Reasonable lending offer or not?

[John_V85]

As an e-commerce business, we're looking to borrow to invest in new inventory if there is the right offer out there.

We've been presented with an offer through a broker of £150k over 5 years with a rate of 12.55% and an arrangement fee of £13,500. It's unsecured but includes a personal guarantee.

I'm curious as to if people think this fits in the reasonable bucket or not? I appreciate there are a whole host of factors that come into play, so really just trying to understand if this broadly fits into a terrible, ok'ish, or great bucket.

Thanks.

 

[MarkOnline]

It seems on the high side to me, be careful you dont spend the next 5 years working for a finance company. The offer looks to me as though they think they are doing you a favour lending you the money (which they may be).

 

[John_V85]

It seems on the high side to me, be careful you dont spend the next 5 years working for a finance company. The offer looks to me as though they think they are doing you a favour lending you the money (which they may be).

Thanks for the comment. It's largely in line with my own thoughts.

Is it the rate or the fee (appreciably they probably should just be considered together) that look on the high side?

 

[Ian J]

Have a word with @Mark T Jones as he is probably best placed to advise

 

[Gordon - Commercial Finance]

The rate is pretty standard for an unsecured loan yes.

The fee is high. 9% arrangement fee looks to me like the broker has added a handful for themselves. Last unsecured loan I did was for £140k also and the fee was 4% all in if I remember rightly.

Take great care and spend the money on things that will genuinely earn a tangible return. Don’t spend even a pound of that money on things that you would like to buy “if you had the money”

 

[Chris Ashdown]

How is it unsecured if it has a PG which may offer them far more ways to get their money back

 

[John_V85]

How is it unsecured if it has a PG which may offer them far more ways to get their money back

A rather unrepresentative way of describing it I agree, but I guess in lending parlance it refers to secured/unsecured over assets of the company; not mine.

 

[Mark T Jones]

The rate is pretty standard for an unsecured loan yes.

The fee is high. 9% arrangement fee looks to me like the broker has added a handful for themselves. Last unsecured loan I did was for £140k also and the fee was 4% all in if I remember rightly.

Take great care and spend the money on things that will genuinely earn a tangible return. Don’t spend even a pound of that money on things that you would like to buy “if you had the money”

Thank you @Ian J

I'd broadly agree with this - 9% arrangement fee is high. I certainly wouldn't be parting with cash before you are certain funds are forthcoming.

12.5% (without the fee) would be normal for an established, profitable business. (Assuming we are talking APR/IRR)

As you have surmised- it's all about the underlying credit

 

[John_V85]

I'd broadly agree with this - 9% arrangement fee is high. I certainly wouldn't be parting with cash before you are certain funds are forthcoming.

My understanding is that the fee would be added to the balance of the loan rather than paid upfront, effectively changing the effective APR to around 16% if my calculations are correct.

 

[Mark T Jones]

My understanding is that the fee would be added to the balance of the loan rather than paid upfront, effectively changing the effective APR to around 16% if my calculations are correct.

Broadly correct, yes (assuming the lender is Funding Circle, others may be different)

The fee will be negotiable- it's my opinion that they are taking the pi55, but that's for you to decide

Far more important is whether this is the right funding for your purpose- which really comes down to your plan.

If you are certain that borrowing for stock is a good idea, you should at least consider some of the short term facilities on offer which allow you to regulate how much and how often you borrow

 

[John_V85]

Broadly correct, yes (assuming the lender is Funding Circle, others may be different)

The fee will be negotiable- it's my opinion that they are taking the pi55, but that's for you to decide

Far more important is whether this is the right funding for your purpose- which really comes down to your plan.

If you are certain that borrowing for stock is a good idea, you should at least consider some of the short term facilities on offer which allow you to regulate how much and how often you borrow

It isn't Funding Circle, but it is a follow-up to Funding Circle. We had looked to explore the potential (what we could borrow, rates, etc.) for a Funding Circle loan some time ago, but we didn't get past an initial enquiry as we were told they don't look at non-high-street banks. We put most of our transactions through Wise, previously Revolut, etc. for fx reasons.

This is from a team they have that follows up on "unsuccessful" Funding Circle applications. The underlying lender is LendingCrowd.

 

[Mark T Jones]

It isn't Funding Circle, but it is a follow-up to Funding Circle. We had looked to explore the potential (what we could borrow, rates, etc.) for a Funding Circle loan some time ago, but we didn't get past an initial enquiry as we were told they don't look at non-high-street banks. We put most of our transactions through Wise, previously Revolut, etc. for fx reasons.

This is from a team they have that follows up on "unsuccessful" Funding Circle applications. The underlying lender is LendingCrowd.

All good - the fee still strikes me as excessive, but ultimately, ensuring it is the right type of facility for your needs is the critical part

What you absolutely don't want is either interest-bearing debt sitting in a current account, or buying excess stock just because.

