Do you need to raise finance for your business?
Are you looking to borrow money against your company assets? In this film I chat with Dave George from Finance For Enterprise on the best ways to approach this, how to prepare your application and what gives you a higher chance of being successful.
Lets start by asking what is commercial finance?
Commercial finance is offered from many lenders from High Street banks to second tier lenders like Funding Circle and ourselves. There are different types of borrowing, the first is usually for cash flow or working capital, which can come in many guises such as invoice discounting, which is when you borrow against debtor receipts. And it’s usually provided by banks or you have specific invoice discounting firms. There is also long term debt, which is to do with commercial mortgages, which are usually done over a longer term so you can buy business or training premises etc. Then you have short term cash flow lending with a FinTech like Lendable and Money Stream, who lend on an unsecured basis, but usually at a higher interest rate and a shorter term. What I have found in my experience over the years is that there is somebody out there who will lend against most things, there are even people who will lend money against your tables and chairs as essentially they are offering secure lending against the assets in your business.
In general terms, how long does it take for a lender to make a decision?
It should be quite a quick process because so long as they have the information to hand, and that is driven by the client who’s looking for the money. Once they’ve got the information to hand the decision making process should be relatively quick. Depending on the type of borrowing. So specifically, if it’s secured against property, it’s going to take a little bit longer because the lender has to take a charge over that security and that is dependent upon searches coming back, it’s dependent upon solicitors actioning documents, and it’s dependent on the bank issuing the charging documentation so that the the charge over the the piece of security can be can be perfected, and then the loan can be drawn.
If you’re dealing with somebody like Finance For Enterprise, where are our loans are unsecured then it can be quite quick because everything we do is in house and it doesn’t go down to a bunker somewhere. We can we can manage our workflow quite easily because we’ve got our people doing the security documentation and the facility documentation sat behind us. We can literally shout over and say, “look, you know, I need this one quicker, because I need the money quicker”. We might be able to get it done in a week, whereas some of the banks are taking months at the moment. This is where what I would call alternative funders become of paramount importance.
What we are seeing is that credit sanction is taking longer, and therefore, funds getting into business bank accounts are taking longer. One of the first questions that you need to ask when you’re speaking to a lender is, how long is this going to take? Because, I need the money by the end of February. And if you’re not going to get it to me till April, then I really can’t be doing business with you. One of the questions you need to ask at the forefront is what do you need from me? And how quickly can you get me the money after I’ve given you that information?
If you have a piece of machinery that is worth 100,000 pounds, what sort of loan to value would ordinarily be given against that, considering that machinery is also going to be a depreciating asset?
Assets are a specialist lending requirement, because the asset has to be valued. And obviously, you have to take into the account that depreciation, you have to take into account hours that the machines worked. You have to take into account portability, whether it’s easy to move If it weighs 500 tonnes, and it’s concreted into floor it’s going to it’s going to be difficult for a loan provider to to move that if the company defualts. So obviously, the cost of moving it and digging it out of the business premises is going to be taken off the value. So it’s not an easy question to answer. From my gut feeling, I think if, if you had 100,000 pounds worth of kit, and it was relatively easy to get out, and it was easily identifiable, then I would think you’d probably get up to 40%. And especially in situations where people are buying the machinery after it’s defaulted on the loan, they’ll try and get it for next to nothing. There is value in an asset, but it will be valued to the benefit of the lender, and not to the benefit of the person borrowing the money.
How will lenders look at the current situation in the Pandemic?
Lenders will look for up to date information. And that information might be negligible. But there will still be things going out of the bank, whether I’m to pay for suppliers, or to pay for utilities, to pay rent if there isn’t a rental or holiday there. So there will still be things going out of the account. What we look at as lenders is how they were doing before the COVID pandemic came. And there were still costs that need to go out of the business to keep it going. I mean, obviously, furloughing helps and the money they get from the government, but the fact is, how do we as lenders, how do we forecast what’s going to happen in the future. We can’t. We can’t say this business is going to survive, we can’t see that this business is going to trade through COVID. We don’t have crystal balls. But what we do have is experience. And we look at the people who are running the business. That is very important to us. It’s their experience, their flexibility, their willingness to change and willingness to do things a little bit differently than what they were doing before because they have to.
