Assets can often be purchased through a hire purchase agreement, but where this option is unavailable a business loan can fill the funding gap and allow you to spread the cost of potentially expensive equipment. In some instances the asset can act as security for the loan which will somewhat reduce the risk.
In 2015 more than £29 billion in finance was provided by members of the The Finance & Leasing Association to assist with asset purchases. This figure is further boosted by the work being carried out by the Peer-to-Peer funders who offer an alternative route to finance outside of the traditional sources.
Business acquisition is the process of acquiring another company in order to build on strengths or weaknesses of the acquiring company. The aim is often to aid growth in a quicker manner than would normally occur organically. We have also supported new business owners who are able to show experience in their field of purchase and where security is strong to support the acquisition.
Successful businesses typically have a healthy cash flow, but even the best run businesses can experience fluctuations and cash flow finance can be an effective way to ease cash flow issues during busy periods. For short term options, businesses can use credit cards and overdrafts where appropriate. Longer term requirements such as construction firms covering a shortfall before they are paid by their customers and import/export or retail businesses making large inventory purchases to save money a loan can offer timely support to help plug this gap in finance. Another popular option is invoice financing and it’s important to consider the best fit for your organisation before entering in to any agreements.
A fairly common use of a loan is to consolidate other debt. This may seem confusing but there are three main reasons why a business may wish to take this route; businesses can spread the cost of an expensive loan over a longer period, combine several smaller loans into one more manageable loan or they may wish to refinance at a better rate.
Some debt consolidation companies have a bad reputation and Money Saving Expert, Martin Lewis rightly warns his readers to be wary of these in this excellent piece on his website.
The key here is to make sure the deal is the right one for you. Are the savings on the monthly payments going to help you and your business to succeed? Once you have considered the likely rate and repayments on the consolidation loan you will be in a better position to decide if this is the right move for you, but whatever you do, do not blindly accept a deal without considering the benefits or potential pitfalls.
If you are looking to grow your business, expansion can take many forms. There are a plethora of options for expansion including taking on new employees, larger offices, additional sites, product diversification and taking your product online. You may find a cash injection from a loan helpful in achieving your desired growth. It can help to pay for the new revenue stream in it’s early stages before it starts to pay for itself and could help you to achieve your planned expansion earlier than you may have through organic growth.
Before taking a loan for expansion you should be confident that you have planned effectively and considered the relative risks and challenges. If the expansion is unsuccessful for any reason you will still be expected to pay the remainder of the loan from your existing profit, so it is vital that there is a clear route to profit before accepting finance to fund the project.
14th Nov, 2016
Our lender base is made up of a wide variety of savvy and well connected individuals, many of which are greatly involved with local entrepreneurs and businesses. Growing businesses need access to capital and we’re here to help.
We’d like to reward our members for referring businesses who are looking for additional finance.
If you refer a business to us that successfully raises finance through rebuildingsociety.com, we’ll reward you with a referral fee of 1% of the amount raised. All you have to do is send them our way and ask them to mention you at the point of application or first contact.
We’re looking for businesses that you love and support, that:
- Have been trading for at least 2 years as a Ltd company or LLP; and
- Have an average turnover of £50,000 a quarter
To find out more about our lending criteria, please visit How to Borrow
To refer businesses applicants to us, send them the link http://reb.so/apply.
Terms of Referral
* The loan must be fully funded by 31st Dec 2016
* You should not be a shareholder or director of the referred applicant
* You may not act as a broker on behalf of the applicant
* You must be registered lender of rebuildingsociety.com
11th Nov, 2016
In 2014, Candy Hero Ltd. came to rebuildingsociety.com looking for an influx of funds in order to expand. They planned to use the investment to boost wholesale sales, strengthen equity and then open a new UK store in time to maximise Christmas time sales.
Candy Hero Ltd. was founded in December 2008, by two entrepreneurial siblings with a mission to bring unique, specialist and delicious sweets from all over the world to sweet-toothed customers in the UK and Europe.
The online shop was launched in 2009, to be followed later by high street shops in York and Leeds. Visit one of their shops, and prepare to be tempted by Birthday Cake Golden Oreos, exploding cinnamon candy, Nerds, giant lollipops, wasabi candy and boxes of Jelly Belly Buttered Popcorn Jelly Beans, to name just a few from the vast collection. The 10,000 square foot warehouse in Bradford sees around 4,000 unique product lines carefully handled by employees individually chosen to fit the company’s high energy, innovative ethos.
