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Banks, Lenders & Investors Business Development & Marketing Factoring, Invoice Discounting & Asset Finance Finance General

Is raising finance from debt crowdfunding a good idea?

In the second in our series on crowdfunding we’re focusing on debt crowdfunding, also called Peer to Business lending.
Typically lenders are looking to finance tangible assets that they can secure, such as book debts, vehicles or plant & machinery. However all too often businesses want to finance business growth which might involve business development, staff or simply working capital. The banks have largely withdrawn from such funding unless security can be provided. As a result there is an explosion of crowdfunding with most models based on loans.
In the debt crowdfunding model most loans are based on compounding interest with equal monthly repayments for the duration of the loan which is normally for between 2 and 5 years.
According to Nicola Horlick, chief executive of Money&Co, writing in CityAM in April 2015, debt crowdfunding is the source of funding for the vast majority of UK SMEs. She argues that this type of crowdfunding is less risky than equity crowdfunding because of the high failure rate of start-ups, whereas a debt funder like herself will ask for several years of made-up accounts.
Funding Circle is probably the best known debt crowdfunder in UK. It has loaned about £750 million to 7,300 businesses in UK and US. Examples include Blood & Sand who borrowed £104,000 in October 2014 from 100s of individual lenders to refurbish their new cocktail bar in London.
Given the risks, such loans are not much cheaper than those from a bank but they tend to be easier to obtain. However despite the perception of an easy loan, most funding platforms rely on directors giving a personal guarantee so as to make sure that they have every intention of repaying the loan.

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Wednesday will be an interesting day for small businesses

 

Results of a survey into lending to small businesses are due to be published tomorrow (Wednesday) and are expected to prove an eye-opener.

The six-month survey, carried out by the British Chambers of Commerce (BCC) and Federation of Small Businesses (FSB) at the behest of Chancellor George Osborne, is widely thought to show that small businesses continue to feel excluded by the banks from lending, despite all the exhortations of the Chancellor and Treasury.

Bank of England figures have, in any case, already indicated that business lending continued to fall in the three months to February 2014 down by £500 million, following a reduction of £3.3 billion in the preceding three months.

Publication of the survey will coincide with the launch of a joint BCC/FSB website called Business Banking Insight (BBI), which is expected to allow small businesses to rate their banks’ performance on services and on understanding their businesses.

It is expected to give small businesses the information they need to compare offerings by banks and by alternative finance providers.

While it may be, as reported in the weekend’s Business Telegraph, that the Treasury will urge banks to increase competition in lending to small businesses, is it likely that bank lending will rise, given the lack of security for new loans and regulators’ requirements for higher capital reserves?

The matter for real concern should be existing loans and the impact on borrowers when interest rates rise.

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Banks, Lenders & Investors Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

Strong arm tactics and fractured thinking

 

Many Buy-to-Let landlords who bought property before the Great Financial Crisis are being subjected to strong arm tactics by lenders.

UK Asset Resolution Limited (UKAR) is the holding company established in October 2010 to “facilitate the orderly management of the closed mortgage books” of Bradford & Bingley (B&B), its subsidiary Mortgage Express (MX) and Northern Rock Asset Management (NRAM). The run-off period UKAR was anticipated as taking between five and ten years.

It would seem that UKAR are becoming more assertive in their zeal to recover taxpayer money, despite the consequences.

Landlords are being sent demands, for full repayment of loans giving only a few days’ notice. If followed through this would result in personal guarantees being called and trigger the bankruptcy of many landlords.

Even when landlords are not in arrears due to low interest rates, UKAR are relying on clauses in the loan agreements such as those that relate to ratios defined as a Loan to Value covenant.

In one recent case repayment of approximately £1.4 million was demanded by NRAM giving 7 days notice even though their client wasn’t in arrears. This was following a valuation of six Buy-to-Let properties out of a portfolio of ten very different properties two years previously. Extrapolation of the part valuation was used as the pretext that the total value breached a Loan to Value covenant of 80%.

In another case, a landlord tried to sell one property in a portfolio, but discovered that the fine print meant she had to sell the whole portfolio.

It should be acknowledged that many of these mortgages are interest only which concerns UKAR about its ability to meet target dates for the run-off time frame. Furthermore most of these loans have come out of a fixed rate period and are now benefiting from low interest rates with UKAR being concerned about landlords’ ability to service interest when rates rise.

However, these concerns do not justify a 7-day notice letter.

Instead cool heads are needed to develop solutions such as those that can be developed by independent turnaround advisers.

Strong-arm tactics tend to invoke fear and a lack of trust, they are not the way to reach consensual agreement.

