A better take on business loanswww.spotcap.co.uk

Becoming a Better Business AdviserA Guide to Short-Term Business Loans

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Welcome!When speaking to accountants and financial advisers, I have come across two common themes: their eagerness to expand their offering and the importance of client service. They see it as the foundation of their success.

So how does a short-term business loan fit into the picture? I’ll let two accountants from recent meetings answer that for you:

“By sourcing a short-term loan for my client, I was able to help them seize a business opportunity.” – Peter, Birmingham

“I recently started to help my clients source cash flow finance. The response has been hugely positive and I have already attracted two new clients that way.” – Andrew, Glasgow

Interestingly, accountants and financial advisers often mention how surprised they are by the minimal effort involved in sourcing finance. They are keen to share that, in the long run, it enabled them to improve client services and attract new business.

We’ve partnered with Accountancy Age to put together this guide on short-term loans and hope it provides a useful introduction.

Happy reading.

Niels TurfboerManaging Director Spotcap UK

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Content

Welcome! 2Why do businesses need a short-term business loan? 4What loan types are available? 5What information is needed to apply for a short-term loan? 8How can accountants help their clients identify the right short-term loan? 9Do you have questions? 10Common phrases explained 11Useful online resources 11

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Key reasons why small businesses seek short-term loans include:

Why do businesses need a short-term business loan?Short-term loans are available from a variety of different lenders, including traditional and alternative funding providers. Due to the nature of the loan, they could be set up much faster than medium or long-term loans. However, this might vary depending on the lender or complexity of the case.

Managing cash flow

Purchasing inventory or equipment

Bridging receivables

Remodelling and renovation

Hiring staff

Are you keen to find out how a short-term loan supported music TV channel Vintage TV with their cash flow challenges? Click here.

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What loan types are available? When educating clients about the different loan options available, accountants should first establish whether the business is looking for a secured or unsecured business loan. This will be one of the first questions asked by potential lenders.

Many UK businesses have an overdraft set up for their business bank account or hold a business credit card. Both can help with seasonal trends and short-term cash flow challenges. The main benefit of these options is that the outstanding balance can be mostly paid back after one month interest-free.

When looking to borrow a larger sum of money, many businesses tend to go to their banks or an alternative lender for a secured loan. That way, business owners will provide an asset as a security. This can include a commercial property, machinery, vehicles or stock. The borrowed amount is ‘secured’ against one, or more, of these assets, which the lender can take if the business stops making repayments.

Popular choices of secured loan options include:

� A traditional bank loan � A loan provided by a peer-to-peer

lender that matches lenders with borrowers

Secured business loans � An asset finance loan, where the

business pays a regular charge for use of an asset–such as machinery–over an agreed period of time, thus avoiding to pay the full cost of buying outright

� Invoice finance, an 80-90% advance of what an invoice is worth provided by a lender to the business, essentially ensuring that the company is paid sooner

� Other alternative finance lending platforms

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When looking for short-term funding, businesses are increasingly keen to use an unsecured loan. This means that they don’t need to provide any security, but the lender will often ask for a personal guarantee. The guarantee will be provided by the business owner who will be held responsible if the business is unable to keep up with the loan repayments. In most cases, lenders will want the guarantor to have good personal net worth and be a UK homeowner.

Another unsecured option is a merchant cash advance, which is particularly popular among retailers with a regular and strong volume of card transactions. Here, a lender provides the business with an upfront sum of cash in exchange for a slice of their future sales. Repayments are then taken as a proportion of their card transactions.

There are some lenders which offer fully unsecured short-term loans to established and profitable businesses, without the need for a personal guarantee. Given that the lender takes on a considerably higher risk, interest rates could be higher. That said, many businesses are glad to receivea short-term loan without having to provide any collateral.

Unsecured business loans

For more information on Spotcap’s fully unsecured offering, please

click here.

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Here is an overview to help businesses think about and compare some of the main options when it comes to short-term lending:

Secured business loan Unsecured business loan

Secured loans are based on the assets a business holds, e.g. property, equipment, receivables etc. Typically involves valuations and legal costs. Tends to have higher, more stringent requirements which means it may take longer to get a decision.

Invoice finance (selective invoice discounting and/or factoring)

Working capital finance Fully unsecured loan without a personal

guarantee Merchant cash advance

Unsecured loans are based on the financial strength of the business. Do you have a healthy bank account with a steady flow of payments? Asset valuations are not necessary. Decisions can be made quicker and there are no, or small, upfront costs.

