As part of our Navigating COVID-19 Instagram Live series, we’ve been asking experts for practical advice to help small businesses stay afloat during the coronavirus pandemic. Demi Ariyo, founder of small business lender Lendoe, broke down some key tips about getting access to finance as a business owner.
Tell us about you and the work that Lendoe does. What are ‘underserved’ businesses?
Lendoe is a social lender particularly focused on supporting ‘underestimated’ businesses. We used to term them as ‘underserved’ but we actually found that after they would receive their loans from us, these businesses would go on to experience a lot more traction with other lenders – so now they’re well-served! Often they just needed the opportunity to demonstrate how far they could go with an injection of cash.
I’m really passionate about supporting small businesses and helping people birth their visions. I believe a lot in people – sometimes more than they believe in themselves!
What types of businesses do you lend to?
We are sector-agnostic but like most lenders have our favourites; with that being said, we tend to focus more on the demographic and characteristics of the entrepreneur. We typically focus on people of colour, migrants, women and businesses between 8-21 months old.
Specific, I know – but it’s important, and we serve each one of our target groups for a particular reason. It is usually because they are either highly underserved or have shown signs of the fear of rejection. For example, we have a particular focus on businesses between 8-21 months old – early-stage businesses – because banks loan off the back of a business’ credit score, which can’t be acquired until after a business files their first set of accounts. However, a business cannot file their accounts until one year after registering, and due to the nine-month grace period they typically tend not to file their accounts until their 21st month of operating. This therefore leaves a gap in the market that needs to be filled for businesses who are over one year old but are yet to file their accounts.
One of the first businesses we funded suffered from this problem: despite having a strong financial profile with healthy assets and cash flow, a change in legal structure (from self-employed to limited company to community interest company) meant that the banks refused to lend to them. Their applications were being automatically rejected because they had no financial accounts for their new structure.
Many of our clients never even applied to the banks before coming to us, this was due to their fear of rejection. Instead, they were taking out credit cards and paying high-interest rates on their loans.
What was your journey to getting started?
Prior to Lendoe, I ran AH Partners, which I launched after I and several other young adults raised a bond for my church. The church found themselves in a situation where they had an expensive loan* and, due to recently incorporating a new entity but not having the required track record, the banks were unwilling to refinance this loan**. The church building was about to be repossessed because the loan payments they were required to pay were simply unsustainable.
Myself and several others came together and decided to do something about this. My experience in buying and selling bonds allowed me to create a private, mini bond*** to help them out. The bond we raised decreased their monthly repayments and bought them some breathing room to get them to a place where the banks would agree to lend. However, this time never came, so I restructured the bond and began using the interest payments we were generating to issue micro-loans to others who approached me after they found out what we had done for the church.
*It was a bridge loan: short term finance with high-interest rates circa 25% fixed including fees.
**The banks were unwilling to provide the church with a loan to pay off the bridge loan over a longer time period with lower interest rate payments.
*** The mini-bond had a fixed annual coupon of 10% including fees.
How are your clients coping with the impact of COVID-19? How have you been able to help them?
Lendoe’s clients have been massively affected: a lot are hair salons, barbers and tailors on the high streets, and so the lockdown has halted sales. But even our e-commerce and streaming clients have suffered; challenges with delivery are hampering sales and former clients of ours, Mixtape Madness, have had problems with video production due to social distancing requirements.
Many of our clients have been put into a position where they can’t afford to pay us back because they are simply not operating. As a result, we’ve initiated a three-month payment holiday for all those who’ve been directly impacted by the virus. In the meantime, the whole team has decided to forgo our salaries during this time and volunteer for the company. We’re focusing on our partner network, matching clients with funding from lenders in our partner network who’ve been accredited by the Government to offer Coronavirus Business Interruption Loans. We will use the fees from this (paid for by the government) to pay commission to staff and donate to charities if we can.
Coronavirus had a massive effect on the business, but we’re thinking about how we can be more creative with our resources.
Can you go into more detail about your Partner network?
Our Partner network allows us to match our clients to bigger lenders when we no longer have the capacity or funding power to support them – for example, when they require above our funding limit of £20,000, or need longer loan tenures. The network is working to push community lenders to the forefront; these organisations have been literally set up and mandated to support entrepreneurs from the underserved communities we exclusively focus on and those who have been in financial difficulties in the past.
What help is being offered to small businesses by the government? What grants and loans are available?
There has been a lack of transparency over this – the government has been quite vague about what’s on offer. As far as I’m aware, there are grants of up to £25,000 available and there are websites set up to allow small business owners to work out how much they can access.
There’s also the furlough scheme: effectively, the government is willing to pay up to 80% of your staff’s wages, up to £2,500 per month, as long as the employee was on payroll from 28 February 2020. If you’re a small business owner, you should definitely take a look at this: it’s a great way to support your staff and keep them on your payroll for 20% of the cost.
Finally, there are Coronavirus Business Interruption Loans (CBILs). The government released them without considering the fact that banks have had a very similar scheme in place since 2008 – the Enterprise Finance Guarantee (EFG) scheme – yet they still weren’t lending to small businesses. The EFG scheme was very similar to the CBILs, except it was only a 75% guarantee as opposed to 80% of any capital that could not be recouped by the lender of loans to small business owners. However, this did not encourage lending.
