An SME Guide to P2P 

  • By Steve Grice
  • 24 Aug, 2017

All you need to know about peer-to-peer lending

Obtaining the best funding solution, best suited to each individual company’s need, is challenging.  

With 30+ P2P platforms, each having a different credit appetite and each offering different options depending on whether you need a loan or working capital finance, there can be a confusing array of possibilities.

It isn’t just about choosing the right platform or the right product, but about getting the right deal that is right for you.

It is also about understanding all aspects of the process, particularly with regard to fees and repayment charges.

P2P lending comprises an online platform that connects investors with borrowers, in return for a fee.

These alternative lenders compete with mainstream lenders such as challenger banks, as well as high street banks.

The sector continues to expand rapidly with £4.2bn of loans forecast for 2017.

Loans from £5K up to several £M can be arranged.

Institutional money continues to back the sector, meaning many platforms now underwrite/fund their own deals. Revolving Credit Facilities (overdrafts) are also now available.

High street banks are not suitable for everyone.

They tend to have quite prescriptive lending criteria, which means that many SMEs will get rejected even if they are perfectly eligible for a loan. (See our article ‘What to do when the Bank says No" in our Newsfeed).

P2P lending is often a viable alternative as the company’s individual circumstances are considered; it isn’t just about meeting defined credit scoring parameters.

A survey by the British Business Bank for 2015/16 found that 100,000 small businesses were rejected for loans by mainstream lenders – equating to £4bn of missed opportunity finance.

P2P can provide more specialist finance solutions more quickly and with better service. P2P platforms are small and nimble making them much more flexible, reducing costs and making the process faster and simpler.

Whilst banks can take several months to complete a proposal, typical turnaround for a simple P2P proposal ranges from a few days to 4/6 weeks.

There is a strong sector emerging for fast deals up to £250K, but these tend to be more expensive and should be seen as the first step towards a longer deal.

The sector arguably has better appetite than the banks at present for MBO/MBI deals, property development finance and general working capital lending.

While criteria varies from platform to platform, P2P loans are often more suitable for businesses that are more established. Although there are some options available, Start-Ups are difficult, as are challenging turnaround situations.

There is a wide variation between platforms in the level of due diligence and security required, but most proposals can be accommodated if they are reasonable.

P2P loans are rarely cheaper than going to a high street bank – it really depends on the individual facility, risk and platform.

Typically interest rates are between 8-15% (as at July 2017) though we are seeing some downward pressure on rates as more institutional money enters the sector.

These rates are competitive bearing in mind the other benefits they can offer such as flexibility of proposal and speed of decision, and banks will continue with conservative credit policies for the foreseeable future.

Business finance should also be a progression through a number of steps: P2P funding is an enabler, often acting as the first step in a longer finance journey. It allows you to get the deal done so the business can reap the benefits quickly, then move on to mainstream financing options.

We often advise clients to run a parallel funding strategy – apply through your bank but at the same time, work with someone like Ludgate to have a back-up solution.

In many cases, we see banks prevaricating over a lending decision; we have seen some of them take 9-12 months to make a decision for an existing client.

P2P can be quicker than this, so another strategy is to use alternative funding to get the initial job done, then move to more mainstream funding later, at your leisure, when you can take your time to do the best deal. We tend to build this progression strategy in with all our clients, and careful initial structuring means an easier switch to the bank at a later date.

By Steve Grice 06 Nov, 2017
When assessing a business for a loan or other borrowing, many lenders will look at the value of the assets within a business as a key component of the loan assessment.

The reason behind this is that if the business goes badly wrong, the lender can sell the assets to recover their loan.

What’s more, lenders typically discount the everyday value of business assets, and value them on a ‘fire sale’ basis – so plant and machinery could get written down to 10-20% of it’s everyday value, and a goodwill is typically written down to nothing.

In these circumstances, how does a business raise a loan for more than the value of its assets?

A good example that we saw recently is a niche manufacturer that had the following assets on its balance sheet:

  •   Plant & Machinery £260K
  •   Stock/WIP £200K
  •   Trade debtors £340K
  •   Total £800K

The incumbent management team wanted to raise £2M to effect a buy-out of the business from the current shareholders, so they approached their bank. The bank assessment started by using Invoice Finance to raise a facility equivalent to 80% of the trade debtors. Then they looked at Asset Finance to raise funds specifically against the P&M. Next, a loan against stock was added. Together this added up to:

  •  P&M Asset Finance £130K
  •   Stock/WIP loan £120K
  •   Invoice Finance line £272K
  •   Total £522K

A long way short of the £2M required.

