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WHAT ARE THE ALTERNATIVES TO HIGH STREET BUSINESS LENDERS?

LENDERS

by Nic Redfern , Director – www.knowyourmoney.co.uk

 

High street banks have typically been the first port of call for businesses looking for credit, whether that’s in the form of an overdraft or a business loan. However, high street banks seem increasingly reluctant to lend to small and medium-sized enterprises (SMEs), and this, combined with the lengthy application process, can put businesses off from applying for funding.

Indeed, many businesses continue to be wary of using any kind of credit, even to expand and grow their operations.

But with the rising numbers of alternative lenders, businesses are seeing that high street banks are far from the only source of finance available. Many of these alternative lenders are specifically targeted at SMEs and offer various forms of finance to cater for different business needs, so they are becoming increasingly popular choices for businesses in need of funding.

Below, we highlight some of the alternative lenders for small businesses and discuss some of their advantages and disadvantages.

But before applying for a business loan from any lender, make sure you research your options as each lender will have different terms and payment structures.

 

Online challengers

Particularly in the aftermath of the financial crash, we have seen the emergence of new finance providers that are challenging the dominance of the big-name high street banks. These challenger banks and online lenders offer new opportunities to businesses looking for external finance- providing a faster application process than traditional banks and often being more prepared to lend to SMEs.

They can also offer smaller and more short-term loans, in contrast to high street banks which impose a minimum loan amount.

Online lenders use the latest fintech to make it easier for businesses to find a loan that meets their needs. However, even though online lenders may be more willing to take on risk and approve applicants with a less-than-perfect credit history, their loans may also come with higher interest rates to compensate for this.

 

Peer-to-peer lending

Peer-to-peer lending is sometimes described as an online marketplace. It matches people who want to invest and lend money with those who want to borrow, cutting out the middleman of the bank.

Like other online lenders, peer-to-peer platforms enable businesses to apply for and receive funds in a short space of time, although they will usually need to pay an arrangement fee for the service. Interest rates will vary between providers and will depend on the profile of your business, but it is possible to find favourable rates if your credit history is good.

 

Grants

Grants are one of the best funding options, simply because you don’t need to repay them.

However, because of this, the application process is often very lengthy and may include an interview. Grants can also have strict eligibility criteria, for example relating to location, industry, and age, and they may have restrictions on what the grant can be used for, such as equipment purchases, property refurbishment, and training.

Although competition for grants is high, there is a large number of national and local grants available for all types of businesses.

 

Angel investment

Angel investors are wealthy individuals, typically experienced and successful businesspeople, who invest in early-stage businesses.

Businesses can source and apply for angel investment in many ways, but the easiest way is likely to be through online platforms.

Rather than a typical loan with repayments, this arrangement would usually mean the investor takes a share of your business profits. So, business owners would have to weigh up this loss of shares with the benefits of receiving an immediate cash injection, as well as any guidance and contacts that the investor may bring.

 

Crowdfunding

If you have an exciting product or service to launch, you may want to try setting up a profile on a crowdfunding platform that people can then donate to. However, it can be hard for businesses to reach their target sum through crowdfunding as they need to build up enough interest in their proposition.

There are different types of crowdfunding platforms which arrange different forms of “repayment”. For example, businesses may repay their supporters, offer incentives/rewards to backers, or even offer shares in their company.

 

Invoice finance

For businesses that are already trading and have money tied up in unpaid invoices, invoice financing can help to release some cash flow.

Businesses receive a loan based on the value of unpaid invoices, with lenders usually paying them a set percentage of the invoice value. Depending on the exact arrangement, the lender may then own the invoice with the customer paying the full amount to them (invoice factoring), or the business will repay the lender (with fees) when the customer pays them (invoice discounting).

Businesses need to balance the advantages of releasing money to boost their immediate cash flow with the fact that they would lose a proportion of their invoice value. It could be a useful arrangement for sales businesses, that may need to pay for stock before they have received money from its sale for example.

 

Finding the right lending option

These are just some of the alternatives to high street lenders that businesses in need of funding can choose from, but there are many others available such as tax loans, merchant cash advance, and asset finance.