The sweet importers and retailers’ first loan application was a great success; brothers and co-owners Frank and Leo managed to raise the target £50,000 from investors. Candy Hero Ltd. invested the money they raised into the wholesale distribution of imported sweets, snacks, and groceries. They decided not to open a shop, as they were unable to find an adequate unit within their chosen city. Instead, they focused on their online sector. In the last two years, the company has:
- grown turnover significantly; 2015 to 2016 saw 83% growth
- increased their stock-holding capacity from 5,000 to 10,000 square feet
- acquired a great number of additional wholesale customers
- built a proprietary pre-order system
- co-ordinated a huge UK product range comprising around 10,000 lines available for pre-order and export
- improved internal systems with strong procedures that improve staff training processes
- added powerful price and margin controls and mitigated currency fluctuations
Frank commented on their experiences with rebuildingsociety:
“They provided a smooth process prior to listing the application, support throughout, and a platform that is clear and easy-to-use. Rebuildingsociety is a very impressive social business that is a powerful tool when you need extra finance above and beyond what may have been already possible.”
Perhaps one of the keys to their online funding success was the company’s open-door policy. Frank discusses business with his team quite openly, “from the top to the bottom of the organisation, in response to any question.” Therefore, he embraced the discussion forums available on rebuildingsociety.com, believing that “talking business with lenders in a peer-to-peer environment with the same openness and clarity builds up the confidence to invest in us.”
Now, Candy Hero is back with a new loan application. The return borrowers are well-supported by rebuildingsociety’s lender base, something they hope will help them fund their £300,000 loan application. If successful, the team plan to refinance £184,000 to achieve cheaper interest per month and fewer capital repayments per month, and use additional capital to add to the stock cycle.
When asked why they decided to return to Rebuildingsociety, Frank explained that while their bank is very supportive, recently offering them a new import loan facility, they cannot approve a loan of this size. As he commented: “The only method of gaining a loan of this size would be crowdfunding and the only place I want to crowdfund is Rebuildingsociety.”
Read about the company on their website, and find out more about their loan application at rebuildingsociety.com.
Lending to businesses carries risk. Past returns are not necessarily a guide to future returns. Any unrepaid capital is at risk of arrears or default. To find out more please visit http://reb.so/risk
07th Nov, 2016
Any investment involves risks. Whilst we pride ourselves on our ability to minimise the possibility of the borrower not repaying through our careful selection of businesses that meet our lending criteria and our proactive approach to credit control, there will unfortunately always be occasions where a business will fail and cannot repay capital and interest as agreed.
In this situation, it becomes necessary to commence our legal enforcement process to enforce the security offered by the borrower to secure the loan. Whilst this is not an option we take lightly, we are confident that our security requirements and our close working relationship with credit control agents, debt recoveries experts and in-house and external legal agents, we are well prepared to utilise the many tools at our disposal to recover the debt.
In this post, we briefly discuss a few of the types of security we take and the various powers of enforcement they each provide should the worst happen.
The key advantage in holding a debenture for security is the powers it gives you to enforce the charge against all assets of that business. Our debenture form creates a fixed and floating charge over the assets of the company. This fixed charge applies to the assets of the business not subject to any other legal charge. A fixed charge creates conditions over how the company deals or disposes with the assets in question. A company cannot sell the asset without either paying our charge or obtaining our permission.
The floating charge over all assets grants more flexibility to the chargee in what it applies to, and additional flexibility to the chargor by dispensing with some of the restrictions on use or disposal of the asset. The company is free to deal with its assets in the ordinary course of business, but we are protected when a ‘crystallising event’ takes place and the charge is crystallised. Along with any fixed assets (things like premises, machinery, tools), the debenture also creates a charge over the book debts of the company, and the floating charge applies to assets current and future.
Critically, the existence of a debenture grants secured creditor status, meaning that the debt is given preferential status and must be repaid before that of unsecured creditors. The book debts (which comprise individuals or companies which owe the business money), and all other assets of the business can be recovered to pay off our loan before unsecured creditors debts are considered.
Another advantage of a debenture is that it gives the holder the right to appoint an administrator to place the business in administration. This allows us a method to place our appointed insolvency practitioner in control of the company’s assets and operations, and allows the administrator to take appropriate actions to protect the assets of the company to satisfy its creditors and make a judgement on the survivability of the company in question as a going concern.
Our debenture also contains a ‘negative pledge’ which prevents further charges from being registered against the business without our express permission. This acts both as a safeguard to prevent the business in question obtaining additional secured credit, and also a way to protect the priority of our creditor status and limit the number of other parties with access to the powers a debenture provides.
Legal Charges over Property
On loans secured by way of a property charge, we have additional safeguards and powers regarding enforcement of the debt.
