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

Secure the Right FundingA Guide to Short-Term Business Loans

2.co.uk

Welcome!When speaking to business owners, I’ve come across two common themes: their eagerness to grow and the importance of having the right funding in place. They see it as a foundation of their success.

So how do short-term loans fit into this picture? I’ll let one of our clients answer:

“When you’re a small retail business like Kirk & Kirk, it’s not always obvious where the money is going to come from for simple things like stock, and turning away customers just feels wrong. Traditional financing opportunities are slow and not reactive. With a flexible short-term loan we were able to expand into the US market.” - Jason, Brighton

We understand that when you look for business financing, the variety of available options can be overwhelming. This guide will provide you with an introduction to short-term loans. We hope you find it useful!

Happy reading.

Niels TurfboerManaging DirectorSpotcap UK

3.co.uk

Content

Why do businesses need a short-term business loan? 4What loan types are available? 5What information is needed 8Identify if a short-term loan is right for you 9Do you have questions? 10Common phrases explained 11Useful online resources 11

4.co.uk

Why do you need a short-term business loan?Short-term loans are an important part of the financing mix and are used by businesses to grow or pursue opportunities. With quick application processes and fast turnarounds, many lenders offer attractive solutions to businesses. Reasons you might seek short-term loans include:

Short-term loans are available from a variety of different lenders, including traditional and alternative 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.

David Pick, founder of Vintage TV, didn’t miss a beat expanding abroad, after spotting a niche in the market for timeless classics. When a swift cash injection was needed, he turned to Spotcap. “They took a look at our accounts and just over a week later we had everything we’d requested. It was that simple. I was extremely impressed.”

Managing cash flow

Purchasing inventory or equipment

Bridging receivables

Remodelling and renovation

Hiring staff

Check out this video to find out more on how a short-term loan supported Vintage TV with their cash flow challenges.

5.co.uk

What loan types are available? When considering the different loan options available, start by asking yourself if you are looking for a secured or unsecured business loan.

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

• 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

Secured business loansWhen 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.

6.co.uk

When looking for short-term funding, businesses are increasingly keen to use an unsecured loan. This means 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 completely unsecured short-term loans to established and profitable businesses, without the need for a personal guarantee. This is possible due to the lenders’ expert underwriting team and innovative technology. Given that the lender takes on a considerably higher risk, interest rates could be higher. That said, many businesses are glad to receive a short-term loan without having to provide any collateral.

“As our hair salon business, Bleach, grew so did our ambition. There was an opportunity

to start a wholesale business and roll out Bleach products to retailers. However, this

came with challenges — a key one being raising finance for stock. Today we sell

around 30,000 units of product per week through Boots and Superdrug. Without a short-term loan we would not have been

able to have a wholesale business.”Sam, London

Unsecured business loans

For more information on Spotcap’s completely unsecured offering, which we combine with expert underwriting click here.

7.co.uk

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

Overview of short-term business loans

Secured business lo an Unsecured business lo anSecured loans are based on the assets a business holds (e.g. property, equipment, receivables) or on the business' cash flow.Typically involves asset valuations, charges on the company's assets, personal guarantees as well as

Tends to have higher, more stringent requirements which means it may take longer to get a credit decision.

Invoice finance (selective invoice discounting

and/or factoring) Other asset-backed finance facility (asset

finance, commercial mortgage).

Working capital finance Short and medium term loan e.g. Spotcap

business loan 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 ca be made quicker and there are no, or small, upfront costs and no security needed.

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 application 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 Other fixed assets

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

Pre-application requirement s

Pricing will typically be lower given the facility is secured. Legal and valuation costs are typical, while there is the possibility of losing the asset if the loan is not repaid.

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

Risk and pricin g

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

Typically 3 months to 5 years and beyond. Typically 1 month to 5 years.Duration

How does it work ?

What options are av ailabl e?

8.co.uk

What information is needed to apply for a short-term loan?In order to apply for a short-term loan, you 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

• 6-12 months bank statements in CSV or PDF format

• Most recent filed annual accounts

• VAT returns for the last 5 quarters

• Management accounts if annual accounts are older than 6 months

Personal and businessinformation:

Required documents:

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

9.co.uk

Identify if a short-term loan is right for youCommon trends in a successful application for a short-term loan include:

• Growth: increasing revenue trends

• Profitability: strong net profit margin

• Serviceability: repayment capacity fromavailable cash flow

• Creditworthiness: high credit scoresfor both the business and the businessdirector

Here are some more considerations to keep in mind:

You need 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 in less than one working day.

You don’t want to put up your home as security: Would it be possible to secure a short-term loan without you having to provide any asset or personal guarantee?

You do not want to monetise your invoices: Invoice finance only works for businesses who sit on commercial invoices. If you work primarily with consumers, you’ll have to look for finance elsewhere.

You should work with a trusted and transparent lender: take the time and check whether they are FCA registered, read their Trustpilot page and 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 charges hidden in the small print.

10.co.uk

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 summarises the 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, she/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 offering, please contact client services on:

Or visit our website at:

0203 308 9188 clientservice@spotcap.co.uk

www.spotcap.co.uk