The lending option that is most appropriate for you will depend on the stage your business is at, why you need funding, and the borrowing timescale you want. Not every alternative lender will be the “easiest” or “best” option, so it’s worth shopping around the different lenders to find the best deal for your business. With so much to look at, you may find it useful to use a broker to help you make your decision.

 

Business

CAPITAL MARKETS – LIQUIDITY MANAGEMENT DURING COVID-19

COVID-19

Tony Farnfield, Partner at management and technology consultancy, BearingPoint

 

When “Dr. Doom” predicted the 2008 financial crisis back in 2006, and spoke of a necessitated market correction and was calling for the repricing of riskier assets; predicting a continuation of a global financial slowdown, or even a global recession starting in 2020, this prediction was based on known factors affecting the global economy. The unforeseen outbreak of Covid-19 and the increased volatility this has brought to global financial markets was not taken into account.

Three months on from the initial outbreak, and we have already witnessed the biggest intraday drop in the Dow Jones Industrial Average. The outbreak, coupled with the oil price shock, triggered responses from the Federal Reserve, the Bank of England and Central Bank of Canada to cut benchmarks rates in an effort to even out the shock to the wider economies.

There is a high degree of uncertainty on how the coronavirus crisis will unfold. We could experience only a temporary disruption – lasting from a few weeks to a few months, or a prolonged stress in markets, assuming that it will be months until vaccine clinical trials begin and with rate cuts (already reaching bottom) having limited effects on the required stimulus.

Banks have undeniably improved their liquidity following regulatory guidance post financial crisis; however, treasury departments will need to prepare and caveat for a wide range of possible outcomes. Traditional stress testing, scenario development and re-calibration have not taken into account conditions such as the ones experienced with the Covid-19 outbreak or the speed with which things evolved.

At a generic level, there are three key steps Treasurer’s should look to take:

 

  1. Convert uncertainties into emerging and quantifiable risks

This is already being considered by some of the larger financial institutions under their crisis management responses. However, it’s important to highlight that even for those that have triggered the crisis management process, the forecasting, rebalancing and risk assessment should be continuous, taking into account new developments in the following manner:

Continuous forecasting

Continuously monitor and develop scenarios of potential sources that could disrupt funding and liquidity usage. With the right analytical capability, cash-flow projections should adapt to changing scenarios, including scenarios coming from the different business lines. Scenario sources could include unexpected credit usage that could encourage either large prepayments or defaults, or changing corporate customer behaviour – deposit inflows from corporates and depositors affecting leverage-constrained institutions. Also, there should be some consideration given to the availability of funding sources or, for wholesale funding, acceleration or reduction of funding plans.

Continuous re-balancing

Take immediate actions in increasing liquidity and cash holdings in the short term to cover for the uncertainty.

Continuous risk assessment

Account for emerging risks previously not accounted for, such as the temporary closure of operations or reduced capacity of market utilities. Assess those scenarios and how these are captured and factored in stress tests. Intraday liquidity should be the primary focus to understand immediate cash requirements.

 

  1. Refine your liquidity risk measurement

Better identification, measurement and analysis of key liquidity drivers should become core for an institution’s ability to effectively manage and mitigate particularly unique risks not previously considered. To do this, Treasurers should consider the frequency of their monitoring, and increase levels to daily stress tests and daily Early Warning Indicator testing to include daily developments.

In-depth analysis of risks

Re-run your liquidity risk identification exercise to understand better your current exposures, especially examining certain instances of this outbreak crisis, e.g. oil-related exposures, airline, marine or supply chain related exposures etc.

Re-calibrate based on new understanding

Re-assess existing scenarios or add new scenarios in covering a range of events and timeframes (e.g. sustained spread of the virus over x months vs limited spread and containment). Revisit your Early Warning Indicators to monitor emerging risks. At a later point, revisit these to assess if market signals existed and if they were picked up by your indicators.

 

  1. Review your mitigation plan

Identification, assessment and measurement is only part of the overall response. Stresses or risks that can be crystallised need to be accompanied by mitigative actions, agile and feasible enough under the current market conditions. Contingency funding actions might need to be revisited to determine if additional actions need to be considered.