Before the funds are transferred to the borrower, our lawyers complete the legal registration of the charge at the Land Registry. Once this is done, this means that the borrower cannot sell their property without first satisfying our charge in full. Further, the borrower cannot remortgage the property or take additional charges without either satisfying our debt or obtaining our express written permission. This allows us a degree of certainty that the equity position in the property will not have dissipated when it comes time to call in our loan.
A property charge also gives us the power to petition the courts to force the debtor to sell the property in question, with the monies received from the sale used to satisfy the charges on the property. Whilst this is a powerful tool, it is worth remembering that not only are there several barriers to forcing a sale, but even when successful, it is often a time-consuming and expensive legal process. Further, factors like dependents in the property, children under the age of 18, a partner or ex-partner with a share of the equity are taken into consideration by the court and can complicate or delay the sale. Along with the time and legal cost involved, frequently the sale price achieved under a forced sale is less than a sale in optimal market conditions. For these reasons, wherever possible it is normally beneficial to use a forced sale only as a last resort when other options have been exhausted. Frequently, the threat of a forced sale is enough to bring a debtor to the table to either settle the debt in full or establish a repayment plan.
Personal Guarantees and Bankruptcy
Critically, as discussed in our previous blog post in this series, Personal Guarantees create a personal obligation for the debt. This allows us to go after the guarantor even if the original business has been wound up and ceased trading.
This gives us two main avenues to reclaim funds against the individual- bankruptcy and court judgements.
Instead of seeking bankruptcy, we also have the option to seek a court judgement for the money owed. By applying to the County Court, we can ask for them to issue a CCJ against the individual to set out how the debt should be repaid. A CCJ is a court order mandating the repayment of the debt and setting out whether it is to be paid all at once or through regular monthly repayments. The court sets the repayments based on the defendant’s income. The CCJ is entered on the Register of Judgements, Orders and Fines and remains for six years. If the CCJ is unpaid, we have the authority to return to the court to enforce their judgement. Using this method, we can send bailiffs to collect payment. The bailiff will ask the debtor for payment within seven days and, if it isn’t paid in this time, will visit the debtor’s home or business to seize goods to pay the debt.
The advantage of a CCJ is that it allows you some additional freedom in enforcing the debt. If the debtor has commenced new employment, we can apply to the court for an attachment of earnings order to deduct money from the debtor’s wages and have it paid directly to us. We can also apply for a third party debt order, which allows us to petition the court for an order to seek our funds from a third party who owes money to (or holds money to the credit of) the judgement debtor. This can allow us, in certain circumstances, to apply to take money directly from the bank or building society account of the debtor.
Another tool available to us to pursue an ‘unsecured’ debt is a charging order. This is a tool placing a charge to secure the debt against the debtor’s property. This can only be pursued once a court judgement has been obtained, and usually only when the repayment terms of the judgement have been broken. Once a charge is placed on a property, the owner cannot sell or remortgage the property without paying off the debt.
The disadvantage of CCJs is that, whilst they may appear to have a number of possible enforcement options associated with them, each have their own specific advantages, disadvantages and costs. They all rely on the administering of an order by a judge, and are only available in specific circumstances. A CCJ also nowhere near as effective a ‘threat’ as bankruptcy, which holds with it the possibility of your entire estate being liquidated, and can prove a very effective way of ‘encouraging’ co-operation.
There is also the ‘superseding’ effect of bankruptcy, and the dangers of wasting effort and funds on prior enforcement measures. Whilst it sounds tempting to utilise all of these various court orders and tools to enforce a debt, at the time a borrower defaults to us, they have often defaulted to one or more other lenders. If one of those lenders makes the debtor bankrupt before the CCJ is registered and the particular enforcement measure is successfully pursued, then the CCJ is essentially superseded by the bankruptcy. This means that the money and time spent obtaining the CCJ and petitioning the court to grant a particular enforcement order is wasted.
Bankruptcy is usually a ‘final resort’ in situations involving a defaulted loan and in fact, to successfully petition for bankruptcy you must demonstrate that all reasonable options have first been pursued, as the court seeks to prevent bankruptcy hearings being used as a ‘normal’ credit control method. Our legal agents are experienced in satisfying the legal pre-requisites to, where necessary, seek a bankruptcy order against a non-paying guarantor.
In bankruptcy, the bankrupt’s assets are assessed and their estate is vested in the bankruptcy trustee. The Trustee liquidates the bankrupt’s estate in order to pursue a realisation for creditors. Thus, once a bankruptcy order has been made, it falls to the Trustee to oversee the bankruptcy and work in accordance with the law to secure any creditor realisation.
