to five years.

Many banks have their own business planning software or templates that you can use.

However, whatever the banks say (or don’t say) they don’t like risk.

If your business has yet to file accounts or has a trading record of just a few years, the banks will consider you a very risky project.  And, if you’re still at the pre-revenue stage the perceived risk rises through the roof.

The caution of banks can slow down the whole lending process. Even if a bank does eventually advance the cash your business needs, the gap between the initial application and the green light can stretch to months.

But, if you think about this from their perspective it is easy to understand.

Keep in mind that if you apply for a facility of £10,000 over five years at 8% they will generate a little over £2,000 of interest.

This is the banks total revenue and from the arrangement from which direct costs and overheads need to be deducted. If it is an overdraft this could be an annual review so the profit on the deal may be as low as £1,000 or less.

Also bear in mind that the bank gives you the money today but they their profit over five years, so inflation makes the interest worth less.

So, one bad debt can eliminate the profit from one manager’s portfolio.

To help encourage lending to businesses the Government have a number of schemes.

The three schemes we will look at for this presentation are:

• The Enterprise Finance Guarantee scheme
• Export Enterprise Finance Guarantee scheme
• Community Development Finance Initiatives

The Enterprise Finance Guarantee scheme replaced the old Small Firms Loan Guarantee scheme.

Launched in January 2009, the loan scheme provides a government guarantee to help boost the credibility of small business loan applications.

Although established small and mid-sized companies have benefited the most from the scheme, start-ups in the first three years of business account for 37% of all loans offered, with 17% attributed to businesses within their first three months.

Like any normal lending arrangement, the cash for an Enterprise Finance Guarantee loan comes from the bank but the government will underwrite 75% of the loan.

In theory this means you have a chance of securing a business loan even if you don’t have the collateral to back it up.

Loans range in size from £1,000 to £1m, and the time span can range from three months to 10 years.

You can choose to receive the loan in a lump sum, or break it up into regular chunks to suit your business strategy.

The scheme is designed to suit all sorts of needs and circumstances. You can access the finance to:

• Increase a company’s working capital
• Refinancing an existing loan
• Convert an overdraft into a term loan

In addition to the standard capital and interest payments demanded by the lender, Enterprise Finance Guarantee loan recipients have to pay a premium to the Department for Business, Innovation and Skills.

This is usually equivalent to 2% per annum on the outstanding balance of the loan, and is assessed and collected quarterly throughout the loan’s lifespan.

Although this is a Government scheme, the decision on whether or not to grant a loan using this scheme is wholly delegated to the bank; the government does not have a say.

Like any loan application, an Enterprise Finance Guarantee loan requires an application and a raft of supporting documents, including a business plan, management accounts and financial projections.

The Export Enterprise Finance Guarantee scheme is similar scheme exists for businesses that trade overseas but the scheme only covers 60% of the loan.

Community Development Finance Initiatives are loans that are delivered on a local level and are for deprived communities. A Website will help you find an initiative in your area www.FindingFinance.org.uk.

The pros of Bank Overdrafts and Loans are:

• The loan is not repayable on demand and so available for the term of the loan.
• You do not have to give the lender a percentage of your profits or a share in your company.
• Interest rates may be fixed for the term so you will know the level of repayments throughout the life of the loan.

The cons of Bank Overdrafts and Loans are:

•  Larger loans will have certain terms and conditions that you must adhere to, such as giving the bank quarterly management information.
• Loans are not very flexible – you could be paying interest on funds you’re not using.
• You are likely to need to provide a personal guarantee which puts your home at risk.

But, banks are not the only game in town so the next post will explore funding from customers and suppliers.

Are you heading for 12 years of poverty?

Research by HSBC shows that UK population expects to spend 19 years in retirement but their savings will run out in 7 years.

Out of 15 Countries surveyed, only Egypt has a lower percentage of regular savers. The main reason being the cost of day-to-day living.

