Small business finance: does P2P beat traditional bank lending?
Memories of the credit crunch may be fading, but many practices still experience difficulties in accessing loans for growth and expansion from their banks, prompting some to consider alternative finance models such as the peer-to-peer lenders that recently burst onto the scene.
Ten of these direct lending funds, which draw the money to be borrowed from investors looking for a return on their savings, have sprung up over the last three years. This new route to unsecured loans stands at a combined market value of £1.7 billion.
One of the attractions of alternative lenders is their flexible loan terms with no early repayment charges. Another is the speed, with finance offers being made within a matter of days rather than weeks.
Carl Turner, founding director of Carl Turner Architects, reports that he raised £100k from Funding Circle, which specialises in loans to small businesses, and had the money available within a week. The loan for an office move, equipment and IT is repayable over three years, is unsecured and has a reasonable interest rate. He jokes that he is still waiting to hear back from his bank.
Banks remain reluctant to lend to any small business without personal director security. And it is no secret that architects’ practices may struggle with late payment for their services and a market place in which fees are continually being squeezed.
Victoria Taylor, financial controller for expanding young practice Ayre Chamberlain Gaunt (ACG), was pleased to discover that their longstanding bank had the practice rated as ‘one’ on a rising risk scale of one to ten, yet they still appeared to face an enormous amount of red tape to secure a loan as well as demands for personal loan security.
It was the personal security demands from their bank that prompted ACG to look at the strengths and weaknesses of a variety of growth funding routes for the practice. This is what they found:
Traditional bank lending offered lower interest rates compared to newer alternatives, with no fees for early repayment. But directors had to put their personal assets up as security and a ‘vast amount of information’ was required, even though the practice was trading as a limited company.
Turnaround time looked to be a minimum of six weeks from enquiry to receiving funds, with only 70% of the funding required expected to be made available, leaving the directors to find the remaining 30%.
Asset funding, where the capital asset purchased forms the security for the loan, looked attractive and promised a quick turnaround once documentation and proof of purchase had been submitted, but typically required the purchase to be made first and the cost reimbursed – not an option if the money is simply not available.
Loan managers were readily accessible, however, as well as the offer of a prior-agreed credit limit that would have allowed multiple purchases over a period of time, yet each purchase would have required a new set of management accounts.
Like Carl Turner, ACG looked at Funding Circle as an alternative finance provider. On offer were unsecured loans (personal guarantees only) of up to £100k with no early repayment fees and refinancing available, with the prospect of a better interest rate, after 12 months. The flexibility looked attractive and the whole process could be completed within 5-7 days, including just two days to wait for an offer.
The downside for ACG was interest rates, which were much higher than what they could get from their bank.
In the event, ACG chose to go with a mix of finance from its bank, Natwest, after their relationship manager agreed to ask for personal guarantees rather than security on the directors’ personal assets, and asset funding from Lombard (via Natwest, both part of RBS), which most recently provided for the purchase of a laser cutter.
Taylor says it was an all-round positive experience dealing with Funding Circle, but the rates proved too high even though ACG was regarded as low risk.
‘Having approach Funding Circle, we might go back if we wanted funding quickly, as we know there would not be an issue with them,’ adds Taylor.
Thanks to Carl Turner, Director, Carl Turner Architects; Victoria Taylor, Financial Controller, Ayre Chamberlain Gaunt.
Text by Neal Morris. This is a Professional Feature edited by the RIBA Practice team. Send us your feedback and ideas
RIBA Core Curriculum Topic: Business, clients and services.
As part of the flexible RIBA CPD programme, Professional Features count as microlearning. See further information on the updated RIBA CPD Core Curriculum and on fulfilling your CPD requirements as an RIBA Chartered Member.
Posted on 10 May 2018.