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Choosing a lender
15 Jan 2016 | Guide | Alternative business finance
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Lender similarities
At the end of the day, all alternative business funding sites have the same strengths and weaknesses. P2P
or B2B, the concept is quite samey. What these companies do best is credit assessments. They claim to
have developed sophisticated algorithmic models, which goes beyond normal credit scores. This credit
assessment allows the alternative funding companies to apply to a broader audience than banks, and
perhaps take risks that traditional banks are unwilling to take.
SEE ALSO: Choosing your business identity
The fact these lenders are powered by disruptive technology, and machine learning algorithms, also allows
them to operate much quicker than banks. All alternative business lenders in the UK like Funding Circle,
Zopa and RateSetter guarantee it wont take more than a week to process the application and grant (or
disapprove) the loan, while cash advance firm Liberis promise it will take less than 24 hours to process the
application.
For investors, the benefits are obvious. When interest rates are kept at the level of all times low, a 5-7 per
cent annual ROI becomes a good enough reason to give alternative investment a try. In particular with
some lenders like Funding Circle which are transparent about their defaultingstatistics (less than 2 per cent
currently defaulted up to date).
Differentiators?
The first thing most business owners would look for, when they compare business loan companies, is the
APR each one offers. At the end of the day, any business owner is looking to pay as little as possible in
interest.
Alas, this is not a feasible task, considering the nature of the alternative funding industry. For starters,
offers are individualised; each business gets its own risk assessment, and thus, is eligible for different
terms. Secondly, very few companies are as transparent as Funding Circle. As most companies arent keen
on revealing their entire pricing model divided to risk levels and expected APR (besides Funding Circle),
Its difficult to figure out the exact loan terms without actually applying.
Thus, a price comparison between different loan providers is virtually impossible. The only feasible way to
compare the market is to complete the loan quote application with multiple providers. The good news is
the application is a simple and smooth process with most lenders, and should not require a great deal of
time to complete.
Here are some tips to help you speed up and optimise the comparison process:
Each lender would state its minimum requirements on its website. It would be a waste of time to apply for
a loan when the lender clearly states a certain type or size of business would not be welcome.
For example, Fleximize advertises that it looks for business with trading history of at least six months, with
annual revenue of at least 3,000, and profit margins of at least 20 per cent, while iWoca would seek for
businesses with at least four months of trading history, earning of at least 10,000 annually, but with no set
profit margin.
Learn from the experiences of fellow SMEs. Interest rate is not the only factor to weigh in when making
such an impactful decision. Its also about the service, the ease of use, early repayment policies, and the
overall experience.
As a rule of thumb, cash advances are more expensive than other forms of lending. Although they might be
the quickest and easiest form, they will also carry the highest interest. Avoid those if you can get funding
from other sources.
To shorten the alternative business funding comparison even further, we recommend to browse
through business lender reviews. You may find a lot of the relevant information you need there.
A DIY approach
So, what things can you do yourself? These are some of the business activities than can lend
themselves to a DIY approach:
Setting up a partnership
If you choose to set up a (unincorporated) partnership or limited liability partnership rather than a
limited company then this is also easy to do. A traditional partnership has similar status to a sole
trader and does not need to be registered with Companies House a simple, single Partnership
Agreement document is all that is required. Setting up a limited liability partnership is more like
forming a limited company various forms have to be completed and submitted to Companies
House. In either case, you can find plenty of information online including template documents.
Employing staff
Once your business grows to the point that you are ready to employ staff there are a range of other
legal documents you will probably need, the main one being a contract of employment.
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Engaging a consultant
If you want to engage the services of a consultant (e.g. a business coach, IT consultant, Health and
Safety Consultant, Marketing consultant etc.) then you almost certainly will need some form of
contract between your business and the consultant. You can let the consultant provide a contract for
you to sign or you can provide your own (making sure the terms suit your business). A contract to
engage the services of a consultant is often a fairly standard document and lends itself to a standard
template.
DIY Suppliers
There are many websites from which you can buy legal document templates. You can also buy some
legal document templates in paper form from traditional stationers but these documents tend to be
things like wills and tenancy agreements rather than business legal forms.