Then the bank offered to do a separate business loan using the value of the directors' houses as collateral.

This added another £300K, still a long way short.

The bank suggested the team look to raise some equity from a venture capital firm. This would have required giving away a significant portion of the business and ceding a degree of control.

If all these elements could be made to work, the business would have five different funding streams to juggle.

The way we approached it was to look at the performance of the business. The present turnover was £4.75M and the average EBITDA for the last 3 years (after adding back dividends, tax mitigation strategies and exceptionals) was £1.2M. Turnover was increasing steadily, the business had a defensible niche in its market, a good management team and well spread client base. The question the bank should have asked was, ‘Is this business going to be profitable for long enough to repay the loan?’, to which the answer is ‘Yes’. The question they asked instead was, ‘How do we get out money back if it all goes wrong?’, which produces an entirely different answer.

The best way of approaching a lend such as this is to predicate the assessment against the sustainable cashflow of the business. In this case, loan repayments were covered more than twice over by average EBITDA; in these circumstances, hard security becomes a secondary consideration.

We managed to get a Letter of Indication from one of our panel lenders within 3 days of meeting with the client, which gave them confidence to negotiate robustly with the vendors. Within two weeks we had a formal offer from the lender and the transaction completed a month later. The management team did not have to give away any control, nor juggle five different finance lines.

We see many cases like this where traditional lenders are not allowed to approach a proposal entrepreneurially, and we have sourced acquisition and working capital funding for many transactions from a range of niche lenders in the P2P/Direct Lending markets.
By Steve Grice 06 Nov, 2017
MBOs (and MBIs) typically involve the purchase of a company’s share capital using debt, equity and cash.

Being able to minimise the amount of equity given away to an external investor improves the return to the incoming purchasers; being able to further minimise their initial cash contribution means that larger targets can be acquired.

Ludgate raise debt funding for business, using the fast-growing P2P and Direct Lending markets – one of our areas of specialism is raising debt for MBO-style transactions. We have seen some interesting developments in this area recently:

1. Debt can be raised up to a multiple of 3.5x EBITDA.
2. Cash contribution from incoming buyers can be as low as 5-10% of the debt amount
3. There is no need to look to hard asset values to underpin a lend.
4. Facilities can be structured and profiled to minimise loan repayments, assisting cashflow.

For example, we have recently funded an MBO where the incoming management team only had £200K of their own cash but needed to raise £2.5M to make the Day 1 payment to the vendor. The business had a strong and stable EBITDA and we were able to place this with a lender who was willing to advance part of the loan on an interest-only basis, keeping repayments down. We were able to avoid the team having to raise equity and thus preserve value in their hands, and also get the biggest impact for their personal contribution.

Whilst we would never advocate buyers having zero cash contribution – many lenders will want to see some ‘skin in the game’ as a matter of principle – we can ensure that the amount available from the management team can be levered as much as possible.

Furthermore, there is no need to restrict funding to a percentage of the hard assets within the business (machinery, debtors, property etc). The majority of the acquisitions we have arranged funding for have been cashflow lends, where the amount of the loan is a multiple of sustainable EBITDA rather than a percentage of the business assets.
By Steve Grice 03 Nov, 2017

Working capital finance is particularly important as it provides the oil that makes the wheels of the business turn.

At Ludgate we’ve seen many examples of businesses being stifled and even broken, not through having a lack of funding, but through having the wrong type of finance. 

Funding is not just a finance issue, but an operational issue as well. Getting it right can mean better margins, smoother relationships with suppliers, increased sales and a real competitive advantage.

For manufacturers in particular, working capital is crucial. Whilst some may have enough cash within the business to fund their own working capital cycle, most manufacturers will be reliant on some form of borrowing.


The traditional source of this funding was the bank, usually via the provision of an overdraft. This was simple to administer and flexible and security was provided by the assets of the business rather than directors personal property. Nowadays, most banks push their customers to Invoice Finance which can be expensive and complex to manage.


Within the P2P/Direct Lending market there is an alternative. Several providers now provide non-bank overdrafts; this is a pool of cash set aside for the business to draw upon and repay as and when required. It is a very similar concept to the old bank overdraft, except it is not tied to your bank account – you simply draw upon the facility as and when, transferring to the company bank account as required.


There is no complicated reconciliation to invoices, or funding directly tied to invoices; no need to query disallowed invoices or credit notes or calculate exactly how much funding is available on a day to day basis. This makes this type of funding good for businesses who don’t quite fit the IF model, such as construction or contracting, or businesses where customers pay in stages.