Where the bankrupt has attempted to dispose of assets quickly at any point in the five years before the bankruptcy below their proper value (or indeed as a gift) the Trustee can apply to the court for an order voiding any transaction made at an undervalue. This offers a degree of protection and recourse to us from the risk of a debtor disposing of assets before being made bankrupt.
A further method to do this is by way of a freezing order. We can apply to the court to grant a freezing order which prevents a debtor (individual or business) from disposing of assets before liquidation proceedings.
This was a brief introduction into some of the recovery options available to us and a discussion into the additional powers granted by particular security types. It is by no means final or comprehensive, and in each circumstance the tools utilised by us to recover your debt are decided upon after careful consideration of the case in hand and close discussion with skilled legal professionals with many years experience in debt recovery.
Lenders should be aware that irrespective of these tools, capital is always at risk, recovery is never guaranteed and past returns are not necessarily a guide to future returns. To find out more about the risks associated with Peer to Peer investments please visit our Risk Page.
24th Oct, 2016
We’ve been working hard to bring you good quality borrowing applications for you to consider. Currently businesses that are eligible to borrow through rebuildingsociety.com, must have at least two years history, an average turnover of £50,000 a quarter and offer at least a personal guarantee as security. The average final rate paid by borrowers on our loan book is over 20% APR*, this rate is paid usually regardless of the security offered in support of the loan.
Currently, the risk rating given to the borrower drives the maximum starting rate for bids. To incentivise applicant borrowers to offer more or better security we are introducing a modifier to the maximum rate ceiling on the loan auction.
Whilst we currently take security into account during the underwriting process, it is not a significant factor in determining the risk rating given to the borrower, and therefore has little bearing on the cost of the finance.
From the 26th October 2016, the starting rate on a loan will be driven by the security strength and Loan To Value (LTV) score of the security rather than the final risk rating. The underwriting of the loan will be done in the same manner as before and risk ratings between A+ and C will continue. The weightings attributed to the determination of the Risk Rating in our model will remain unchanged, therefore a loan that was rated as C risk earlier, will still be rated as a C rated loan, allowing you still to view the suggested relative risk of the business.
The Changes in Practice
What is it?
A new borrower incentive to encourage borrowers to offer more and better security in support of their loan.
How does it work?
The borrower can offer a wide variety of security to support their loan. We’ve assigned a nominal value to the different types of security, making some security ‘more valuable’ than others. For example a 1st charge on a property will be deemed a more valuable form of security than a company debenture, and as such they will be rewarded with a lower starting interest rate.
The more security added, the more the starting rate will be reduced* as the security added works in a cumulative way linked to the loan to value ratio.
The starting maximum rate will never be modified lower than 5% of the standard maximum rates, which are currently as follows:
- A+ = Max rate 11%
- A= Max rate 14%
- B= Max rate 17%
- C= Max rate 20%
Therefore a C rated loan will never have a maximum starting rate of less than 15%.
The security we can accept from a borrower is ranked in priority below.
- 1st Charge Commercial Property
- 1st Charge Non Residential Property
- 2nd Charge Commercial Property
- 2nd Charge Non Residential Property
- 1st Charge Residential Property
- Fixed Asset Debenture
- 2nd Charge Residential Property
- All Assets Fixed and Floating Debenture
- Corporate Guarantee
- Personal Guarantee Insurance
Therefore, depending on the LTV on the security, a 1st legal charge taken on a commercial property in support of a loan will be ranked higher than a loan with an All Assets Debenture and may be achieve a lower maximum loan rate. Similarly, based on the above a loan secured on a 1st charge non residential property with an exceptional LTV will not achieve a better rate than a loan secured on a 1st commercial charge that also has an exceptional LTV, unless the former is accompanied by additional security.
Personal Guarantee’s do not qualify for a reduction in the interest rate as this is a mandatory requirement for all loans.
Why are we introducing it?
We have received feedback that the security being offered should have a more direct effect on the rate of loans. As such, we are rewarding borrowers who choose to back their loan with additional security. In the long run this should result in a higher percentage of secured loans and an increased rate of recovery.
When will it be introduced?
The security discount will apply to all new loans from Wednesday 26th October 2016.
How will this affect you and your use of the site?
The bidding process of the site remains unchanged as does indicative risk rating given to each loan, the only change will be the maximum starting rate of any loan that achieves the reward.
Will this be applied to historic loans?
No, but existing borrowers who reapply for new finance may qualify for the ceiling rate reduction.
Will this reduce my returns?
We expect any reduction in average gross returns to be offset by an improvement in net returns.