Again I know nothing about your business or your plan - this may have been addressed

 

[John_V85]

All good - the fee still strikes me as excessive, but ultimately, ensuring it is the right type of facility for your needs is the critical part

What you absolutely don't want is either interest-bearing debt sitting in a current account, or buying excess stock just because.

Again I know nothing about your business or your plan - this may have been addressed

Thanks. Yes, completely appreciate the points and the time you've taken to respond.

I think the conclusion is that the fee is on the high side.

I note Funding Circle talk about rates of 2.9% to 12.1% per year. Is that just marketing guff, or is basically everything they fund at the very top end of that?

 

[Mark T Jones]

A rather unrepresentative way of describing it I agree, but I guess in lending parlance it refers to secured/unsecured over assets of the company; not mine.

Yip.

Industry parlance 'secured' refers to charges taken - usually over b & m property

 

[Cloud Accounting]

See if they’ll secure it against the inventory itself in exchange for a better rate and/or reduced arrangement fee and/or removal of PG. Was going to say look at other forms of asset financing but presume as an e-commerce business inventory is your biggest asset.

 

[Gordon - Commercial Finance]

I note Funding Circle talk about rates of 2.9% to 12.1% per year. Is that just marketing guff, or is basically everything they fund at the very top end of that?

Its marketing guff. In actual fact most of what they do is above the top end of that scale.

 

[Mark T Jones]

Its marketing guff. In actual fact most of what they do is above the top end of that scale.

How could you suggest such a thing?

 

[Mark T Jones]

See if they’ll secure it against the inventory itself in exchange for a better rate and/or reduced arrangement fee and/or removal of PG. Was going to say look at other forms of asset financing but presume as an e-commerce business inventory is your biggest asset.

Securing against inventory of fast-moving stock is impractical or usually impossible.

 

[John_V85]

A little more flesh on the bones. The arrangement fee of £13,500 breaks down to £6,000 (or 4%) for Lending Crowd and £7,500 (5%) for Funding Circle.

I'm assuming the £7,500 can be pushed considerably, but any idea how far?

What would stop also going to the actual lender directly? Presumably, if they saw fit to make an offer through a broker, there's a reasonable possibility they would without one.

 

[Mark T Jones]

A little more flesh on the bones. The arrangement fee of £13,500 breaks down to £6,000 (or 4%) for Lending Crowd and £7,500 (5%) for Funding Circle.

I'm assuming the £7,500 can be pushed considerably, but any idea how far?

What would stop also going to the actual lender directly? Presumably, if they saw fit to make an offer through a broker, there's a reasonable possibility they would without one.

It would be completely unethical, and possibly breach of contract for the lender to cut out the broker.

In most cases our lenders value us brokers as a source of business; so wouldn't want to cut of their nose to spite their face, in the same way that manufactirers would be silly to cut out retailers.

Only a personal opinion, but I'd consider a 2% fee to be reasonable for just passing details over (it's possible that Funding Circle have more involvement), but again, that's for you to negotiate.

 

[Talay]

What a set of scammers and anyone defending these interest rates or fees should be sent to Coventry as well on a one way ticket and have "scammer" tattooed on their person.

Walk into your High Street bank and you'll be somewhere around 0.5% to 1% as a fee and you can even have this knocked down or refunded (I've had both) and an interest rate of a couple of percentage points above base rates and maybe another 1% or so if you want to fix rates.

That equates to a fee of a maximum £1500 and an interest rate less than 1/4 of the crap the OP has posted.

Unrealistic ? Nope, half decent business plan, cashflow, a little history and you are good to go.

Of course, no fat fees for the boys in these circumstances but this is what is fairly easily achievable.

Alternatively, pull down £150k on credit cards with average 2.5% fees and up to 36 months to pay back. Of course, you won't get all at 36 months but if you have a range of cards you should be able to rustle up £100k fairly easily so long as you have a viable proposition to pay it back on time.

What would I do ? Probably try for the loan from the bank but also ask for an overdraft of £25k put onto the account to provide some liquidity. They'll want a personal guarantee of course and you'll be unlikely to get more than £25/50k without one.

Is the British Business Bank not doing some funding assistance ?

 

[Mark T Jones]

What a set of scammers and anyone defending these interest rates or fees should be sent to Coventry as well on a one way ticket and have "scammer" tattooed on their person.

Walk into your High Street bank and you'll be somewhere around 0.5% to 1% as a fee and you can even have this knocked down or refunded (I've had both) and an interest rate of a couple of percentage points above base rates and maybe another 1% or so if you want to fix rates.

That equates to a fee of a maximum £1500 and an interest rate less than 1/4 of the crap the OP has posted.

Unrealistic ? Nope, half decent business plan, cashflow, a little history and you are good to go.

Of course, no fat fees for the boys in these circumstances but this is what is fairly easily achievable.

