During the current climate, the need for short term finance is at its highest in modern times with many small, medium and large companies going into administration / bankruptcy.

There is a need for those who have capital to lend it to businesses in order to assist with the cashflow issues at this time. If you are in a position to lend funds, then it may be a way to give back or generate equity in businesses in your local area.

If lending funds (more like a bond or loan) then the market rate of this depends on a few factors (namely; risk free rate, liquidity premium and credit risk):

  1. What is the risk free rate? This is the rate at which you could lend your money out in the market and there be no risk of losing it. The base rate in the UK is currently 0.1% – so let’s just assume this is 0%.
  2. The term over which you will lend the funds – this should add in the rates you would usually get from a bond / fixed term ISA. On https://moneyfacts.co.uk/savings-accounts/fixed-rate-bonds/ – the rates are around 1%-2%.
  3. The risk the business goes bankrupt – credit risk – this would make up the rest. This is the most difficult to estimate – but you can look at comparable investments to get a fair estimate such as peer-to-peer lending sites. (Such as: https://www.fundingcircle.com/uk/investors/).

So you really need to carry out your due diligence to assess the business you’re going to be lending to.

Funding circle provide borrowers a fixed rate of 1.9% but this is before their fees are taken which range between 1%-6%(!) depending on security and term. This pushes the rate up to around 8%. With late payments at 15% – this is sure to put off many looking for short term capital. Zopa’s rate is 8.7%.

Are you happy to lend capital to a company at this rate on more flexible terms?

If the answer is no, then an equity stake may be more appropriate – how much of the funds can be divided between buying part of the business, and lending money on a fixed term basis?

With the above breakdown, you can see how your rates should change whenever there is a change in the economy. For instance, if the base rate drops further, so should the rate you expect from the first element of your return.

Part 2 of this blog will be out this week to help those who are looking for finance…

If you enjoyed this, please like and share!