Before you buy an online legal document template, satisfy yourself that:
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records, or ideas for a new pricing plan. An NDA is your first line of defense
to protecting this information. This legal document creates a confidential
relationship between your business and any contractors, employees, and
other business partners who might get a behind-the-scenes look at your
operations.
Related: Rocket Lawyer: Cutting Out Small Business Attorneys' Fees
5. Employment agreement. This contract sets the obligations and
expectations of the company and employee in order to minimize future
disputes. Not every hire requires an employment agreement, but the
document can be a useful if you want to dissuade certain new hires from
leaving your company too soon, disclosing confidential information about
your business, or going to work at a competitor. The contract should be
reviewed by an experienced employment law attorney before given to an
employee to sign.
6. Business plan. A business plan may not be a legal document, but its
required should you ever decide to seek financing or sell your business. Your
business plan can be one page or a hundred pages, as long as it provides
clarity on your business opportunity and your roadmap to get there.
7. Memorandum of understanding. An MOU falls somewhere between a
formal contract and a handshake. It documents any important conversations
you have with suppliers, potential partners and others involved in the
business. MOUs are great ways to lay out the terms of a project or
relationship in writing, but do not rely on the document to be legally
binding.
8. Online terms of use. While not required by law, any business with a
website should include their terms of use. These pages can limit your liability
in cases where there are errors in your own content, as well as information
contained in any hyperlinks from your website. Furthermore, your Terms
should let visitors know what they can or cant do on your site, particularly in
cases where visitors can comment on blogs or share their own content.
9. Online privacy policy. If you gather any information from your customers
or website visitors (such as email addresses), you are legally required to post
a privacy policy that outlines how this information will be used and not
used.
10. Apostille. Businesses involved in international trade with other Hague
Convention countries may need a certificate, known as an "apostille,'' that
authenticates the origin of a public document (like articles of incorporation)
so they can be recognized in another country. Apostilles are only valid in
countries that are members of the Hague Convention.
In most cases, you dont need to create any of these documents from scratch.
You can find free templates online to serve as a starting point. While these
legal documents are important part of staying compliant with your state
requirements, they are more than empty formalities. By taking the time to
think about the various elements on each document, you are setting the right
foundation for your business.
1. Overview
You must choose a structure for your business. This structure will
define your legal responsibilities, like:
sole trader
limited company
business partnership
You can form an unincorporated association if youre setting up a
small organisation like a sports club or a voluntary group and dont
plan to make a profit.
You can use other structures for businesses that help people or
communities, eg social enterprises.
2. Sole trader
If you start working for yourself, youre classed as a selfemployed sole trader- even if youve not yet told HM Revenue and
Customs (HMRC).
As a sole trader, you run your own business as an individual. You can
keep all your businesss profits after youve paid tax on them.
You can employ staff. Sole trader means youre responsible for the
business, not that you have to work alone.
Youre personally responsible for any losses your business makes.
Find out how to set up as sole trader.
Tax responsibilities
You must:
3. Limited company
A limited company is an organisation that you can set up to run your
business - its responsible in its own right for everything it does and its
finances are separate to your personal finances.
Any profit it makes is owned by the company, after it pays Corporation
Tax. The company can then share its profits.
Ownership
Limited by shares
Most limited companies are limited by shares. This means that the
shareholders responsibilities for the companys financial liabilities are
limited to the value of shares that they own but havent paid for.
Company directors arent personally responsible for debts the
business cant pay if it goes wrong, as long as they havent broken the
law.
Example
A company limited by shares issues 100 shares valued at 1 each
when its set up. Its 2 shareholders own 50 shares each and have
both paid in full for 25 of these.
If the company goes bust, the maximum the shareholders have to pay
towards its outstanding bills is 50 - the value of the remaining 25
shares that theyve each not paid for.
Private company limited by guarantee
Directors or shareholders financially back the organisation up to a
specific amount if things go wrong.
Public limited company
The companys shares are traded publicly on a market, such as the
London Stock Exchange.
You can also consider setting up a private unlimited company as an
alternative legal structure. Directors or shareholders are liable for all
debts if things go wrong.
