Crowdlending provides a straightforward, cost effective source of financing for SMEs, with which the banks seem unwilling to compete.
The overhang from the financial crises of 2008, the removal of an entire tier of managers and the new, stringent, capital adequacy ratios imposed by Basel III, have combined to leave the ‘big four’ unwilling and unable to provide finance for the UK’s SMEs.
The worst hit are those businesses seeking to borrow between £100k and £1m. These are the businesses upon which the UK’s growth depends.
Under normal circumstances, banks can lend to whoever they please under the terms they choose. However, the 2008 bailouts, the Funding For Lending Scheme, the British Business Bank Investment Programme and quantitative easing have seen the Government pump billions of pounds into the ‘big four’ with the purpose of encouraging lending to businesses. To date, only the merest trickle has found its way to where it is needed most. As far as SMEs seeking finance are concerned, the banks may as well be closed for business.
Where they do lend, they push SMEs down the invoice discounting, or even factoring, route with all its restrictions, loss of control and pernicious personal guarantees. These last are something we never take. Either a business can support the loan or it cannot. Taking assets from outside the business is tantamount to admitting the business cannot support the loan.
Also, the cost of invoice discounting is usually more than 20% by the time all charges are accounted for.
This is where the ArchOver crowdlending model comes in.
Typically, a UK crowdlending loan is for short-term finance, averaging £75K for terms less than a year and at double digit interest rates. The ArchOver model starts where the others end. Our average loan is £220k+, and rather than providing short term finance we set out to replace an incumbent source of mid-term finance with a product that is better in both price and process. Such a loan allows the borrower to regain control of their customers, with whom ArchOver has no contact, and financial future, all without personal guarantees, with a simply monthly reporting process.
Security for ArchOver loans rests entirely on the strength and insurability of a company’s trade debtors. Historical performance and the character of the directors are taken into account, but the key criteria are the solidity and regularity of a broad group of credit insurable customers. ArchOver, on behalf of its lenders, takes a first floating charge over the trade debtors, the borrower takes out credit insurance with our lenders joint insured. Loans up to 80% of the borrowers average debtor book are achievable.
ArchOver leaves the rest of the balance sheet free, so borrowers can access other forms of finance.
For example, TruTac is a company that analyses tachographs and produces bespoke reports for transport companies. To do this, it has had to develop much of its own software. Software development comes at a high cost and it can be a long time before it generates income.
Therefore, TruTac finding a cost effective way of financing the development is vital to it and its customers.
For 19 years TruTac used an invoice discounting facility to provide funding, but this was proving expensive.
Says TruTac managing director Terry Ramsey: “Invoice discounting is never satisfactory as it means the discounting firm comes between us and our customers over payment. We wanted to find an alternative, but none of them seemed really attractive. The banks wanted to tie us into fixed term loans, high interest rates and take our heart and soul as security.
TruTac obtained a loan from ArchOver of £100,000 to reduce credit costs. The loan was spread over two years and was secured within a month through ArchOver’s straightforward systems.
“We are a profitable company,” says Terry Ramsey, “but the ArchOver loan has made a considerable difference to our bottom line. It’s far more competitive than banks and it also gives us the ability to pay off the loan early without penalties.
“The crowdfunding model was very simple and very flexible, and ArchOver really seemed to understand our business.”
At a time when the banks are turning off the taps and other borrowers restrict, ArchOver aims to be an active contributor to the rejuvenation of the UK economy by being better on price and planning.