December 2012

Bank Expects Funding for Lending Boost in 2013

According to the Bank of England, the Funding for Lending Scheme (FLS) should start to make a difference in 2013 – in the last 6 months it is unlikely to have had much affect on lending volume.

The Bank explained that usual credit lags have meant that the effect of the government’s scheme would not be clear in 2012, but encouraging early signs indicate SMEs may start to see benefits from the scheme in 2013.

The FLS was initially launched by the Bank of England in July 2012 to incentivize banks to boost their lending by reducing their own borrowing costs.

The Bank of England has disclosed that several banks took advantage of the scheme and drew down almost £4.4bn in the scheme’s first couple of months – this helped to increase net borrowing by £496m.

UK: Business Secretary Vince Cable announces funding for ‘peer-to-peer’ lending

Business Secretary Vince Cable pledged £55m to SMEs through P2P lenders. The cash will be split between Funding Circle, Zopa, Boost and Credit Asset Management.

Match-funding from the private sector would then contribute a further £55m, making at least £110m available to SMEs through web based lenders.

  • Funding Circle will receive £20m
  • Zopa will receive £10m
  • Boost will receive £20m
  • Credit Asset Management will receive £5m

Review of 2012 and forecast for 2013 for SME’s

During 2012, we have seen a host of issues in the finance world. These include:

  • PPI mis-selling
  • Record fines for various Banks (the latest being a $1.9bn fine for HSBC for money laundering.)
  • LIBOR scandal
  • More recently we have seen signs of another mis-selling scandal – Swaps.

In addition, through Basel II and Basel III, Banks will be required to hold far greater levels of liquid cash on their balance sheets to cope with various disastrous scenarios. This has led to Banks tightening up their risk appetite and hence losing all goodwill they once had with SMEs.

The Banks unwillingness to lend to SMEs has seen the emergence and rapid growth of an entirely new type of finance – Peer-to-peer lending e.g. Funding Circle.

Government announces £1.1 million innovation boost for SMEs

The Government has announced that a further £1.1 million will be made available through the Innovation Voucher Scheme that was launched earlier this year. This additional funding is for companies who want to use public open data to develop products and prototypes.

The Fund was initially created by the Business for Innovation and Skills (BIS) in September 2012 and provided £5k for a UK based start ups and SMEs to work alongside external experts and gain knowledge o help their business.

The scheme was set up to accelerate economic growth by supporting business-led innovation. Businesses that are involved in the Agri-food, Built Environment, Space industries, Energy, Water and Waste sectors are eligible to apply.

How does bridging work? Benefits and Risks

What is bridging?

Bridging loans in their purist form are simply short term, high value loans. They were traditionally used to prevent shortfalls between buying and selling your house. As the market matures and develops, it has now become an option for individuals to fund business or private expenditure against their property too.

Some loans in recent years have included financing the purchase of a property at auction, capitalising on a business opportunity, raising short-term capital against equity in a property and to fund the refurbishment of a property.

Closed or open?

A closed bridging loan is a when the borrower has a defined exit plan in place when taking out the loan. This could be an already approved source of credit like a mortgage, but the borrower needs cash in a shorter time frame. Another popular case of this is when the buyer of your property needs to draw equity on his home before payment is made, which can put you in a position where you need to borrow until the sale has gone through.

An open bridging loan has more risk, and an exit strategy will have to be very detailed but is not definite. An example of this is when someone who is selling a property finds a buyer, but they drop out before the sale goes through. A bridging loan is taken to cover the cost of buying your new property, but have no concrete sale for the house you are looking to sell.

How does it work?

By using your property with equity such as residential, commercial and land, you can borrow up to a specified loan-to-value ratio, based on the value of the assets. This can be anywhere between 0% and 80% based on your personal situation and how easy the asset would be to resell. You are then charged interest monthly on the loan, and it can be paid back when you secure another source of finance, be that a mortgage or the sale of an asset.

Why would I not go to a bank instead?

The speed of the loan going through is the biggest benefit of bridging finance. If you are in the market for a bridging loan, more than likely you will be in a hurry to get the money. Where banks have a lot of paperwork, which can in some cases take months, a bridging loan is often approved within a week. You can borrow the money up to a year, and with the huge expansion of the bridging loan market and low base rate of interest, loans are very competitive.

Although mainly used in property, businesses are increasingly turning to bridging loans to cover short term cash flow and liquidity problems, by managing directors and owners using their private property as a security. Bridging companies offer a very personalised service to ensure you can meet the requirements of the loan, and they will get their money back.

What are the risks?

A bridging loan is not for every situation, and a well thought out exit strategy must be in place before you will be allowed to borrow the money. A closed bridging loan can save a lot of trouble and losses in fees over the short term, making bridging loans very beneficial. However, an open bridging loan is a lot riskier and it may be possible that other sources of finance are more beneficial in some cases.

The beauty of bridging financiers is that the personalised approach will talk you through every step of the way. It’s in nobody’s interest to default on the loan; therefore every precaution will be taken to prevent this from happening.

Can a bridging loan work for me?

Depending on your scenario, bridging loans are useful when it comes to property. Be that buying to redevelop or simply covering a short term gap in capital. It can also be used in business to raise short term capital to meet a stock shortage or short term cash flow problems. All in all, with a well-planned exit plan, bridging loans can be used for any property or commercial expenditure.