Unlike invoice finance, the overall credit limit is not tied to the amount of trade debtors outstanding at any one time; lenders will take account of stock, work in progress and any other assets within the business.


For example, we recently arranged a non-bank overdraft of £600,000 for a manufacturer of complex electronics. Most customers paid in stages against defined project steps, meaning that invoice finance did not work especially well and did not maximise the amount of funding available.

The only other solution that the incumbent bank could offer was a smaller overdraft secured by second charges over the Directors' houses.
By Steve Grice 01 Nov, 2017

Haulage firms are usually paid on credit terms by their customers, typically 90 days. 

Conversely, the two major outgoings – fuel and wages - have to be paid almost immediately. This creates a cashflow problem – a working capital gap that is structural to the industry. Most haulage firms are not cash rich because of the high costs of assets and general pressured margins, so need to turn to some kind of funding to address this working capital gap.


In the past, this would have been supplied by the companys’ bank in the form of an overdraft. This was flexible, easy to administer and cost effective. In more recent years, as banks have turned away from overdrafts, the gap has usually been plugged by invoice finance. 

This is less flexible, more expensive and reduces the risk to the bank. It can also be much more complex to administer. Banks also make a lot of money from invoice finance.


Within the P2P/Direct Lending market there is an alternative. 

Several providers now provide non-bank overdrafts; this is a pool of cash set aside for the business to draw upon and repay as and when required. It is a very similar concept to the old bank overdraft, except it is not tied to your bank account – you simply draw upon the facility as and when, transferring to the company bank account as required.


There is no complicated reconciliation to invoices, or funding directly tied to invoices; no need to query disallowed invoices or credit notes or calculate exactly how much funding is available on a day to day basis. This reduces the administrative burden significantly and takes some pressure off the need to invoice clients quickly. 

The overdraft limit is agreed at the outset and reviewed every twelve months, just like a traditional bank overdraft.


Costs can be lower than a Full Factoring line, and can remove much of the admin work required for an Invoice Discount line.

By Steve Grice 10 Sep, 2017
The biggest threat to any business is drift.

Start-up businesses and high-growth businesses are less likely to suffer from this problem.  They generally have well-thought out plans and a clear set of goals as a result of needing to raise finance.

But what about those small businesses that have been established for a few years?

These are the businesses that are most likely to succumb to drift.  They are typically not in high growth sectors, and whilst not quite lifestyle businesses, the owners have had a good living out of them for the past few years.

I see many businesses like this and they quietly dominate the local economy.  They tend to be small, less than £1M turnover and have little in the way of formal plans or vision for the future, other than a vague direction in the head of the owner-manager.  

There is often a general sense that next year will turn out much like this year with no major surprises.  Budgets are based around this year's performance... plus say 5%.

The assumptions of the owners are probably correct.  Most of these businesses will be there in five years' time.

So what's wrong with drift?

Because change is constant and failure to change will eventually lead to any or all of the following:

  • Moribund or patchy growth
  • Falling sales, margins and profits
  • Poor customer retention and satisfaction
  • Problematic cashflow
What is worse for the small business owner is that once these problems become manifest, solutions are likely to be imposed externally.  This could be from competitors taking your market share, customers moving away due to poor service, suppliers imposing pro-forma terms or your bank calling in your borrowing.  In extremis, external solutions may be imposed by an insolvency practitioner.

Drift can be characterised as an absence of control.

If you do not take control of where your business is going then, by default, others will.  

Drift is easy, control is not - it requires constant planning, monitoring and assessment.

By Steve Grice 10 Sep, 2017
Recently we had the opportunity to look over a small business whose Directors were struggling to expand.  

They had great products with a good deal of price elasticity, relatively low overheads and a desire to grow, but were finding it difficult to grow sales at anything like the rate they aspired to.  

The business was selling direct to the public.  Their answer was to spend more money on marketing - printing brochures, revamping the website etc.

However, talking to them for an hour or so, it quickly became clear that this approach would not take them where they wanted to go and could very easily end up being dead money wasted.

The real strength (and the biggest problem) that the Directors had was their passion for the product.  

This had led them to create more than two hundred products and product variations, which left them with a huge pile of stock and money tied up in tooling. They were undoubtedly excellent at product design and development but it had run away with them - they were treating it as a hobby rather than a business.

Now, there's nothing wrong with lifestyle businesses:  They can provide a good living for some people to exploit doing what they do best and enjoying it.  But the Directors had wanted to grow the business to something more.