As ever you should always review each loan application in detail before lending. Where you have questions in regard to an application you should put these to the borrower via the discussion forum on each application.
11th Oct, 2016
Loans on rebuildingsociety.com carry varying types and levels of security, but what does this mean?
What is security?
Loans on rebuildingsociety.com can carry the following types of security.
- Personal Guarantee
- Corporate Guarantees
- All Asset Debentures
- 1st and 2nd Priority Charge Legal charges over property
Each loan profile will highlight what security is being offered on the particular loan. The headline information can be found on the Overview tab. Every loan on rebuildingsociety.com, unless otherwise stated carries at least a Personal Guarantee.
Security on a loan is the instrument that will be used to recover funds owed should a borrower fall into arrears and their account declared to be in default. The security will allow you or rebuildingsociety.com on your behalf to try and recover the money owed to you. Therefore, generally speaking, the more security offered by a borrower the greater the chance of recovering the debt if things go wrong.
Should it affect my lending decision?
In deciding to lend to a business, the security offered by the borrower should act to give you a higher level of comfort in your decision.
While each lender has their own underwriting system and investment strategy, generally speaking when assessing a business before bidding to lend, you should carefully assess the merits of the business itself rather than solely focusing on the security being offered. This is because loan security should only be a back-up to the lending decision itself as it only becomes a factor should the business be unable to maintain repayments and default. Many lenders may consider it prudent to first assess the business’s ability to repay the loan through assessment of the accounts and other information supplied before assessing the security as a later consideration.
It is important to note that whilst all loans on rebuildingsociety.com carry some level of security, recovery of funds owed to you are never guaranteed.
How is the Rebs loan book secured?
Rebuildingsociety,com has some of of the most stringent criteria on security being offered on its loans when compared to other platforms. What we mean by this is that whilst many of our competitors may offer loans of over £200,000 ‘unsecured’ (without a personal guarantee, or with a personal guarantee but nothing else), we insist that all loans carry at least one Personal Guarantee from the main directors or shareholders, and where the loan is for more than £50,000 we require extra security in addition to a personal guarantee.
How has this changed over time?
We try and source a variety of different businesses with a variety of different security so that there are opportunities to suit a diverse range of risk appetites.
We’ve taken a look into the level of security offered on all loans. Taking into account that many loans carry more than one type of security, we have only taken into account the ‘primary’ security on the loan. So for example; where a loan is secured on a PG, Debenture and 2nd Charge, we regard the 2nd charge as the ‘primary security’ as it is generally regarded as the strongest of the three and as such we have not included the other ‘secondary security’ in the graphs below.
The below pie chart illustrates the current primary security levels of all active loans in the Rebs loan book.
70.99% of the current active loan book is secured with more than a personal guarantee, with over 32% currently secured on a legal property charge.
Over time our lender base have asked us to provide them with more property secured lending opportunities, a call we have tried to answer.
The graph below shows the change in percentage of all loans over the years secured by the various primary security types. As you’ll be able to see, the number of loans secured only on a personal guarantee has decreased year on year since 2014, whilst the proportion of loans secured by 2nd charges has increased year on year at a higher rate. This year already, we have secured more of our loan book on 1st and 2nd legal charges than any year prior to it .
Going forward, we will continue to try and source creditworthy businesses backed with higher levels of security.
26th Sep, 2016
FCA, TCF, FOS, OFT, PRA…As a lender on a Peer to Peer site, these are all acronyms you may have come across. But do you know what they stand for and what the regulation means for you as a lender? In this post, we take a closer look.
The Financial Conduct Authority (aka The FCA) were formally known as the Financial Service Authority and the Office of Fair Trading (OFT).
In 2013, the FCA was formed, taking over the operations of the FSA and the OFT and at the same time also creating the PRA, the Prudential Regulatory Authority, the authority that regulates the banks and insurers.
The FCA (who are directly accountable to HM Treasury and Parliament) aim to secure an appropriate degree of protection for consumers, protect and enhance the integrity of the UK Financial System and promote effective competition.
In 2013, the FCA announced that it planned to regulate the previously unregulated crowdfunding sector, including both the equity and debt-based sides of the market. Rebuildingsociety.com, having operated since late 2012, fell under the new regulation and authority of the FCA. As rebuildingsociety.com was already trading under the supervision of the OFT, it was granted Interim Permission and invited to apply for full permissions in October 2014.
So, how does the FCA go about ensuring that the firms under its supervision protect consumers (you)?
