By Steve Grice, Director
The Peer-to-Peer funding market is developing and changing constantly. Until very recently, the main way of borrowing from a P2P platform was by way of a loan. Whilst this can be structured in a variety of ways, there is a certain inflexibility to a loan, particularly for those businesses that have seasonal funding needs. On the other hand, banks are no longer disposed to lending via overdrafts, generally preferring to lend via Invoice Finance facilities or term loans.
We now have a number of platforms that can offer more flexible facilities – though these are known as ‘Revolving Capital Facilities’, they are very close to old-style overdrafts.
These typically suit businesses with the following profile:
A stable or increasing level of current assets:
This can be stock, WIP, debtors etc. An invoice finance facility will only look at debtors, so can be restrictive if these fluctuate across the year. By looking at all components of current assets, P2P providers can eliminate seasonal issues.
Note- this does not mean at the Net Profit level, which may include deductions for depreciation, interest charges etc, and may have other adjustments to be ‘presented for tax’. The focus is more on the underlying operational profitability.
Businesses with a working capital need that may fluctuate:
If your debtor payment terms are consistently more than your creditor payment terms, then you will have a permanent working capital need. This could be funded by a loan but an overdraft-style facility will give more flexibility and will be cheaper because you may only be borrowing against it for half the month, and will have less impact on cashflow because of the lack or regular capital repayments.
A first charge over the business is available:
This will involve registering a debenture over the company assets in the same way that a bank does. If the business already has a charge registered against it by the bank, then the existing bank facilities could be refinanced.
Regular management information is available:
This will be used to monitor the covenants agreed at the outset of the agreement. In the world of P2P these types of facilities generally work by agreeing upfront a facility limit – anywhere from £200K-£1M; the borrower then draws down or repays however much is appropriate, perhaps on a daily basis. Interest is charged only on funds drawn, rather than the whole amount. Agreements are normally for twelve months with option to renew, as with a bank overdraft.
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