For ambitious businesses with their eyes on rapid growth, crowdlending can be a worthy alternative to the often cumbersome process of securing a bank loan
New business ideas and investment for long-term growth usually require external finance. However many businesses lack the type of assets required by banks, discounting them from traditional loans in spite of operational performance and track record.
Alternative forms of finance are still relatively new and many businesses are either unfamiliar with crowdlending or sceptical about its relevance to them. However, crowdlending is one of the fastest growing segments of an expanding alternative finance sector and, since April 2014, has been regulated by the FCA. It offers a dynamic tool to enable businesses’ growth and development.
What is crowdlending?
The principle behind crowdlending is to source a loan from a 'crowd' of many investors, each contributing a small proportion of the overall amount. By committing only small amounts to any one loan, the investors can spread their overall risk.
There are a number of online companies providing crowdlending platforms that bring borrowers and lenders together. They will analyse the borrower’s eligibility for credit and management information in order to decide whether to offer it to their audience of interested investors. They will also assign each agreed loan application a rating. This is used to help define the reserve rate, which is the maximum amount of interest that the borrower is willing to pay.
Each crowdlending platform has a different process for this: some will designate a single interest rate to each proposal but many use an auction-based system in which investors can offer funds at a rate they choose. Through this reverse-auction process, bids at lower interest rates push out those at higher rates and the overall rate paid can be less than the reserve rate that was originally proposed.
Crowdlending is typically on an all-or-nothing basis: funds will not be transferred unless the whole loan amount is achieved. Platforms which cannot guarantee that auctions will be filled promptly may impose a time limit to prevent them dragging on indefinitely.
Because it operates in a completely different way to traditional lending, crowdlending offers a number of unique benefits to businesses that are seeking external finance.
Crowdlending operates very quickly, especially in comparison to traditional lending. Once all the necessary documentation is submitted, an offer can be made in just a few days. The time between starting an application to receiving the funds can, in some cases, be as little as three weeks.
Some crowdlenders do not require the final documentation to be submitted until after the auction has completed. However, transfer of the moneys to the borrower is always contingent on completed paperwork, so in these cases it’s important to ensure all the required documents are signed and submitted in good time.
The maximum duration of an auction will also vary from platform to platform.
'Bricks and mortar' security is not required
Most crowdlending platforms offer both secured and unsecured loans. Unsecured loans typically require a personal guarantee from the company owner or directors. The basis on which platforms make their assessment varies but often they will look at bank statements, previous end of year account statements and cashflow forecasts. Credit analysts may also want to talk directly with company directors as this enables them to get a more personal view of the company, along with its goals and ethos.
No loss of equity
There are a number of crowdfunding models available which can source funds in exchange for future revenues or equity. However these should not be confused with crowdlending, which is not equity-based. This means you don’t have to forfeit a share of your business to finance its growth.
Crowdlending applications are designed to be completed online so the company criteria and documentation required will be available upfront. All subsequent processes, including approval, auction and payment will also be clearly signposted.
As small companies themselves, most crowdlenders understand the difficulties their clients face. Many have small teams of credit analysts that manage applications end to end. This enables borrowers to speak directly to the person assessing their case and to be in contact with the same people throughout the process.
The entire crowdlending process creates publicity. By putting your company and its message out in front of the crowd, you are reaching hundreds of people who could potentially be customers, partners or distributors. If your loan is for a new product, you are also publicising the product. The reaction from the crowd can also be an indication of how your product or message may be received.
Feedback from the investors
Investors are able to pose questions during the auction process. While it’s generally not mandatory for the borrower to respond, the answers given will reassure investors and provide an additional dimension to the relationship between borrower and investors. Many investors are experienced businessmen themselves and the questions raised can be thought-provoking and useful.
In short, crowdlending provides a much needed way for businesses to access finance. Fast and flexible, it enables companies to plan for growth and expansion and to take advantage of opportunities as and when they arise.
Sophie Koenig is content writer for FundingKnight, one of the fastest-growing and most established crowdlenders in the UK.