All firms under the authority of the FCA must meet the minimum applicable standards as set out in their Regulatory Handbook. The Regulatory Handbook is driven directly from legislation, primarily the Financial Services and Markets Act 2000 (FSMA). The handbook acts somewhat like a Bible for regulated firms, setting out how it should handle client money, how it must manage its promotional activity and communicate to their clients, to name but a few of the rules set out in the extensive Handbook.
Some of the most prevalent rules that go towards protecting consumers are the rules on Treating Customers Fairly (TCF) and Financial Promotions. These rules, if not followed, can result in firms facing penalties and restrictions and as such are taken seriously by regulated firms.
Treating Customers Fairly
TCF rules aim to raise the standards by which firms carry out their business. The TCF rules are driven by 6 outcomes that firms should measure their performance against. These principles aim to help you fully understand the features, benefits, risks and costs of the financial products you buy and minimise the sale of unsuitable products by encouraging best practice before, during and after a sale.
What are the 6 Outcomes?
- 1. Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.
Whilst this outcome may seem obvious at first, it is central to the FCA’s core mission to protect consumers. The FCA insist that firms make fair treatment of consumers core to their corporate culture and not merely a box ticking exercise to satisfy the regulator.
Firms are expected to ensure that all staff act honestly and with integrity and deliver a high standard of service to clients.
- 2.Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
This means that firms must not sell financial products to customers who do not need them, nor sell products that are not suitable to their specific needs.
This puts the responsibility on firms to ensure that they know their customers and their needs, so that they are not burdened with products or services that they do not actually need. For an obvious example, a firm should not sell a Pay Day Loan to a customer who does not have a job.
If you think back to PPI, or to the mis-selling of mortgages and the effect of the collapse of this market, you can see the importance of this principle clearly illustrated by the consequences of previous failures.
- 3.Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
You may have heard of the Latin Phrase, ‘Caveat Emptor’ roughly translated to ‘Buyer beware’. This is exactly the type of behavior that the FCA is trying to remove from the financial services sector. They want to ensure that firms do not hide important details in the small print.
Customers should be made aware of all costs, penalties and terms before entering into an agreement to ensure that they are fully aware of what they are committing to or should expect throughout the term of the product or service.
- 4. Where customers receive advice, the advice is suitable and takes account of their circumstances.
Entering into a contract for a financial service or product is one of the most important contracts that many of us enter into. Think Mortgage, Life Insurance or Pension. As such, it goes without saying that when doing so you expect to be given advice that is suitable and tailored to your needs so that you are able to make an informed decision.
Firms that fail on this principle are subject to exceptional penalties.
- 5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect.
When you buy a financial product or service you should expect to get what you expected when you bought it. So if you open a savings account that you are told will yield a certain amount of interest each year, your savings account should deliver as expected.
- 6.Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
Firms must make it easy for customers to change providers, make a claim or submit a complaint.
Matters concerning financial products and services are often time sensitive and as such firms should react in a reasonable manner so as not to cause major inconvenience for their customers.
At rebuildingsociety.com, TCF is in our DNA. We’re always striving to improve your experience of the site and the service you receive from us. If you don’t think that we are meeting your expectations we’d like to hear from you so that we can put it right.
You can contact us either by phone or email, all details are available on our Contact Us Page.
21st Sep, 2016
At rebuildingsociety.com, we carefully assess the viability of every loan application that comes our way. To learn more about this process and understand what makes a business the best fit for our community, we’ve interviewed Philip, our lead underwriter and part of our underwriting and credit risk team, so he can answer some frequently asked questions.
1. What do you look for in a business whose application we will accept?
We look for growth in turnover and profitability, good cash management, sound investment decisions from previous borrowings and evidence that the loan from us will strengthen the business for the future. All this should be predicated on true and fair answers to my questions. Sometimes an applicant will not answer my questions truthfully. Difficult to believe, I know, but I assure you it can happen. However, a company that honestly meets the criteria above is highly likely to be listed on the platform.
2. What are some red flags that you often see? What will lead to a rejection?
Any identified deliberate misrepresentation will lead to an immediate refusal, and not treating my questions seriously will not enhance the applicant’s chances of a listing. Sometimes applicants attempt to hide information from us; this is when I ask questions to which I already know the answers. If I do not get the correct answer (often through negligence or incompetence) and I have to ask them to reconsider the answer they have given me, their chance of achieving a listing diminishes. Very often things are blamed on their external accountant. This is because we have no way of testing this advice and certainly no way of holding the accountant to account. However, in my experience, most poor decision making is done contrary to the advice of the accountant and he is a scapegoat when things go wrong. If I believe that the business is being run exclusively for the personal benefit of the directors and shareholders and that a loan from us is likely to be used for their personal benefit rather than to build up the company I will consider a refusal of listing. Likewise, some applicants will insist that audits have been completed or planning consent received when in fact those tasks are still in process. I am also very suspicious of applicants who refuse to file their completed accounts on the public record and say that their accountant has advised them not to do this; I don’t believe a word of it.
