Small Talk: Repayments that change with your revenues – flexible loans, Swedish style

The old ideas are always the best. You’re going to hear a lot of talk about innovative new “revenue loans” in the months and years ahead, as alternative finance providers look for new ways to get funding to growing small businesses. But this is a concept that the oil barons of the early 20th century knew all about: many of them got started by offering a slice of their future revenues to lenders. Film producers have often worked this way too.

In their modern incarnation, revenue loans for small firms look set to be popularised by a new launch from iZettle, the Swedish company that has made its name with a series of innovations in payments technology. It has just announced the launch of iAdvance, a financing service that will enable merchants who use its payments tools to borrow a lump sum from the company. Repayments will then be made by deducting a small percentage of the subsequent revenues each month.

This is a potentially attractive model. Lenders offer finance on the basis of the business’s previous trading history – its month-by-month record of sales. Borrowers aren’t wedded to a fixed repayment each month; since they’re charged a percentage of their revenues, the size of their repayments is directly related to their ability to find the money.

The duration and price of the loan will vary from borrower to borrower. Rather than imposing a fixed interest rate, lenders typically set a repayment cap – the amount they expect to receive in repaid principal and charges. Once the borrower’s monthly repayments hit this total, the loan arrangement comes to an end.

It’s likely that this model will prove more expensive than traditional loan finance from a bank, though that may not be available anyway for many small firms. And even where a business does have access to bank funding, it may prefer the flexibility of the revenue loan – particularly since this is an arrangement that aligns the interests of the lender and the entrepreneur much more closely.

Revenue loans won’t suit all businesses. Borrowers will have to demonstrate a track record of profitability. They will also need to be comfortable that their profit margins can sustain a deduction for the loan repayment each month.

Equally, however, they may be very attractive to certain types of company. Those with very stable revenues – from licensing arrangements or long-term contracts, for example – will be confident about their ability to make the repayments. At the other extreme, businesses with fluctuating revenues will take great comfort from knowing their repayments will automatically adjust to take account of their changing fortunes.

It’s only fair to point out that iZettle isn’t the first lender to offer revenue loans in the UK. Crowd2Fund launched a similar concept this summer, while Boost & Co, a specialist lender, has been ploughing this furrow for some time.

Still, the idea remains relatively unknown in the UK, so the emergence of a better-known brand is important. In the US, revenue loans are a more established means of funding small businesses, with several funds having built portfolios worth tens of millions of dollars.

There’s no reason why the UK’s small firms shouldn’t embrace the concept too. Our alternative finance sector is increasingly establishing itself as a mainstream provider of capital that can rival what the banks offer in terms of volumes as well as variety – and revenue loans could have a big role to play.

Asset-based finance – where businesses borrow money against the value of their assets – is now at an all-time high, according to new figures from the Asset Based Finance Association (ABFA). The trade body says that British businesses had outstanding borrowing of this type totalling around £4.2bn at the end of June – a 9 per cent increase on 12 months previously.

The concept of asset-based finance – where businesses secure funding on the basis of the value of their plant, machinery and inventory – is an old one, but it came to the fore as mainstream banks withdrew from financing small and medium-sized enterprises in the wake of the financial crisis. The aim is to unlock the value of assets tied up in the business.

“Borrowing against hard assets is one of the innovative forms of alternative finance that has really gone mainstream in the last couple of years,” says Jeff Longhurst, chief executive of the ABFA. “For businesses with substantial assets tied up in warehouses, for instance, or in plant and machinery, this can be an excellent way to access lending to drive investment.”

Will the recent tax reforms damage the ability of small businesses to exploit the UK’s economic recovery? New data from the Federation of Small Businesses (FSB) appears to suggest that they may. The group says its latest quarterly survey of sentiment among small businesses indicates that while many remain optimistic, tax increases and new costs unveiled in July’s Budget have taken the shine off their confidence.

The FSB said its Small Business Index stands at 20.3 (the net balance of those feeling positive against those feeling negative) as companies come towards the end of the third quarter of the year – down from 37.9 in the second quarter and 41.0 a year ago.

John Allan, the FSB’s national chairman, said government action is needed to ensure that confidence among small businesses does not slip further.

“The recent Budget left many small firms with real challenges to overcome in how they operate in future,” he warned. “Now they need reassurance from government and policymakers; their confidence is crucial to driving the economy and job creation.”

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