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Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Investors need to rethink their requirements

Many of us believe that a change in investor culture is long overdue. We need to incentivise long-term investment in sustainable growth instead of short-term ‘quick flip’ or ‘get rich quick’ schemes that deceive everyone into thinking that making money is risk free and easy.
It is this short-term thinking that has made it more difficult for Private Equity firms to raise new funds for further investment.
Private Equity firms depend on their reputation for making profits for their investors and their problem since the Credit Crunch of 2008 has been that funds have been tied up in businesses that are effectively zombies because of the amount of debt they have, no matter whether these businesses may have good potential for growth.
Similarly both lenders and investors are very wary of taking a risk with new and small businesses, hence the Government’s failure to persuade funders to support start-up companies and SMEs, even profitable ones and those with potential for growth. The only source of funds really available for such businesses are book debt and asset based lenders but these only improve cash flow they don’t provide equity or loan capital for investment.
To address the funding culture issue we need to justify a switch from investing in property to investing in businesses. This will involve understanding a risk rated return on investment that provides for better returns to investors.
There are a number of ways of achieving this change of investor behaviour, one is to penalize investment in property by taxing them, another is to provide for matched funding from banks alongside new equity, possibly with a Government guarantee, another would be for debt forgiveness by banks to restructure their ‘zombie’ client loans alongside new equity, others could be an expansion of the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, or simply a reduction in the corporation tax rate.
But all this requires a Government to confront those who view property as their source of security.

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Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

Construction in Crisis – Time for a Reconstruction?

The ongoing economic crisis continues to take its toll on the construction industry with the sad news that a high profile company that was more than 100 years old has gone into administration.
KPMG have been appointed as administrators of London-based Holloway White Allom, which recently completed a refurbishment of the Victoria & Albert Museum, for which it won a conservation award.
The company, founded in 1882, was known for high profile contracts including the refurbishment of the Bank of England in the 1930s, the construction of Admiralty Buildings on Horse Guards Parade, of the Old Bailey in the early 1900s and the fountains in Trafalgar Square.
Although the company was undergoing a turnaround and restructure, following a cash injection earlier in the year from private equity firm Privet Capital, it is understood that it was forced into administration by late payment for one large project.
This latest high profile casualty comes as the construction industry faces increasing pressure. ONS figures show that output on public housing was down by 5.3% and on other public projects by 7.5% during the three months to August 2011 compared with Q3 last year, and accountancy firm Deloitte reports that the number of property and construction companies that went into administration in Q3 2011 rose by 11% to 117 compared to 105 in the same period last year.
However, some sectors of the industry are faring better than others.  Bellway, for example, this week posted a 50% annual increase in pre-tax profits, smaller construction companies focusing on repair and refurbishment are also surviving well and commercial construction activity has increased for the 19th month in a row.
Those companies that took steps to restructure their business to focus on what is likely to survive in a declining market and to deal with indebtedness early in the recession have done well. 
This suggests that those companies with a bad debt or over-indebtedness due to historical loans should consider restructuring their businesses before they run out of cash. It is not too late for them, but they are likely to require a restructuring adviser to help them.

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Banks, Lenders & Investors Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Businesses Should Pay Down Debt and Beware Offers That Seem Too Good to be True

Many businesses are overburdened with debt and desperate for ways to deal with pressure from banks, HMRC and other creditors. All too often they are prepared to pay off old debt by taking on new debt which leaves them vulnerable to unscrupulous lenders.
Prior to 2008, interest-only loans and overdrafts were a common method of funding, and were reliant on being able to renew facilities or refinancing.
Like many interest-only loans, an overdraft is renewed, normally on an annual basis, but it is also repayable on demand. What happens when the bank doesn’t want to renew the overdraft facility?  With the economic climate continuing to be volatile and uncertain and banks under intense pressure to improve their own balance sheets, they are increasingly insisting on converting overdrafts to repayment loans and interest-only finance is disappearing.
This has created a vacuum for alternative sources of funding to enter the market where distinguishing between the credible salesman and the ‘snake oil’ salesman can be very difficult. Desperate businesses are desperate often try to borrow money and become more vulnerable to what at first sight seem to be lenders that can offer them alternative funding solutions that the banks cannot.
Generally the advice is to beware, as the recent eight-year prison sentence handed to “Lord” Eddie Davenport illustrates.  The charges related to a conspiracy to defraud, deception and money laundering, also referred to as “advanced fees fraud”. 
The court found Davenport and two others guilty in September. Meanwhile a large number of businesses had paid tens of thousands of pounds for due diligence and deposit fees for loans that never materialised and left victims even deeper in debt. The case only became reportable in October, when restrictions were lifted.
Many businesses just want to survive and are trading with no plan or in some cases no prospect for repaying debt. In such instances they should be considering options for improving their balance sheet by reducing debt. Options might include swapping debt for equity, or debt forgiveness by creditors or setting up a CVA (Company Voluntary Arrangement).