Interest-free loans? Advances against HMRC’s furlough payments? Read how some alternative finance providers are quickly responding to the changing needs of businesses.
The business funding landscape is changing by the day. If you’re a business trying to survive – or thrive – as you emerge from this pandemic, access to finance and cash flow are just two of the many financial and operational challenges you’ll be trying to navigate. Nevertheless it’s important to identify your funding requirements early on, and to know your options. The good news is that since the start of April we’ve seen the introduction of some new, targeted lending products (in particular loans and invoice finance) that might help your business bridge to what will most likely be a decade of unpredictable and muted economic recovery.
You might have read our summary of the more popular non-government funding options available. We’ve seen demand in particular from seven categories of business, all looking beyond the government support programmes:
- businesses who despite the pandemic are looking to expand but (for whatever reason) don’t want government-backed loans
- businesses looking to set up invoice finance in order to smooth out cash flow (by borrowing against money they are owed by customers)
- businesses who are taking their offerings online as they respond to brick-and-mortar closures and social distancing measures – and existing e-commerce businesses looking to grow (e.g. EduTech)
- businesses who have adapted their product offering in response to the coronavirus crisis, e.g. those manufacturing ventilators and Personal Protective Equipment (PPE)
- recruitment businesses or firms that contract out security guards or industrial cleaners – demand for these roles has increased since Boris Johnson encouraged people to return to work under strict social distancing rules from 25 May
- businesses who don’t qualify for government initiatives such as the Coronavirus Business Interruption Loan Scheme (CBILS) or the Future Fund
- businesses for whom a £50,000 Bounce Back Loan just isn’t enough.
If you’re in any of these camps, you might be interested to know how some alternative finance providers are adapting their product offerings – in particular loans and invoice finance – to keep up with the rapidly changing circumstances and the demands of individual businesses.
First, though, let’s reflect on the last eight weeks.
Access to alternative finance – are we starting to turn a corner?
You might have discovered first-hand the impact of the contraction in funding markets since March. No-one was surprised to see funders across the board tightening their lending criteria (rather than taking on new risk) while they focused on safeguarding their current book and customers.
But aside from peer-to-peer lending, which has mostly ground to a halt, it’s beginning to look a bit less gloomy. Let’s focus on three positive trends we’ve seen in the alternative finance market since the end of April:
1. Specialised loans are emerging – targeting businesses affected by COVID-19
If you’re one of the many businesses who’ve been turned down for either standard loans or government schemes like the CBILS, you might be encouraged to hear about a number of new lending products targeting specific sectors and business profiles (see the section below).
2. Asset-based lenders are moving to virtual site visits
Asset-based lending agreements have been harder to come by during lockdown, but we’re seeing an increasing number of lenders introducing virtual site visits – which means they’re able to value assets using video and photographic evidence.
3. Trade credit insurance is returning – along with invoice finance
Invoice finance has generally been less affected by the pandemic than other types of lending, but smaller players have been restricted by the impact the coronavirus has had on trade credit insurance, as businesses struggle to pay their bills. Insurers are expecting huge claims on credit insurance policies so they’ve been forced to stop offering cover or to increase premiums to levels that are unaffordable for many. But there’s good news for businesses who trade domestically or internationally and rely on trade credit insurance to protect them if a customer defaults on payment. The government has temporarily stepped in to guarantee business-to-business transactions currently supported by trade credit insurance. The idea is that this will stop the market seizing up and will “maintain a vital cog in our economy”, in the words of John Glen, the economic secretary to the Treasury. The guarantee is designed to ensure that the majority of insurance cover is maintained across the market.
We’ve already seen demand for invoice finance picking up since the announcement on 13 May and we expect a further uptick once the scheme is in place at the end of May (we’ve been told that the scheme will last until the end of the year.)
Another reason we’re expecting even more demand for invoice finance facilities is the impact of COVID-19 on international trade. There’s a lot of discussion about how companies will need to operate supply chains with more geographic sources. The trade-off will be between short-term profit maximisation and longer-term risk reduction. While the bigger, stronger companies will be able to afford safer but more expensive global supply chains, we’ll probably see smaller, weaker companies having to take greater risks. Invoice finance is here to stay…
That’s a bit of background, but what does this all mean for businesses looking for funding now?