The government has given everyone the impression that the banks will provide the finance, but the statistics show that the number of referrals from banks to alternative lenders have now hit an all-time high. Almost 140,000 small businesses have applied for CBILs but only 0.8% have received funding. It’s a very difficult situation – there is money available but it seems as though it’s extremely hard to get.
Why are the banks refusing to lend?
Ultimately, they don’t have the capacity or the appetite. In many cases, it takes the same amount of resources to write a small loan of £25,000 as it does to write a large sized loan for £300,000, for example – but the rewards are much higher on the latter. It makes more sense for them to turn away smaller loans or provide them with unfavourable terms, such as asking for personal guarantees or charging excessive interest rates.
Also, from a risk perspective, these small loans are unsecured even with personal guarantees. This means these banks will have to provision to cover these loans in the case that anything goes wrong, which comes at a cost that eats directly into their profits. Ultimately, the banks don’t want to lend the money in the capacity that the government wants them to.
What are the other options?
The government is also using community lenders to disburse funds, but many of them also have their issues. A number of these organisations are very ‘old school’ and lack the technological capacity to process the loans quickly. On average, it can take a community lender two months to disburse from when an application has been submitted. In the best case scenario, it could take one month – while some small businesses don’t have two weeks to wait! In fact, a report came out recently highlighting that most small businesses in the UK only have one month of runway before they hit serious financial difficulties.
The government has changed the CBILs scheme so personal guarantees are no longer required, but this has added an additional week to the process as the community lenders we work with have advised all their legal paperwork now needs to be revised. This is even for businesses who have had their loans approved!
It’s a very challenging scenario, but we’re hoping that our new technology will help to ease some of these problems. We need more FinTech (financial technology) companies to step in and help the community lenders by providing their processing power to get the loans approved and the funds disbursed as soon as possible.
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Should small businesses just avoid applying to banks?
Definitely try with the banks, but apply for multiple accredited lenders at one time. In fact, being rejected by a bank improves your chances of getting approved by a community lender. Don’t rely on just one lender for funds.
Lendoe is trying to build a marketplace that solves this problem. We have dedicated our tech team to solving the problem of the mundane paper application form that community lenders often require you to complete.
It’s a long process when going through any of the government schemes – you need a clear business plan and financial reports, including up-to-date management accounts. Unfortunately, not every small business has these to hand, making it even more difficult to apply for CBILs. We are putting together a support network to help all our entrepreneurs get the information together quickly and affordably, to then get them to the right lender. This will mean that Lendoe is the only company they need to liaise with to apply for multiple lenders and also access all the support they may need.
In our community, we’re often told that debt is bad, and in 2020 investment is touted as the funding source we should be looking to. Why does debt make sense for some businesses?
Debt is a type of investment. It’s a financial instrument that can be used to grow your business. It is better to take loans when you know your business very well – when you know your margins, cost of sales and so on. That’s when you can know for sure exactly how it will be spent and on what timeline, and that it makes practical, financial sense for your business.
Debt becomes challenging when you take it too early and don’t understand your business enough. Unlike venture capital or angel investment, debt is usually used for a specific purpose, such as to buy a new asset or fund the purchase of stock. There’s a clear date when you should be able to repay it because you’re investing in the opportunity to make more money – and you can clearly project when this investment will pay off.
Venture capital, on the other hand, is more often used to scale a business, and it’s less about profitability. It’s a longer-term game than debt (Uber still isn’t profitable, but is global. If they had taken a loan, they would have gone bankrupt a long time ago). In some situations, it makes sense to take loans as well as venture capital.
What types of things should you take out a loan for?
It’s on a case-by-case basis and is entirely dependent on when you know you’ll be able to repay it. What I will say is that if you are going to take out a loan, ensure that the money goes to work straight away.
Can you tell us about the different debt products on the market for online businesses?
E-commerce businesses are great businesses to loan to (and get loans for), because all the necessary purchase data is at their fingertips.
Shopify was working on something along these lines, although it was more like a venture product than a loan as they were discussing offering it to brand new merchants without trading data.
Amazon has also been known to partner with direct lending companies. I recall them working with Iwoca, one of the UK’s leading direct lenders, and was allowing merchants to access finance based on their user reviews and rating. They are now in talks with Goldman Sachs about creating a similar product. There’s a whole suite of products coming out allowing lenders to look at business data and use data science to determine whether or not they want to give you a loan.
Do you have any final tips and advice for small businesses in relation to managing their finances and cash flow?
Firstly, do the numbers before you take out any finance product – understand them as much as possible.
Secondly, track everything – from your conversion ratio, to your newsletter opens, to your customer personas. The latter helps you to better understand who your core customers are and how you can target other people who fit those profiles.
Thirdly, don’t over-leverage yourself. Look at how much money (equity) you have in your business before taking out a loan and make sure you have breathing room in case things go wrong (such as COVID-19). Even when you’re not making money, you’ll still need to make repayments. Be conservative and look at your debt-to-income ratio; don’t take out loans that are 3-4 times what you are earning.
Lastly, learn the banking terms so you’re not confused by what you’ll need to repay. An often misunderstood term is APR: this is not a fixed interest rate, but the average amount of interest you will pay on an annual basis, and so sometimes means you’ll be paying less than what you thought.
Also, pay attention to the administrative and other fees you are asked to pay. Depending on the size of your loan, you may be able to negotiate or have the financial institution you are working with discount some of these fees.
Lendoe is currently taking CBIL applicants – apply for a loan now