Alternatively, pull down £150k on credit cards with average 2.5% fees and up to 36 months to pay back. Of course, you won't get all at 36 months but if you have a range of cards you should be able to rustle up £100k fairly easily so long as you have a viable proposition to pay it back on time.

What would I do ? Probably try for the loan from the bank but also ask for an overdraft of £25k put onto the account to provide some liquidity. They'll want a personal guarantee of course and you'll be unlikely to get more than £25/50k without one.

Is the British Business Bank not doing some funding assistance ?

I would always suggest that anyone seeking a business loan or overdraft sounds out their bank (walking into a bank to speak to someone disappeared many moons ago for most banks) - if they want a piece of business, they will ensure that they win it on price.

Harsh reality - chances of getting a significant facility are tiny, especially on overdraft. Banks aren't in the business of lending (directly) to small businesses. In many cases instead of declining the deal (bad for stats) they will drag it out until you go away, or simply not respond.

Whether loan, overdraft, credit card, short term loan or whatever is the best facility depends on entirely on how it will be used

 

[Talay]

I would always suggest that anyone seeking a business loan or overdraft sounds out their bank (walking into a bank to speak to someone disappeared many moons ago for most banks) - if they want a piece of business, they will ensure that they win it on price.

Harsh reality - chances of getting a significant facility are tiny, especially on overdraft. Banks aren't in the business of lending (directly) to small businesses. In many cases instead of declining the deal (bad for stats) they will drag it out until you go away, or simply not respond.

Whether loan, overdraft, credit card, short term loan or whatever is the best facility depends on entirely on how it will be used

Overdraft over £25/50k then I'd agree but there is decent money in lending for banks if you consider the suite of chargeables that they can provide in house.

They take the margin on the loan of course and then simply package that into a debt instrument and sell it on so that risk is off their books and we'd do billions of that in my time in the City. Then you have fees, which can inflate the effective percentage from low single digits into effective double digits.

Add on some credit card lending and add up some monthly bank account management fees and before you know it they have you signing up for credit card payments and suddenly they have a finger in all of your pies and few individuals pick best providers for everything.

The notion that a 3rd party provider is better is as fictitious as valuing dot com businesses on the number of unique hits their website got but that was very popular in 1999.

However, if you have to give a personal guarantee then in truth, there is zero difference between you borrowing the money yourself and lending it to the business and the business borrowing itself. If you can borrow at 2% and the business is only getting offers from cowboys at 10% plus then you know what makes sense.

 

[John_V85]

Still deciding whether this is right for us, but for reference for anyone who finds themselves in a comparable position, the proposed arrangement fee without much effort has been reduced to 5% (3% and 2%)

 

[John_V85]

However, if you have to give a personal guarantee then in truth, there is zero difference between you borrowing the money yourself and lending it to the business and the business borrowing itself. If you can borrow at 2% and the business is only getting offers from cowboys at 10% plus then you know what makes sense.

I would completely agree if it were so simple, but I think you're overplaying the possibility of borrowing significant sums at 2% or across credit cards (interest free). For that, you need to be in a position to extend a mortgage. That's possible. Or have (or be able to obtain) massive credit limits. For many directors taking tax-efficient salaries, that simply isn't going to be obtainable.

 

[Mark T Jones]

Still deciding whether this is right for us, but for reference for anyone who finds themselves in a comparable position, the proposed arrangement fee without much effort has been reduced to 5% (3% and 2%)

Result! It's always worth a haggle!

 

[John_V85]

I've noted the following and read it several times. I can't determine whether this is entirely boiler-plate and the way all overpayments apply to loans, or not.

"Any overpayment shall be applied against monthly repayments in the inverse order in which they are otherwise payable and shall have the effect of reducing the term of the loan, but not the monthly repayments (subject to minor adjustments deemed necessary)."

 

[Rob_I]

The rate is pretty standard for an unsecured loan yes.

The fee is high. 9% arrangement fee looks to me like the broker has added a handful for themselves. Last unsecured loan I did was for £140k also and the fee was 4% all in if I remember rightly.

Take great care and spend the money on things that will genuinely earn a tangible return. Don’t spend even a pound of that money on things that you would like to buy “if you had the money”

Hi Gordon, when considering loan funds of this amount, what do you think would be the minimum gross profit margin on the stock being bought to sell, to safely service this debt?

 

[John_V85]

Hi Gordon, when considering loan funds of this amount, what do you think would be the minimum gross profit margin on the stock being bought to sell, to safely service this debt?

Gross margin is an ugly proxy. What matters is annualised ROI.

 

[Gordon - Commercial Finance]

Hi Gordon, when considering loan funds of this amount, what do you think would be the minimum gross profit margin on the stock being bought to sell, to safely service this debt?

That's a question I am not placed to answer. It will be different for every business and every individual.