Revisit and verify the availability of near real time reports, such as positions of securities holdings reports. Such information should be readily available and synthesised in the event that you will need to communicate clear and concise plans to investors, regulators or other market participants in relation to liquidity management strategies to foster confidence in the market.

In summary, reviewing and preserving an institution’s liquidity under extreme and volatile circumstances is the core responsibility of any treasurer. However, we know that any scenario or contingency planning is unlikely to be fully predictive of unprecedented scenarios such as this. Re-visiting already set practices and testing their efficacy and completeness should be the first step before considering inserting new scenarios and new actions into the mix. Nothing tried and tested can always remain true.

 

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Business

STOP THE CONFUSION: HOW TO KNOW IF YOUR BUSINESS MAY BE INSURED AGAINST COVID-19

COVID-19

By Alex Balcombe, Partner at Harris Balcombe

 

The last few weeks has seen businesses in hospitality, tourism, retail, leisure and more forced to close their doors following the Government’s orders that they should close to prevent the spread of coronavirus.

While this is expected to flatten the curve and reduce the number of coronavirus cases, it will of course have an impact on businesses and employees alike.  For small businesses especially, there are many concerns about how they can claim on their insurance to weigh the fall of this impact.

 

Mixed Messaging

In response to calls to help struggling businesses, the Government has informed the public that companies who are facing turmoil will be able to claim on their business interruption insurance during this difficult time. For most, this is wrong.

Alex Balcombe

The insurance industry has also been extremely vocal that there is no cover for any coronavirus-hit businesses during this tough financial period. This isn’t strictly true either.

How can businesses see through the mixed messaging and best secure their future and their livelihoods and reduce money worries? It’s an extremely stressful time for many companies, and confusion over whether or not they can be covered can only cause more unnecessary stress.

Since it’s a new disease, most businesses will not be covered for business interruption due to COVID-19. In fact, the vast majority of policies do not cover anything related to COVID-19.

That said –  don’t rule out the idea that you may be covered. There is a chance that you will be covered against COVID-19, but not know it. This is a very small chance, but your current cover may already protect your business against the consequences of coronavirus, and the nationwide response to it –  though those with this cover are unlikely to realise it.

 

How Could I Be Covered?

Not everyone has business interruption insurance, as it’s not a legal requirement. It is entirely up to the policy holder to weigh up the benefits of having it, and their ability to trade should a disaster happen.

To be considered for cover for COVID-19, there are two types of policy extensions to your business interruption cover that can potentially cover you for this situation:

Infectious Disease Extension 

Many policies expressly state which diseases fall within the realm of being an infectious or notifiable disease. If this is the case, your policy will not provide cover. As it is a new disease, these policies will not have included COVID-19.

Other infectious disease extension policies will define the disease with reference to the actions of the government. Since the UK Government has named COVID-19 as a notifiable disease throughout the UK, it is possible that your business may fall into this definition, thus meaning you may be able to make a claim.

However, again, it’s not always that simple. Many policies require the disease to have been on your premises, while others specify a radius from your premises in order to qualify.

 

Denial of Access Extension (non-damage)

Denial of Access Extension (non-damage) policies may cover you if you’re prevented from accessing your property. This could be due to an event, or by the actions of a competent authority, which could cause your business interruption cover to engage.

If covered by this clause, there are often very subtle differences in wording in your policy. This could depend on the insurer or policy. You may well be covered, but it will depend on your particular circumstances, and the specific policy wording.

 

What now?

It’s clear that the Government needs to do more in ensuring there is clear messaging for businesses, and to help the insurance market look after policy holders. This is an unprecedented situation, and with many people looking to claim on their insurance, we’re already seeing major delays which could have a domino impact.

People throughout the world are understandably facing all kinds of worries because of the current pandemic. Our ways of living have changed, and many business owners will not have experienced a situation like this in their life times. If you own a business and are unsure about whether you can claim for business interruption, or are confused about ambiguous wording, get in touch with a loss assessor.

These claims are not simple, but loss assessors will be experts in business interruption insurance, and will specialise in large and complex claims. They will be able to help and guide you along the way, check your wording and work on your behalf to make sure you get everything you are entitled to.

 

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