Recession a good time to start business

According to research by the UK Commission for Employment and Skills, businesses that start up during times of recession are hiring more people than their established counterparts – implying that they are more optimistic about their future.

These start ups are also more likely to provide training, recruit young people and offer internships/apprenticeships. These findings support the view that a recession can be a good time to start a business – with low rent, an available skilled workforce and with competitors burdened by historic costs.

The UK Commission for Employment and Skills surveyed 15,000 employers and found that 71% of businesses that are between 1 and 3 years old were optimistic about their future, compared with 44% for businesses that were more than 5 years old.

80% of new businesses have recruited staff in the last 12 months – double the overall figure of 43%. In addition, 47% of new businesses have recruited young people in the last 12 months, compared with 27% overall.

Alternative finance: what's out there, and what's right for me?

This is a guest post from Doug Richard, successful entrepreneur and former Dragon

In my line of work I meet plenty of folks who want to start a business, or grow the one they have – and the most common question I get asked is: “how do I get funding?”

No business will get off the ground without some money put behind it – and in today’s climate, finding cash via traditional means is no easy task. In spite of promises to the contrary, banks are lending less, not more, to SMEs – and at very unsavoury rates.

Despite this there is, in fact, a vast and growing array of alternative finance options available to young businesses, if you know where to look. It’s important to get to know them – and to know which is right for you.

Let’s take some examples. One of my students at the School for Creative Startups was fortunate enough to receive a large order for her products from a major department store. She needed to go out and find the cash to fulfil the order – but with a purchase order to her name, this was a piece of cake.

She could go to a bank or, better still, to one of the growing number of invoice trading companies. These companies – MarketInvoice being a prime example – allow businesses to access the cash tied up in invoices by auctioning them to a network of professional investors.

Alternatively, she could seek a loan from a peer-to-peer lending platform such as RateSetter. RateSetter allows you, the borrower, to set the amount you would like to raise and the interest rate you would be happy to pay and matches you with savers looking for better returns than high street banks can offer.

If yours is a business that can demonstrate what banks like to call ‘serviceability’ – the ability to repay a loan – then you would be a fool to give away ownership of your business in the form of equity to raise some cash. The minor interest you could pay on a loan would be massively outweighed by the loss of future earnings and control.

But if you find yourself unable to prove that you can service a loan, then seeking an investor is no bad thing – just ask another of my students.

After showing their designs to a potential buyer, they were asked to provide some samples. This raised the problem of having to find the money to pay the production costs, but without any proof of an order at the end of it.

At this point, you would do worse than to turn to the growing number of crowd funding platforms (for example Seedrs) that match investors with start-ups seeking finance. The start-up defines the amount they would like to raise and as soon as the amount is raised, subject to terms of agreement, you have your cash.

Another option is Angel Investment. Business angels are individuals who put the wealth of their wallet and expertise behind young businesses, without saddling them with debt.

You may be lucky enough to meet your angel by chance, but there are also ways to seek them out. A good place to start would be to consult the many networks, events and local business groups up and down the country – networks like the UK Business Angels Association .A final word of caution: be wary of those that charge for access to angel communities. Call me old fashioned, but if you have one group of individuals with cash to spend and another with bare coffers, it seems nonsensical to expect the latter to pay.

And so contrary to public perception, as a result of the ever increasing alternative finance space, there has never been more fundraising opportunities for small business than currently exist. It is time for Britain’s young businesses to look beyond the banks and embrace the options that are at their disposal. Need cash? Seek and you shall find.

About Doug Richard

Doug Richard is a successful entrepreneur with 20 years’ experience in the development and leadership of technology and software ventures. Doug featured in the first two TV series of Dragon’s Den. Doug was the first American to receive The Queen’s Award for Enterprise Promotion. He is a fellow of the Royal Society of the Arts, has honorary doctorate from the University of Essex for his contribution to the teaching of Entrepreneurship and is a guest lecturer on entrepreneurship at Cambridge University for the Nanotech Masters and PHd programmes.

Doug has always been a champion for startups and small businesses. In 2008, after teaching a one-day class in entrepreneurship, Doug decided to found an enterprise dedicated to helping people start better, more profitable businesses. 

Rothschild buys into peer-to-peer lending

Jacob Rothschild has bought a stake in a peer to peer lending company that allows individuals to borrow from each other, without going through the banks.

Lord Rothschild’s investment trust, RIT Capital Partners bought into Zopa – one of several fast-growing businesses that help people lend to each other directly over the internet. Zopa has facilitated the lending of £250m since it was founded in 2005.

Zopa’s loan book and revenues were growing more than 55% per year. They estimate that lenders on its platform earn an average interest rate of 5.4% after charges and defaults.

In the UK, there are three distinct types of peer to peer lending platforms – Groups like Zopa and RateSetter offer personal loans, while others like Funding Circle offer businesses loans. Finally, Seedrs and Crowdcube allow SMEs to raise equity investment through their platforms.

UK Service Sector Growth Slows Again in November

The Markit/CIPS Services Purchasing Managers’ Index fell to 50.2 last month from October’s 50.6 – with a reading below 50 signaling a drop in activity.

This adds to fears that the economy is on the brink of contracting again.

A downgrade in forecasts for economic growth this year is likely to lead to the Chancellor, George Osborne revealing that it is unlikely that he will achieve his targets of cutting the gap between income and spending.