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Loan Finance - Social Investment
•Considerations – applicant / funder•Components in an application•Decision process
Wednesday 3rd July 2013Garry Brown
The Key Fund is Britain’s largest regionalCommunity Development Finance Institution (CDFI)
Specialists in the social economy market – balance commercial activity with social return
Leading provider of Social Investment in the North of England
Market leader in innovation
Professional, qualified and passionate
Remove barriers within Society & Financial Markets
About the Key Fund
Revolving Loan Fund
Loan Purpose
Risk Perception
Types of funding considered at various stages in the business life cycle
Seed capital (seed-corn) Concept / prototype DevelopmentMarket researchPre-launch activity
Start-upProduct development / initial marketingInitial Working capital or Asset Purchase
Early StageTrading Not yet profitable / breaking even
DevelopmentFunds for growth and expansionBreaking Even / Profitable
Very High RiskOwn moneyVenture Capitalist
High RiskDebt (Loan) FundingBanks / CDFI / Specialist
Term Loans >Private Investment >Venture Capital / Floatation
High / High
Low / Low
HighRisk Pre –Start
Start-Up
Early Stage
Established
LowRisk
Fixed AssetAcquisition
WorkingCapital
Growth &Development
Low Risk
High Risk
Business Risk / Requirement Risk
Management / track record / resilience / cash contribution / security
Risk dimensions (1)
Bank
Key Fund
HighRepayRate
SecuredLoans
UnsecuredLoans
Equity /PatientCapital
Grants
LowRepayRate
Fixed AssetAcquisition
Workingcapital
Growth &Development
Low Risk
High Risk
Risk dimensions (2)
Management / track record / resilience / cash contribution / security
Secured Lending
Usually a formula used to determine the level of borrowing:
e.g.
•60 – 75% Loan to value (LTV) - underlying asset forms the security
•25% Loan to Value for HMO / Hotel used as hostels for the homeless
•Gross rental income to cover loan repayments by 130%
•Term of 15 – 25 years•Generally lower LTV & shorter term if high proportion of tenants on housing benefit – tenant quality…
C
A
M
P
A
R
I
Lending Decision Criteria
CUSTOMER
ABILITY
MEANS
PURPOSE
AMOUNT
REPAYMENT
INTEREST
LENDING DECISION CRITERIA…
CUSTOMER
ABILITY
MEANS
PURPOSE
AMOUNT
REPAYMENTS
INTEREST
Beneficial Owner / Legal Status / Board / Staff
Experience / Skills / Governance
Net Worth / Available Security
What will funds be spent on?
How much required? Enough? Other sources?
Is the loan affordable? Social Impact?
Can Vary with perceived risk?
Why do businesses fail?•Overestimating income•Underestimating how long to achieve profitable trading•Underestimating costs•Failing to control costs ruthlessly•Losing control of cash… allowing customers too long to pay; paying suppliers to promptly•Failing to identify your market•Failing to adapt product to customer needs•Lacking appropriate/sufficient skills: selling & marketing, financial, production, technical•Failing to build a functioning team•Taking unnecessary risks•Under-pricing
Why do businesses succeed?
•Quality of management: you and others•Experience in the chosen market and growth potential (idea/market)•Sufficient finance to meet working capital needs