The research revealed that UK people want a retirement income of 73% of their working life income but 66% of the population are not saving enough.

Perhaps the most shocking statistic is that 81% of the population do not have a professional prepared retirement plan. However, 47% of people that invest in a professionally produced plan end up saving more.

The biggest retirement fears are financial hardship and poor health.

Business owners are in a unique position. They have the opportunity to create more income to fund retirement and capital value by developing their business.

Many of the ways to develop a business are low risk and cost little or no money.

The five actions recommended by the research are:

Step 1 – Get real about your retirement needs
With life expectancy increasing and the cost of living increase while investment returns falling it is time to put together a personal cashflow forecast to the date of your death.

Step 2 – Put your priorities in order
With 43% of people choosing to save for a holiday rather than their retirement, a change in spending patterns maybe required.

Step 3 – Be aware of major life events
When planning take account of major life events like starting a family, getting a deposit to buy a home, kids education and marriages.

Step 4 – Have a written plan
Commit to having a written plan and start saving now, even if it is small.

Step 4 – Ge professional help
The research makes it clear that professional advice pays. Looking at respondents with average incomes, those who use professional advice when planning their future have the greatest levels of retirement and other savings.

Although Sackmans is not regulated to advise you where to save, we can play a valuable role of working out how much capital you need to accumulate.

We can also explore the role of your business with a business valuation and profit improvement plan.

Our goal is to have all our clients in a position of financial freedom and security.

Target market – part 2

This article focuses on researching your existing customers.

The first thing to consider is which customers do you speak to? The answer is the most enjoyable and profitable because you want more of them.

If your business is like most businesses then you will have a mix, some will be better than others. The 80:20 principle suggests that there will be an un-even split. Perhaps 80% of your  profit comes from 20% of your customers?

Once you have identified your best customers you need to contact them and ask for their help. You could say you have created a customer focus group and want their input.

You can explain that on 20% of customers are being invested and there will be a prize draw as a thank you.

Design and complete a questionnaire yourself. Do not send them out to clients for them to complete because you will not get many back and you will not have the opportunity to probe. The phone call you make to complete the questionnaire is a valuable use of your time.

Before calling the client complete as many answers as possible to these questions:

1. How did you first hear about us?

2. How long have you been a customer?

3. What products/services have you bought?

4. Why did you buy in the first place?

5. Is there anything we offer that in your opinion is unique compared to the competition?

6. What is it we do that makes us stand out from the competition?

7. What are your three biggest fears/frustrations when dealing with us and people in our industry?

8. What three things could we improve upon?

9. If you were my business adviser, what one thing would you tell us to do?

10. What publications do you read?

11. If you were looking to buy our product/service from another supplier where would you go to source them?

12. How often would you like to be contacted with new information, or be contacted by the salesperson or company service person?

13. Do you prefer being contacted by phone, mail or e-mail?

Once you have completed the survey you need to analyse the results.

Look out for keywords and phrases because one of the main reasons for conducting this research is to help you discover WHY these customers bought from you, what was appealing about the business which made them buy in the first place.

These are their emotional hot buttons and they should be used in all of your marketing collateral.

Also keep an ear out for things that concern the buyer – their fears, concerns, frustrations, and objections.

In all cases you are looking for irrational emotional reasons because there are the most powerful. People do not drive a sports care because it is fast, they buy it because they feel good when other people look at them at the traffic lights.

You are also looking to identify your “Uniqueness”. Knowing what makes you different is one of the most powerful elements of your marketing.

Many business owners who do this discover customers view the business completely differently than you! But remember who cares what you think? What customers think is what matters.

When you are finished you should have a very good picture of how customers view the business.

You will know:

• What you need to improve or change
• What you do well
• Where to promote your business
• What emotional words and phrases to use

As always, remember, Sackmans are Accountants for North London for small businesses so if you know anyone looking for free business advice suggest they sign up to our newsletter.