3. What accounts do we ask for and why?
We ask to see 2 complete years of statutory accounts which are filed on the public record at Companies House plus a third set of accounts from the beginning of the new financial year to a fairly recent date. This is to give the lenders a short recent history of the business and for them to see what the current position is.
4. What does our underwriting process involve?
I am a bit uncomfortable with describing it as underwriting, a word commonly associated with the insurance industry. A successful journey through the question and answer process that I control does not generate any guarantee or insurance for the lenders. I see my job as forensic accounting because it is an analytical process that attempts to come to a conclusion about the veracity of the accounts and tries to enhance the credibility of the figures and the disclosures so that the lenders have a reasonable basis on which to start their own decision making process.
To assess applications, we use our own risk tool which uses standard financial analysis based upon the critical data in a company’s financial statements to facilitate an overall view of the performance of the company. Specifically the tool looks at the liquidity, profitability and capital adequacy of an applicant; it also allows for an experienced subjective judgment, based upon other factors, to be made about the company and to influence the final decision about whether or not to list the application on the platform. We also use external ratings agencies to bolster our underwriting process.
5. What should lenders keep in mind when reviewing an application?
Lenders should make their own assessment of the application from the information disclosed and the Q&A on the platform. Forensic accounting is not a substitute for their own assessment, it is only an attempt to remove obvious inconsistencies and provide information that a reasonable lender should have a right to see. Lenders should be aware of the significant limitations in accounts generally and that my job can not remove these limitations to any large degree.
6. What is your background and experience?
I am a Fellow of the Institute of Chartered Accountants in England and Wales (ICAEW) and also a barrister (member of the Bar of England and Wales). My career has always been in accountancy and since the time of my qualification in 1981 I have worked in the industry as finance director and in regulation as a member of the secretariat developing accounting standards for the profession. More recently I have spent some years in the teaching and training field. Until June 2015 I was a long standing member of the Council of the ICAEW and the profession’s Ethics Advisory Committee. I helped to develop the risk tool that is an essential part of our underwriting function.
12th Sep, 2016
Unlike some of our competitors, every single loan we list on our platform is backed by at least a Personal Guarantee (PG). Here, we will look at a few common questions about Personal Guarantees.
What is a Personal Guarantee?
In the simplest form, a Personal Guarantee is a guarantee under which an individual agrees to be responsible for the financial obligations of a borrower or debtor to a lender, in the event that the borrower or debtor fails to pay an amount owed to the lender.
Why do we use PGs on every loan?
We want to present you, as our lenders, with the best possible lending opportunities. In order to do this, we ask each Director of the companies we list on the platform to offer a Personal Guarantee in support of their application.
Firstly, this forces each Director to effectively ‘put their money where their mouth is’. We ask them to demonstrate their confidence in their business and their lending proposition by offering their personal financial resources as additional cover should the loan default.
Furthermore, as discussed in a previous post in this series, a key concept of limited companies is the limited liability entailed. This means that Directors are only legally responsible for the debts of their company to the extent of the nominal value of their shares. A Personal Guarantee creates a personal liability for the full loan amount upon each individual guarantor. Crucially, this provides a ‘secondary avenue’ to pursue the amount owed, distinct from the company itself. This can often be a useful avenue when action against the business is not possible, such as if a business exits administration through liquidation with no dividend expected for creditors.
The presence of a PG can also prove useful in situations where the business is still trading, and even in before a loan is even in default.
A Personal Guarantee carries with it the potential of Bankruptcy Proceedings should a Guarantor be unable to repay the debt. Bankruptcy carries restrictions and penalties, which include (among others) acting as a director, setting up or running a company or taking credit above £500.00. In addition, there are a large number of bankruptcy offences which, if convicted of, constitute criminal offences which can be punished by a maximum of 7 years in prison.
The potential penalty of bankruptcy can often form a powerful negotiating tool, and work to steady the mind of a director to prioritise making repayment arrangements in order to avoid the prospect of bankruptcy. This gives our collections team a powerful negotiating tool available on day one of a repayment being late.
Should a loan begin to perform poorly, the existence of a PG can also result in the establishment of a more favourable repayment agreement due to the Guarantor being likely to concede more in order to avoid further legal action and bankruptcy.
How do we enforce a Personal Guarantee?