How to set up a limited company
You must register the company with Companies House and let HM
Revenue and Customs (HMRC) know when the company starts
business activities.
Read more about setting up a private limited company.
Tax responsibilities
The liability for debts that cant be paid in a limited partnership is split
among partners.
Partners responsibilities differ as:
The partners in an LLP arent personally liable for debts the business
cant pay - their liability is limited to the amount of money they invest
in the business.
Partners responsibilities and share of the profits are set out in
an LLPagreement. Designated members have extra responsibilities.
Read more about how to set up and run an LLP.
Tax for limited liability and limited partnerships
Overview
Sole trader
Limited company
'Ordinary' business partnership
5. Limited partnership and limited liability partnership
6. Unincorporated association
7. Change your business structure
6. Unincorporated association
An unincorporated association is an organisation set up through an
agreement between a group of people who come together for a
reason other than to make a profit, eg a voluntary group or a sports
club.
sole trader
business partnership
limited company
limited partnership
limited liability partnership (LLP)
Tell HM Revenue and Customs (HMRC)
If you want to close down your existing business structure, follow the
usual steps.
To no longer be a sole trader
Youll need to:
For more advice on the practical aspects of setting up a PLC, or converting an existing private
company into a PLC, go to the Incorporation Services Limited website.
Unlimited companies
Many people refer to a sole trader's business or a partnership as an unlimited company, but such
businesses are not in fact companies. It is possible to register at Companies House a private
company which is unlimited, that is the members accept complete liability for the company's
debts. If the company needs money to pay its debts a call can be made on each of the
shareholders to contribute a fixed amount on each share held by them.
An unlimited company has all the other features of a private company limited by shares. It is
registered at Companies House, has members (usually shareholders), directors, articles, etc. Its
one major advantage is that it is not required to register annual accounts at Companies House.
This type of company is suitable for a business where the risk of insolvency is very low or nonexistent, or where it is important not to put the company's accounts on the public register at
Companies House. There are few unlimited companies, but this may be because their existence
and advantage are not widely appreciated.
For more advice on the practical aspects of forming an unlimited company company and running
it once registered,contact Incorporation Services Limited.
another organisation which itself has an asset lock, such as a charity, or another CIC. With every
application to form a CIC, a Community Interest Statement must be lodged, with the usual
documents, when seeking company registration. This statement, signed by all the directors, must
describe the company's objects and certify that the company is formed to serve the community
rather than for private profit. CICs can be limited by shares or by guarantee. For more
information about CICs, go to the Community Companies website.
or vice versa.
Existing companies can convert themselves into CICs but such conversions require the approval
of the CIC Regulator. Where the company converting to a CIC is a charity, the permission of the
Charity Commission is needed for a change of name.
For more advice on the practical aspects of converting one type of company to another, please
contact Company Law Solutions.
TYPES OF COMPANY
The following gives a brief guide to the various types of companies that can be incorporated in the UK and
their various principal characteristics. More detailed information can be found under each separate heading
within this section and in the customer support section. Use this list and the links provided to help decide
which company formation you need.
The types of company we can incorporate for customers include:
Objects unrestricted
Limited companies are often advantageous for their shareholders regarding taxation
Takes longer to complete registration of new directors and transfer shares to new owners
More expensive
A Guarantee company is not owned by its members and cannot be transferred by its members for
value it has no share capital
Some input required from client to establish main objects if required or objects can be unrestricted
A private company can be converted to a PLC, so most PLCs start life as normal private companies and
convert at a later date prior to flotation of the stock markets
Suitable for new and existing partnerships wishing to obtain limited liability status, and aimed
particularly at professional partnerships such as accountancy and solicitors firms
Beneficial for property developers planning to sell flats or apartments in a development once
completed
Can be used to spread the freehold of a number of flats across the individual owners allowing easy
transfer and sale of each flat
Can be used purely as a vehicle to manage the maintenance of a property comprising of several flats
or apartments
Allows leaseholders to purchase freehold properties or acquire the rights to manage a property under
the Commonhold and Leasehold Reform Act 2002
Intended for use by social enterprises who wish to utilise their profits and assets for public benefit