CROWD FUNDING – a case study

It’s no secret that most small businesses can’t get a loan from their bank. However, most of them are totally unaware of ‘crowd funding’.
If you aren’t too sure how it works exactly, here is a case study to familiarise yourself.

So what is Crowd Funding?
Crowd funding is an auction process that invites bids from ‘crowds’ of private investors to assist a business with its working capital requirements.
Several types of crowd funding are currently available including loans, cash advances against single invoices, and pre- revenue equity.

For business loans

The borrower and the loan required are profiled on the Funder’s website.

Private individuals bid usually between £20 and £200 at a time, occasionally a lot more. The bid will include the rate of interest the lender expects in return.

The bids offering the keenest rates of interest win the auction process.

The Crowd Funder consolidates all these small loans into one loan agreement over a term of up to 5 years. A recent £30k loan, for example, comprised 92 bids from 41 individual investors.

The following case history, which I managed for my client, demonstrates how crowd funding worked for him.

Background
NH is a family business that offered a cosmetic service from their original Slough salon.
This did so well that they opened two more salons in early 2011. This year they plan a fourth salon, for which they need a £60K loan.
However their April 2011 accounts were weakened by including the latest salons’ launch costs but were too early to show any significant revenue from them.
Unsurprisingly, their bank would not lend without more security and their home mortgagor would not lend to them for business purposes.

Applying for funding
• NH is a limited company and had traded for more than 2 years, both pre-requisites demanded by Funding Circle (FC), the original provider of unsecured business loans via crowd funding. (FC have lent over £50m in their first two years)
• FC’s interactive website allows Support Finance to establish a company’s eligibility for a loan. An Experian credit score of at least 30+ is required.
• In this case ’the computer said no’ but it was clear that the April 2012 accounts would show much better results.
• Once they were filed, we waited until Experian had updated their NH file.
• This time our submission to FC was accepted and so Support Finance immediately sent the accounts and the 8 page application for a £60k 3 year loan to FC.

The Auction process

Every application is first reviewed by FC’s credit team. If they don’t think it will be 100% funded by investors, they decline to auction it. They agreed to launch NH for the full £60k.
The auction is open for 14 days, during which Support Finance can monitor how the funding is progressing, in real time, via FC’s website.
The auction attracts a flurry of bids but then slows down, so that with just 2 or 3 days remaining a loan may still be only 50% funded – disconcerting to a first time applicant!

• If an individual plans to lend say, £1000 at 10.00%, experienced bidders doesn’t tender the full £1000 immediately.
• They bid perhaps £100 at 9.50% and then watch what others are bidding, rather like on e-bay. A day later they offer £200 at 10.00%, two days later another £250 at 9.60%, and so on.
• Once they can forecast confidently the interest rate that they must bid to succeed, they pile in and the auction can move, from 50% to 100% funded, in a matter of hours.
• The auction logs every bid until the £60,000 total is reached. Thereafter each bid that offers a lower interest rate than the highest already accepted, replaces that bid.
• In this way the customer obtains the optimum rate of interest. NH’s loan was fully funded by day 12 at an overall 12.1%. Leaving the auction open for the final two days resulted in the rate falling to 9.5%.

Completion and Payment

• On completion of the auction, Support Finance sent NH a summary of the loan showing the amount they were to receive, monthly payment, interest rate, and any conditions.
• The amount received is the loan funded less FC’s arrangement fee of 3% for a 3 year loan.
• Director’s guarantee required for an unsecured loan, no charges over assets or the company.
• If the borrower is comfortable with the offer, FC send the formal loan agreement.
• Once this is signed and accepted, FC pay the loan immediately via BACS.
• Just 18 days , from submission of the application to the funds being in NH’s bank account.

The directors of NH were extremely happy with the service provided by Support Finance
“Well done for doing this and many thanks for all your help, you did a good job. It will be a pleasure to pay your invoice (1.00%) as soon as the funds hit my account.”
Surinder Axxxxx, Managing Director, NH

For more information about Crowd Funding or other ways of raising money, please call me on 01628 668811 or email me on warren.palmer@support-finance.co.uk.

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