What new lending products might be suitable for my business?
At the time of writing, we’ve seen some quick-off-the-mark providers come up with a range of products that fall into five broad categories. It’s worth checking in with our team because lenders are continuing to add new products – and tweak the details – in response to the changing circumstances of different businesses. If you register with us we can automatically match you with new products as soon as they’re available. We’re continually reviewing these new products – along with all other funding options – to make sure our eligibility criteria are up-to-date.
1. Loans with interest-only payments for the first 12 months
At the onset of lockdown some lenders adapted their existing loan products to support businesses who would benefit from a working capital loan (maximum 3 years) with only interest to pay for the first year. These loans come with a low interest rate (on average 1.75% per month) and you don’t have to make any capital repayments for the first year. In some cases interest payments due fortnightly. For years 2 and 3, you’ll continue to pay interest plus capital on the outstanding balance. There’s no early repayment fee, so you can overpay at no cost.
You’ll need to provide three months’ bank statements and up-to-date management information. And you’ll need to demonstrate that the loan is for growth purposes. Lenders will base their credit decisions on the strength of the personal guarantee of your shareholder(s).
The maximum loan size is three times the cumulative net worth of the shareholder(s) giving the personal guarantee(s).
2. Loans targeting sectors deemed critical by the government
In mid-April Swoop saw some lenders change their strategy and lending criteria in order to support businesses deemed critical by the government. These loans have lower interest rates (e.g. about 1.6% per month for loans over 3 months) for businesses in the following sectors:
- health and social care
- education and childcare
- food and other necessary goods
- public safety and national security
- financial services.
These loans are subject to a credit assessment and require a personal guarantee.
3. Micro-loans for sectors heavily impacted (but not deemed critical by the government)
By late April the market had moved towards lenders are offering micro-loans to support businesses operating in sectors which are heavily affected by COVID-19 but which don’t fall into the government’s specified ‘critical’ sectors.
These lenders are targeting businesses in the hospitality, retail, fitness and leisure sectors, and their suppliers.
The loans range from £500 to £3,000 at rates of up to 2.5% per month. Lenders are also offering monthly reviews to consider additional funding. They require a personal guarantee and non-homeowners are eligible for a maximum of £1,000 per drawdown.
Lending is strictly for businesses that can adapt to the changing environment.
4. Furlough finance
Some of the invoice finance providers we work with have come up with a clever way to help specifically B2B businesses pay the wages of furloughed employees ahead of receiving funds from HMRC under the Coronavirus Job Retention Scheme (“furlough scheme”).
The loan works on the same principle as an invoice finance facility and it’s similar to an R&D tax credit loan, i.e. lenders advance businesses cash against their HMRC claims. It follows that you will need to have already made a claim for wages through the furlough scheme.
As with other types of invoice finance, these loans could help some businesses stay afloat while there are so few invoices floating around, but lenders will of course look at your creditworthiness. Some lenders might require personal guarantees along with an (all assets) debenture for exposures over £50,000 and some are also placing a minimum estimated net worth of £20,000 on the guarantor.
5. Asset-based lending – with virtual site visits
Asset-based lending has been severely restricted by the lockdown. We’re talking here about lending secured against physical assets such as inventory, equipment, machinery and commercial property – so it makes sense that lenders would struggle to value assets without a site visit. But since the start of May some lenders have adapted by introducing virtual site visits and accepting video or photographic evidence. We’ve seen good take-up so far.
If you’re interested to learn more about any of the products you’ve read about here, or about the government-backed schemes, please register with us and one of our advisors will be in touch. Alternatively call our COVID-19 hotline on 0203 868 0364.
Arabella is a former BBC business journalist who began her career as a policy analyst at the Bank of England and Financial Conduct Authority, and more recently worked in the communications and policy team at the British Business Bank.