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THE LAST WORD (PART 2) JARGON BUSTING FOR SMES – PART TWO Julian Straker, For further information contact Julian Straker, Regional Director, ArchOver Peer-to-Peer Lending, on 0161 883 1375 julian.straker@archover.com, www.archover.com. 47 Julian Straker, Regional Director, ArchOver Peer-to-Peer Lending, cuts through the jargon facing growing companies. IN THE previous article in December’s 53 Degrees, we looked at the jargon a new company might encounter, here we will examine some of the terms SMEs will encounter while growing. These companies will have traded for at least a few years, acquiring a financial track record and hopefully a steady customer base. This increased business maturity and stability tends to translate into lower risk (and lower reward) for potential investors, something that changes the nature of the available sources of finance. Some companies with more robust balance sheets will now be in a position to seek out senior debt in the form of loans secured against assets of the business. Senior debtholders are those that are most likely to be repaid in the event that a business gets into financial difficulty. Gaining a loan from a bank at this stage of development is notoriously difficult however. As such, businesses are increasingly turning to newer sources of finance, such as peer-to-peer lending platforms, such as the one provided by ArchOver, to provide them with the credit lines they need. ArchOver’s peer-to-peer lending platform provides borrowers with fixed term loans, by engaging with individual and institutional investors who wish to lend to UK businesses. To secure the loans, ArchOver, on behalf of its lenders, takes a first floating charge over the accounts receivable, and the borrower takes out credit insurance with ArchOver jointly insured. This is what we call ‘secured and insured’. ArchOver does not demand personal guarantees and allows borrowers to plan for the future knowing they have the security of funds. Other businesses that lack assets against which to secure debt, or the stable cash flows to service it, may look to invoice financing to improve their cash flow. Invoice financing can be split into discounting and factoring, both of which involve the third-party finance provider advancing the money owed to a business by its customers, minus a service fee. With factoring, the finance provider takes control of the debtor book, while with discounting the relationship between a business and its customers is left untouched. For businesses in certain sectors, manufacturing particularly, there is an increasing availability of supply chain finance (SCF). This links buyer, seller and financier, providing short-term credit to optimise working capital for both buyer and seller. More simply put the buyer uses the financiers money to pay the suppliers invoices, with the financier taking title to the raw materials provided and the goods that the buyers manufactures from them. SCF is available from both banks and P2P business lenders. For those businesses that seek to expand aggressively though, either of these forms of financing alone may not be enough, leading them to seek out mezzanine finance to help them achieve their goals. Mezzanine finance is usually unsecured and sits behind senior debt in terms of repayment priority. Because of this increased risk for the lender, it carries a much higher interest rate and often a clause that converts the debt into equity in the company if the loan is not repaid. These types of funding will suffice to meet the business requirements of many companies, allowing for growth while keeping ownership in private hands. The next step, if the company chooses, is to go public with an IPO (Initial Public Offering). There are a number of reasons why a company might consider going public, such as reducing the burden of interest payments or generating publicity. Over and above any of these considerations though is the ability that being publicly listed brings to raise large amounts of capital on a consistent basis. That said, firms must take into account the significant costs of the listing process, as well as the increased regulatory requirements. Regional Director ArchOver Peer-to-Peer Lending


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