Banks have become the bad boys of the finance world; only lending to large companies or individuals for mortgages and turning their backs on small businesses.
Some 99 per cent of companies in the UK are SMEs and the economy is not going to grow unless they get the finance they need.
The lack of bank lending has already spawned the new digital lending concept crowdfunding; raising funds for a small business from several people ‘a crowd’ over the Internet.
Kickstarter.com and Fundingcircle.com are big players in the crowdfunding market where money can also be raised, relatively quickly and easily, for a project or good cause; round-the-world yachtswoman Tracy Edwards is using crowdfunding to raise funds to rescue her yacht Maiden.
"We act as a dating agency putting lenders and borrowers together"
ArchOver.com aims to take the concept one stage further offering lenders security on their investment. “Our platform is globally unique,” argues ArchOver chief executive Angus Dent.
“We have devised a mechanism that enables SMEs to raise funds while minimising risk to the lender. We act as a dating agency putting lenders and borrowers together; bringing people to the party.”
ArchOver hopes to attract interest from the over 50s age group which may need money to borrow or have money to lend.
“You could be a director of a company that needs to borrow money to expand,” explains Mr Dent. “Or you could be heading up a family firm, want to retire and seek a means to get money out of the company while still being able to pass it on to the next generation.
“You may want to lend without great risk to yourself. We do not lend more than 20 per cent of your disposable cash and we always ask if the investment appropriate for you?”
ArchOver raised initial finance from its founder directors and friends in order to build its platform but has also received backing from Hampden, the insurance and financial services group which now owns 71 per cent of Archover. Hampden has invested £750,000 in the company and made £3 million available to lending.
"Lending security is our prime concern"
Tim Oliver, chairman of Hampden, says: “The crowdfunding sector is growing fast. We have been impressed by ArchOver’s dedication to lender security and we are pleased to back its highly professional team”.
The product provides lenders with a 5 per cent return with a minimum loan of £5,000. Lending is targeted at borrowers seeking a minimum of £50,000.
“Lender security is our prime concern,” adds Mr Dent. "On behalf of the lenders we register a first charge over the borrowers’ accounts receivable (debtors) and, as an added level of security, we also insure that debtor book.
“This achieves two things: it lowers the risk to lenders and it also allows the borrower to benefit from the creditworthiness of its customers.”
ArchOver also carries out extensive due diligence on its borrowers and looks at the debtors of the company.
“The lender needs to know where the money is going to come from to repay the loan,” argues Dent. “Large companies which are customers of smaller companies are a good credit risk so we can lever up on credit worthiness of customer. Plus we have a credit insurer to insure recovery of the cash from the customer.”
"We can offer lenders a better interest rate than they will get elsewhere"
The cost to the borrower is approximately £7,000 insurance premium per year for a minimum £50,000 loan, “But we are really looking to lend upwards of £100,000 to make insurance premium worthwhile,” explains Dent.
Lenders are paid 5 per cent interest on loans and borrowers 6 per cent, and so ArchOver makes 1 per cent interest.
The lenders are named as the loss payee on the insurance policy so ArchOver can collect the money in the event of the loan not being paid and distribute to lenders. Although lenders should be aware that it is the borrowers' debtors who are insured, not the loan.
All the money from lenders and borrowers go through trust accounts; there is a separate account for each lending and is completely separate from ArchOver monies. No member of ArchOver can be on the trust accounts.
"You are supporting small businesses, helping innovators"
“We need to show that we are acting in a highly professional way and demonstrate that people can rely on us,” adds Dent.
“We can offer lenders a better interest rate than they will get elsewhere. Everything is very flexible too. You can invest from 90 days to three years where a single payment is made at the end of the loan, or you can get paid monthly or quarterly.”
Of course nothing is risk free – the insurer insures accounts receivable and not the actual loan. But as Dent explains ArchOver offers a way for investors to cut out the middleman and look at projects themselves.
“There is a socially good aspect or lending this way,” he says. “You are supporting small businesses, helping innovators and perhaps backing a business that interests you.”
Previously Dent headed up a software company but it suffered cash flow problems in that it cost a lot to pitch for new business. His experience inspired the ArchOver concept. The other positive aspect of crowdfunding is that there is the ‘wisdom of crowds’ he says. “Lenders have added security in that it soon gets around if something is a con."
For further information visit: www.archover.com