The basic action plan that we developed was:

  1. Rationalise the product range - focus on maybe a dozen products that will be liked by the widest number of customers and have a high sales potential.  The rest of the products are still there to be used as and when, but the focus in terms of energy and funds should be on a small core.
  2. Realise that for a small business to grow quickly, selling direct to the public will always be a limiting factor unless you've got very substantial marketing and distribution facilities at your control.  The Directors were very good at what they did, but they had no experience in marketing or distribution, so to achieve volume they needed to approach retailers (who are the experts in marketing & distribution) for a wholesale deal.
  3. Realise where your limitations lie and take as much advice as possible.  If you need to pay, buy the best advice you can afford.  As an absolute minimum, engage a good accountant - one who will do more than just prepare your books at the year end.  Make contact with free advice services where possible.  Interview two or three Business Coaches to find one who you can work with.  Yes, it will cost money but so does increasing stock regardless of sales.
  4. Think of what you are doing as a business; get your business model right - this is not a hobby.  Don't put money into product or marketing without having a thought-through strategy - poorly planned marketing spend seldom works well.  This is where good advice is invaluable.
The story here illustrates some of the problems with growing a business that's developed out of something that you enjoy doing and have a real skill at - too often there is more focus on the pleasure of doing what you're good at, or enjoy, rather than developing the business model.

By Steve Grice 08 Sep, 2017
How many people buy a 99p burger?

When MCDonalds introduced a lower priced option on their menus a few years back they demonstrated a great pricing strategy - to drive business in a downturn, you need to show that you can adapt to customers' expectations.

The basic idea goes like this - if your product starts looking expensive then you create a lower-cost stripped back product that sits below your main lines.  Charging less for this new product will inevitably mean some cannibalisation of your existing customer base, but it will also prevent loss of customers to your competition.

So, why not just cut prices on your main product line?  Why go to all the trouble of sourcing, costing and promoting a new range?  There are a number of good reasons, but chief amongst these is that if you simply cut your prices on your main lines, you will have difficulty putting prices up again.  A good secondary reason is that an 'entry-level' product range will attract more customers who do not pursue this strategy.

It's fairly straightforward strategy to apply if you're a large retailer, but what if you're a smaller B2B business?

Let's say you're a distributor of air conditioning equipment to the trade and you have a main, branded supplier that has a reputation for high quality units.  Imagine that lately you've seen sales decline as a result of customers perceiving your prices to be too high.  The knee-jerk reaction would be to lower prices. This means you have to make savings in other areas of your business - sales or admin maybe.  The reduction in margin may even mean you make a loss.  You will inevitably find it extremely difficult to raise prices later on.

A better strategy would be to find a supplier of an alternative aircon unit that you could sell alongside your main brand - it has a lower price point, but the margin you make on it is the same or even a bit more than you make on your main line.  You may need to do this via a separate company to preserve the integrity of your main line, but at least you're now only losing price-sensitive customers to your other company rather than to a competitor.

This is an approach that many businesses use - all the main car manufacturers have 'entry-level' models; major supermarkets have economy ranges which have become more prevalent since the recession; a walk around B&Q will show you the value ranges in their tools.

And while you're eating your 99p burger, consider the amount of effort and strategic thinking that has gone into it........
By Steve Grice 08 Sep, 2017
Many, many small businesses are run by the Founder under autocratic control.

But it can be very lonely at the top.  Decisions can be made without fully running 'make sense' tests or gaining the input of others who may have previous experience. Sometimes this can lead to the wrong decisions being made.

It's not just large businesses that benefit from having a Board.  Small businesses can benefit as well from having an advisory Board.  The idea is to hold the management to scrutiny and critically examine current trading and future plans.  This means that you get asked the awkward questions that many small business owners avoid.

Here's some guidance:

  1. Ask people you trust and respect, and who have some distance from the business.  This means you will have to explain your underlying assumptions and norms within your industry in greater detail, which  means they can be critically examined.
  2. Board members will be volunteers.  You may want to pay them a small amount.  
  3. Board size should be limited to 4 or 5.
  4. Meet once a quarter.  Any more, and you'll be taking too much volunteer time; any less will not be worthwhile.
  5. Open yourself and your business up to scrutiny.  This may be uncomfortable at first, but the idea is to make the business stronger.  Listen to the Board's questions and make sure you follow up.
  6. Information is important - the Board members need to have full disclosure from you prior to the meetings.  This means Management Accounts at the very least.
The best businesses that I see are those that are open to advice.  Be clear though - this does not mean that you cede control of your business.  You are still in charge and the final decisions are yours.  The purpose of your Board is to give you different perspectives and be a critical friend to you and your business.