In these current times, would it be advantageous for an established company to bring in a non executive director who sits on the board?
In our area as a small to medium business lender, that would be a quite a luxury. If it was one of the larger companies then yes, I think the major support you could get would be a good. At this point in time, financial directors are very, very important to businesses, but most smaller and medium sized business can’t afford to afford to employ them full time. They do give banks a lot of confidence in a business purely and simply because there’s somebody who’s a professional, running the finance side of the business. You can of course hire a financial director as and when needed.
If you know in a year’s time you will want to finance a particularly large asset, would taking on a part time, or consultant FD now benefit your application?
I think so – yes. There’s a lot of people out there who run their own businesses, managing directors, and they do everything, and they are fantastic. They look after the sales side, they look after the strategic side, they take an overview of the financial side. And it’s usually not their area of expertise. I mean, their area of expertise is usually selling, and building relationships and getting new customers into the business. It isn’t looking at figures and strategizing where do we need this or that, when’s this going to hit, when do we need the money in the bank so that we can pay this. A FD can add great value in planning this.
How many years of trading history would you ideally be looking at to offer finance?
At Finance For Enterprise we look at established businesses, Startup loans we do via the British business bank, as we are a delivery partner with them, and that’s where businesses has been trading under two years. Currently, with the commercial funding, it’s usually two years or more because we we would like to see some sort of trend in their accounts to see what they’ve done previously and are they improving? Is the business deteriorating? Are they burning cash. We can see the issue that is causing them a hole in their cash flow, and you can’t see that from just one set of figures, you have to see over over a period of time the trends and trigger points in the cash flow cycle. We can work out where and say to the client there’s going to be a problem in July. I would rather lend a client more money than they need because with more money they can pay us back anytime they want. Because we don’t charge repayment penalties for early repayment. So, if I’ve given them too much, then they can give us it back. But if I haven’t given them enough, then it means another credit application, and that time it takes to get the money back out.
Lets assume that four years ago a plumber was made redundant from their job and decided to first become a sole trader and then set up as a limited company. They came to you with two years trading profitably as a limited company for finance to expand. Unfortunately they have bad personal credit history from 4 years ago when they started up. How does this effect their chances?
It depends on the institution that you apply through. Most banks will see adverse credit information in an electronic check. They will say yes, or say no. Even if you apply as a company, they’re still going to take into account your personal financial situation because a limited company is controlled by its owners. So why would you lend money to a business if the director can’t manage their own personal finance?
I mean, I mean, it’s folly. But sometimes there’s a story, like you said, and banks use a credit scoring system, which will say yes or no, it won’t go into the details, it’ll just look at the credit file. And if there’s defaults or CCJ’s, it’ll just kick it out and say No. We always look at the credit file of the directors and the shareholders. And we get into some rather unpleasant conversations about that, because some people just don’t want to pay things back. And if they are like that they’re not for us, basically, because we know that if they’re not going to pay the personal stuff back, the they’re not going to pay the business stuff back, either, because the business stuff is limited by liability.
Personally, and I say this as a lender, as somebody who writes credit reports, and who is responsible for recommending loans to sanction, I would say, to me, 50 to 60% of my decision will be based on the people behind the business. I’m not talking about liking or disliking them, that’s irrelevant. It’s whether or not they can show me that they know what they’re doing. If they’ve run a business before and have a strong team behind them with a good workforce that is loyal (and that’s only created by having a good boss) then you’ll try to help them.
The people behind the business to me are the deal breaker. They could have a fantastic business, they could have fantastic accounts, and they could have fantastic projections. But if the people aren’t right, then I won’t lend to them. The people have to be right. Because the fact is they know more about that business than I will ever do. And if they can’t run it properly and they can’t run their own finances properly, and they’ve got issues with creditors, how will I get my money back from the loan?
It’s incredibly important how people present themselves, how they presented themselves in the past. To me, it’s paramount. And I would think a lot of lenders, especially, the older lenders would look at the people first and then look at the figures.
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If you are looking for start up finance then watch our read our article on Start Up Finance