When a debt is enforced against a Guarantor, they will initially be personally served with a Statutory Demand for the claimed debt. From service, a debtor has 21 days to either settle the debt in full or propose an acceptable repayment schedule. A failure to do this will lead to the commencement of county court proceedings or the presenting of petitions for a Guarantor’s bankruptcy.
Once a Bankruptcy Hearing date has been set, a Debtor has a further opportunity to come to a repayment arrangement (which may involve the submission of an Individual Voluntary Arrangement). Our legal agents attend the hearing on behalf of lenders and will usually petition the court to make a bankruptcy order.
After a Debtor has been declared bankrupt, if the court has appointed one, their estate will vest in a Bankruptcy Trustee, or if not, the Official Receiver. Our legal agents liaise closely with the court, the Bankruptcy Trustee and Insolvency Practitioners during the bankruptcy process in order to secure a dividend for lenders. The bankrupt’s estate is reviewed, the nature of the assets are determined and eventually their estate is liquidated to secure a recovery dividend for the bankrupt’s personal creditors.
Along with the financial dividend paid from the bankrupt estate to creditors, the bankrupt’s conduct is reviewed by the Official Receiver, who investigates and if it is deemed that the Bankrupt has committed any bankruptcy offences, then the court may make the appropriate bankruptcy restriction orders to extend the usual bankruptcy penalties or seek a custodial sentence.
01st Sep, 2016
There is a lot of work which goes on behind the scenes from the point when an application is first submitted until the point at when it goes live on the marketplace.
To give you an idea of the time involved, the borrower team spend an average of nine days on the assessment phase of an application, from the initial submission to listing.
This time is spent analysing the prospective borrower’s submissions, assessing the accounts and security submitted, asking pertinent questions about the business, liaising with the applicant to get more information on their business or additional security to support their application and, when identified, requesting amended accounts in circumstances where accounting errors are spotted, to ensure that the figures presented to lenders are as fair and accurate as possible.
First and foremost, however, a listing must meet our basic lending criteria, and we filter out those that don’t at the first instance. Our five basic criteria are as follows:
1) The applicant must be a limited company.
We do not offer loans to partnerships, sole traders or individuals. Limited companies are by law separate legal entities from their directors or shareholders. This means that there is a clear legal distinction between personal finances and the finances of the business. We can assess the strength of the business purely on its own merits and look at the personal finances of any directors or shareholders separately to assess the suitability of security.
A Limited company is required by law to produce fair and accurate accounts to be filed at Companies House available to the public record every year, along with an Annual Return listing directors and shareholders. This allows us to cross-reference accounts submitted by applicants with those filed at Companies House, an important security check we conduct on every application before listing.
2) The company must have two years or more of trading history.
Recent statistics suggest that up to nine out of every ten start-up businesses will not survive past the first two years. The risk of failure usually reduces after each year of successful trading. We require all businesses we list to have at least two years of prior trading history. This allows us to mitigate the risk of failure by only listing businesses which have already survived the most risky period. It also gives us at least two years of business accounts to assess, and lets our underwriting team get a more accurate idea of the business, adjusting for one unusually good or bad trading year.
3) The business must be profitable and must have a turnover sufficient for our affordability criteria.
As part of our lending criteria, we require that every business we list must have made a profit in the last two years of trading. On top of this, we also use our bespoke risk tool to calculate whether the loan repayments are affordable, taking into account factors such as the business’ turnover, net profit, liquidity and the equity/debt ratio.
4) The business must meet our risk rating requirements.
Along with affordability calculations, our bespoke risk tool also gives each application a risk grade from A+ to F-, factoring in a myriad of criteria from turnover, profitability and growth to liquidity, credit rating, repayment history and creditworthiness.
Any business which scores a D+ or below is rejected. If a business scores C- or higher, should it also meet our security and affordability criteria, it is listed on the marketplace with the appropriate risk rating.
5) The business must also meet our security requirements
Before making it on to the marketplace, businesses must fully satisfy our security requirements, which are considerably higher than most of our competitors. Firstly, unlike some other platforms, all of our loans are backed by Personal Guarantees as a minimum. For any loan request in excess of £50,000, we also require additional security in the form of a Debenture or a Legal Charge over Property.
In addition, in order to try and ensure the greatest prospect of recovery should a loan default, we also require that the total value of all security offered must cover the full loan amount requested. Our underwriters determine the value of each form of security offered by a prospective borrower and should the sum be less than the full loan amount, the borrower will be notified that additional security will be required in order to list.
The above 5 steps are just the first part of underwriting process. Once these initial checks have been done, the application is then pre-approved to undergo further, more stringent assessment.