By Steve Grice 08 Sep, 2017
With the help of Excel, most business owners should be able to construct a working weekly cashflow forecast without input from the accountant. To help you focus on what cash your business needs, I'd always recommend keeping a rolling 13-week cashflow forecast.  This will give you at least 3-months notice of any problems.  For manufacturers this is crucial because of the length of time of the sales and build cycle - this time represents cash tied up on working capital.

A rolling cashflow forecast means you're going to be updating your cash position at least once a week.  Keeping a close eye on your cash position means that you will have the opportunity to sort out any issues in good time.  An unexpected crisis position with your cashflow is a sign of poor management.

Overheads should be relatively easy to predict over a three-month time frame.  You will know the cost of rent, rates, insurance etc.  For most businesses, staff wages are also pretty fixed over this kind of timescale too.  A quick tip for capturing all your regular fixed costs is to look back over your bank statements for the last three months.  You will also know from your incoming invoices or purchase orders who you owe money to and when it needs to be paid.

Predicting Sales:
Whilst predicting overheads is relatively easy for an existing business, predicting sales can be less so, although it is easier over a shorter period.

If you're a manufacturer, you'll have a bunch of live quotations out with customers at any one time.  You should be able to predict reasonably accurately from past experience what proportion of these will turn into firm orders.  You should certainly know the length of your manufacturing cycle and what terms you're selling on.  From these pieces of information, you can predict when you'll be receiving the cash.

For wholesalers or retailers, that sell on a more immediate basis, you need to look back at your historical data at sales in the relevant week last year and adjust by what you know about major customers, or whatever else is happening in your market now.

Keeping it maintained:
Every week you should set aside time in your diary to update the cashflow forecast.  Add another week onto the end of it and modify any numbers that you know have changed in the past week - for example, if one of your customers has told you that payment will be delayed for another month.  Alter the numbers and have a look at the difference this makes to your cashflow over the coming weeks.

Flexing and Modelling:
You can also use your rolling cashflow to answer 'what if?" questions.  For example, what would happen if I got an unexpected large order, or my key supplier suddenly wanted payment on delivery rather than allowing 30 days credit.  You can also model the impact if you changed your payment terms e.g. if you wanted to take less of a deposit upfront.

By getting into the discipline of updating your cashflow each week, you will have a much better grasp on how your business works and which operational areas drain cash from the business.  Targeting these areas will help liquidity and solvency of your business and allow you to sleep better at night.

By Steve Grice 08 Sep, 2017
What's Your Strategy?

All businesses should have a strategy - a medium to long term plan of where they are going.  All large and medium sized businesses will have this - but most small businesses do not.  At best, there is a kind of fuzzy idea of a plan in the head of the owner.

I'm not talking here about a business plan.  This is the short-term planning document that all businesses should have that says what they are going to achieve over the next year or two.  What I'm writing about here is the longer term strategy of where you want the business to be in five or ten years.

Often this is a difficult question to answer precisely, and the answer will need to have some built in wiggle room to allow for contingencies.  However when you are thinking about where you want the business to be in 5-10 years you'll need to think about some of the following:

  • Do I still want to be running the business then?
  • Do I want to sell, or retain control?
  • What size will the business be by that time?
  • How will my customers have changed?
  • Will technological change have an impact?
  • What will the financials look like?
Note again, that this is thinking on a longer timescale than the business plan.  The most fundamental questions are probably the ones that are most personal - the top two in the list.  It is important to say that there is no right answer here - what suits you will depend on your circumstances.  It may be the case that you want to sell the business within five years and retire aged 30.  Or you may want to continue working in the business until you're 90.  Neither answer is right or wrong.  What is not so good is not having the understanding of what you want from the business.

There are lots of professionals out there to help you implement your strategy (accountants are usually a good place to start), but before you contact any of them, take some time to really think through what you want from your business.  Is it simply a cash-generating machine to pay your wages?  Or is it something you absolutely love doing and couldn't imagine giving up?  Do you have children that want to come into the business?  Is the business still going to be around in a few years time, or will market changes have made it obsolete.

Much of this falls under the heading of succession planning, which is largely about personal motivation and realising the long-term value in what you have created.  To do this, you need to consider how this is going to be achieved.  For example, can you achieve your personal goals if your business is suffering from long, slow decline?  If not, then you will need to look at the nature of the business, and this is where personal and business motivation go hand-in-hand.

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