Funding Options during COVID 19
Chancellor Rishi Sunak moved swiftly to try to counter the economic threat posed by the coronavirus pandemic by launching an unprecedented £330 billion package of bailout loans alongside an extraordinary offer of wage subsidies. But the speed of the chancellor’s actions has not been matched by lenders, who are struggling to get the money to those companies who need it most anything like quickly enough. For many SMEs, particularly those in the retail, leisure, hospitality and services sectors, finding ways to bridge the gap it is simply a race against collapse.
Here, we take a look at how businesses can access the funds they need to survive.
- The government-backed Coronavirus Business Interruption Loan Scheme (CBILS)
- Commercial loans and overdrafts
- Invoice-based funding
- Asset refinance
- Peer2peer funding
DETAILS OF THE CBILS SCHEME
You must have a borrowing proposal which, were it not for the COVID-19 pandemic, would be considered viable by the lender. The lender must believe that the provision of finance will enable your business to trade out of any short-to-medium term difficulty. The debt can be provided as a normal term loan, an overdraft, invoice finance or asset finance.
Here’s a quick summary of the scheme:
- No guarantee fees for SMEs to access the scheme
- Interest and fees paid by the Government for 12 months
- Capital repayments holidays are available from some lenders
- Finance terms - up to six years for term loans and asset finance facilities. For overdrafts and invoice finance facilities, terms will be up to three years.
- Security - lenders will not take personal guarantees of any form for facilities of £250,000 and under. For facilities above £250,000, personal guarantees may still be required, at a lender’s discretion, but:
- they exclude main residences, and recoveries under these are capped at a maximum of 20% of the outstanding balance of the CBILS facility after the proceeds of business assets have been applied.
CBILS will, without doubt, provide a lifeline to many businesses with cash flow issues. But it doesn’t come without some catches:
- The borrower always remains 100% liable for the debt.
Providing the right funding to SMEs, which are the backbone of the British economy is essential.
CBILS is essentially a reworking of the enterprise guarantee scheme and will undoubtedly help make funding available. However, it is important to remember that SMEs seeking support must have a sound business model with good projections based on solid cash flow forecasting. The funding is there, but only for the right businesses.
The information you need to supply is quite extensive, but information that as a business owner should be readily available in your business.
Click here to find out what other measures the government has put in place to help small business during this difficult time.
COMMERCIAL LOANS AND OVERDRAFTS
A short-term loan or overdraft might be an easier and more achievable solution in the short term. Banks and alternative funders have various decision-making protocols in place. How quickly you get a decision and can draw down funds depends on whether you satisfy their criteria and how quickly you provide the information that they ask for.
Typically, the decision-making process for a commercial loan through a traditional bank takes from three to six weeks and with alternative lenders from one to three weeks or even days. The rates you achieve will depend on whether the loan is secured or unsecured and if you are not a homeowner, then the number of lenders available to you will be greatly reduced.
Business loans and overdrafts are handy because they are available at any stage in the business lifecycle and they’re cost-effective. Click here to find out more about how we can help you source a commercial loan.
Invoice finance provides a quick win where an injection of cash is needed, but it’s not always the most cost-effective solution; you pay for the convenience of speed and accessibility.
A lender will typically pay up to 90% of an invoice upfront, but this percentage will vary depending on the sector you work in and is only available to businesses selling to other businesses and not consumers. When the invoice is paid by the customer, the business receives the outstanding amount minus the lender’s fee. This can be done on a single invoice, selective invoices or across your whole debtor book, but is only available for business to business debtors.
If your business has physical assets with a slow depreciation rate, such as specialist equipment or machinery, you could be sitting on a potential funding solution without realising it. Asset refinance is a product that allows your business to release the equity contained in any assets, which are not subject to any outstanding finance.
Lenders will need to know what the asset is, how it’s used and how much it’s worth. They’ll appoint a qualified surveyor to inspect and value the asset you intend to refinance – and in these days of lockdown don’t worry – this can be done remotely.
When you refinance, you’re transferring ownership of the asset to the lender, but you’ll still be able to use it for your business without interruption. When you’ve fully repaid the agreement, ownership is transferred back to your business. Remember that, because asset refinance is secured, lenders can seize the asset if you fail to keep up your repayments.
- Peer-to-peer lending (P2P) is a way for one individual to lend directly to another cutting out the middleman, i.e. the financial institution.
- P2P lending websites, like Funding Circle and ThinCats, connect you directly to funders.
- You’ll find a wide range of interest rates based on your creditworthiness. Rates for applicants with good credit are often lower than comparable bank rates. Rates for applicants with sketchy credit records may go much higher.
- For lenders, peer-to-peer lending is a way to generate interest income on their cash at a rate that exceeds those offered by conventional savings accounts.
- Like banks and alternative lenders, the sites will charge loan origination fees, late fees, and bounced-payment fees.
Once you’ve recognised you’ve got a cash flow problem, you need to do something about it.
NEED TO KNOW MORE ABOUT
FINANCIAL SUPPORT FOR BUSINESS?
If you would like to know more about funding options for businesses now please contact the ibd head office on 01223 597 845 or complete our simple enquiry form, Click Here
This page is kindly written by ibd business adviser, Finance and funding specialist Richard Olsen Click here to view his profile