There are certain businesses and start-ups that are considered to be very risky. Perhaps the founder has a poor credit history or has experienced bankruptcy, or maybe they are operating in a volatile industry. Nonetheless, there are some lenders and types of finance that understand that with high risk comes high reward and below we cover some of the funding options available for risky businesses.
This type of finance involves having another third party involved to act as the ‘guarantor’ who agrees to cover any missed repayments that the main beneficiary does not make.
The guarantor is usually separate to the business and rarely has a financial stake in the company. They may receive a small share of profits or the satisfaction of helping a family member or friend – and they trust that they will never have to make a repayment on their behalf.
The use of guarantees offers extra security to the lender or business who is providing the finance. For an SME with only one director in the company, the lender relies heavily on their ability to pay it back. But with another person or company to back up the loan agreement, there is extra security that the lender will be able to recover their funds.
Whilst this guarantor approach is common with borrowing large sums from investors or banks, there is also a consumer credit option to borrow from mainstream lenders like Amigo and UK Credit. Business owners can apply to borrow up to £15,000 over seven years and then pay money into the business and receive dividends. The rates charged range from 39.9 per cent to 59.9 per cent representative APR (Source: GuarantorLoans.com)
Bridging finance is commonly used to purchase property that has a very tight deadline. Common uses include those buying property at auction or putting in an offer for a property in a competitive market.
For high-risk businesses, there is the opportunity to borrow up to £25 million, provided that the loan is secured on the business, property or office space. For businesses that are going through a growth period and need access to funds, they can borrow money secured against their office space or residential property and use the funds to buy equipment, staff or advertising. Once the growth period is over, they can repay their bridging loan.
Bridging finance is typically available for a maximum of 24 months and rates start from 0.44 per cent per month.
This source of funding takes its name from the Latin word meaning ‘middle’ and what it offers is a combination of equity and debt to help you get the finance you need.
The debt refers to a loan that has interest on it, but the equity means that the borrower must also give up a percentage of their business in the process.
Some lenders (and these are commonly bridging lenders) understand that a customer could earn a huge payout if they pull off a risky venture. So mezzanine finance is intended to offer the customer the funds they need whilst allowing the borrower to also get in on the action.
A common structure is: the lender provides 60 per cent of funds in a loan form, 20 per cent as equity and then the customer has to put in a remaining 20 per cent of their money.
It can be also used to top up an existing loan. So whilst the lender cannot continue to lend on the same terms, they can offer more finance if they get a stake in the business. Examples of this include investing in property in a turbulent market or investing a startup that has already lost a lot of money. It comes down to the lender being able to assess a company and its potential growth.