Examples

Typically, longer (1-6 weeks). Due diligence processes means it takes more time to get the funds.

Almost always quicker— in some cases within 24 hours — no valuations necessary and the legal process is straightforward. Less up-front cost — sometimes none at all.

Application

Necessary to have assets in your business such as: Property Equipment Vehicles Invoices

Positive cash flow position Steady flow of income Healthy balance sheet Well managed bank account

Pre-application requirements

Usually lower interest rates but there is the risk of losing your assets and in most cases there are legal and valuation costs which have to be paid upfront.

Traditional lenders tend to charge admin/setup fees as part of the facility costs.

Somewhat higher interest rates than a secured loan as the lender is taking over the risk from the business. Risk and pricing

The more assets you have, the more you can potentially borrow.Size

How does it work?

What options are available?

Overview of short-term business loans

Providers normally offer between £10k and £500k.

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What information is needed to apply for a short-term loan?In order to apply for a short-term loan, businesses need to provide the following documents with a lender:

� Personal information of the applicant/director, as well as business information such as company number, name and registered or trading address

� Business bank account statements � Most recent financials, which include

annual accounts and management accounts

� VAT returns for up to one year � Companies which are part of a

complex group structure may need to provide information on that as well as consolidated financial information

Personal and businessinformation:

Required documents:

Note that a business might have to provide a business plan or forecasting documents; however, not all lenders will ask for this.

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How can accountants help their clients identify the right short-term loan?Common trends in a successful application for a short-term loan include:

� Growth: increasing revenue trends� Profitability: strong net profit margin� Serviceability: repayment capacity from available cash flow

� Creditworthiness: high credit scores for both company and company director

Here are some more considerations accountants should keep in mind when speaking to their clients:

The business needs the capital within a short period of time: It can take several weeks for banks to make a credit decision. However, many alternative lenders can provide a credit decision within days, some even in less than one working day.

The business might not want to put up their home as security: Would it be possible to secure a short-term loan without the business having to provide any asset or personal guarantee?

The business might not want to monetise their invoices: Invoice finance only works for businesses who sit on commercial invoices. If a business works primarily with consumers, they’ll have to look for finance elsewhere.

The business should work with a trusted and transparent lender: Businesses or their accountants should take the time and check whether a lender is FCA registered, read their Trustpilot page and generally Google the company. Any lenders with a bad reputation will be detected quickly. In addition, a responsible loan provider should be transparent about interest rate payments, early repayment fees and any additional costs involved. Make sure that there are no surprises or hidden chargesin the small print.

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Common phrases explained

Useful onlineresources

Annual Percentage Rate (APR) – annual cost of a loan, including all interest and fees, expressed as a percentage.

County Court Judgment (CCJ) – a type of court order in England, Wales and Northern Ireland that might be registered against a business if it fails to repay money it owes.

Debentures – a security agreement that sets out the terms under which the borrower provides security to a lender.

EBITDA – earnings before interest, tax, depreciation and amortisation, an industry standard for measuring a company’s performance (profits) without considering finance, tax and non-cash expenses (accounting decisions).

Management account – these are interim reports on financial performance of a business. These are sought to provide a more up-to-date picture of the trade of a business.

Profit and Loss Statement (P&L Statement) – is a financial statement which summarisesthe revenues, costs and expenses incurred during a specific period, usually a fiscal quarter or year.

Personal guarantee (PG) – if a business owner/director provides a personal guarantee, s/he acts as a guarantor for the debt obligation and can therefore be held responsible should the business be unable to make any loan repayments.

British Business Bank: A state-owned economic development bank established by the UK Government. Its aim is to increase the supply of credit to small and medium enterprises as well as providing business advice services.

British Chambers of Commerce: The national representative body of 52 accredited Chambers of Commerce across the UK, representing 75,000 businesses, which employ over 5m people.

Great Business: Support, advice and inspiration for growing your clients’ business from the UK government.

Pro-Manchester: The largest business development organisation in the North West. Representing the business community across the region and supporting growth and development to promote the north as the place to do business.

Working capital – a measure of current assets minus current liabilities.

For further information about Spotcap’s unsecured business loans,

get in touch with your dedicated partnership manager on:

0203 308 9188 clientservice@spotcap.co.uk

Or visit our website at: www.spotcap.co.uk