Internet finance providers will be regulated by The Financial Conduct Authority from April 2014. Their impact on business finance is growing. Here we consider the various forms of crowdfunding or peer-to-peer lending.
Newer online sources of finance include all the conventional forms of finance – debt funding, equity finance and working capital funding such as factoring and invoice discounting. Whichever type of online finance you choose, the basic model is the same – they are seeking to match businesses looking for finance with individuals and businesses looking for diversification of risk and yield.
Online debt finance
Acceptance criteria will vary according to the platform, but Funding Circle requires the following:
- Must be a UK-based limited company
- At least two years of financial reports
- Making a profit and a good credit rating
- May require up-to-date management accounts
- Details of other loans and commitments
Once accepted for entry, loan applicants enter the auction. The online provider applies a risk rating to assist lenders in assessing the risk of not getting their money back. The registered lenders start bidding the amount they are prepared to lend and the interest rate they expect to be paid. As bidding intensifies the interest rate tends to drop. Applicants can accept the loan as soon as it is fully funded.
Once the loan has been accepted, the money will enter the applicant’s bank account within a few days. The internet platform then deducts an arrangement fee. The applicant repays the loan to the lending platform which distributes repayments to all the individual lenders involved in the loan.
Online equity finance
Businesses seeking equity must complete a questionnaire specifying how much finance is required and the equity on offer. The disclosures are reviewed by the platform to ensure they are fair, clear and not misleading. The platform then approves the listing.
Investors can invest from £10 up to the full amount required. If the applicant business receives offers up to the full amount within a specified period the offer goes to closing. If not, any investors who offered money get their money re-credited to their account.
In closing, legal due diligence is conducted, the business signs documentation and the online platform subscribes for shares on behalf of investors. The platform takes a fee from the proceeds of the share issue.
Post-investment the online platform holds shares on behalf of investors. It pays them back any dividends or monies received if the business floats on a market or sells out.
Factoring and invoice discounting
Online platforms tend to be more flexible than conventional lenders and will consider financing individual sales invoices rather than the whole sales ledger. But sales invoices must be to customers with a good credit rating.
There are an increasing number of finance providers prepared to offer loans to retail businesses, based on their future credit card income. Firstly, the business supplies evidence of recent card turnover to the finance provider/platform. The platform makes an offer of a cash advance based on turnover. The platform agrees to buy future credit card receivables at a discount. Once accepted, the finance is provided.
Daily repayment is made via small fixed percentage of credit card sales. The business must advise the card processor to send settlement funds to an escrow account .The funds are collected and remitted through a proprietary escrow service.
E-invoicing, debtor management and arranging finance
There are a number of packages available to help businesses with electronic invoicing, automatic updating of debtor listings and cash flow forecasts, as well as arranging finance based on the debtor book.
For further advice
With so many financing options out there, it’s helpful to be able to draw on the expertise of leading financial experts. Start today with a free straightforward, open discussion with an ICAEW Chartered Accountant. There’s no catch, no obligation and no charge for your first session.