Caroline Langron, managing director at Platform Black, shares her advice on how you can prepare before you approach VCs.
There’s a good reason why financial professionals prefer to talk about risk-adjusted returns: it’s impossible to work out whether a 5% yield represents a triumph or a disaster without considering the risks you took to achieve it.
Making 5% a year on a savings account would be an excellent result; making 5% a year on peer-to-peer lending would be disappointing, considering the Association of Chartered Certified Accountants (ACCA) reports the average yield on invoice finance ranges from 12–15%. The point is a simple one: return is what you get after taking the risk.
Institutional investors are acutely aware of the risks associated with peer-to-peer lending but see great value and return in funding technology companies. As the confidence and adoption of peer-to-peer lending platforms continues to grow, more technology companies are using these platforms to secure finance. The amount of finance secured via peer-to-peer lending platforms has increased by 60% in the last year, rising to £711m in 2016, as reported by The Asset Based Finance Association.
Before investing in any company, financial professionals will start their due diligence process. Companies can streamline this process by preparing for the questions savvy professionals will ask.
Here’s a guide highlighting four main categories investors and peer-to-peer platforms will focus on when investigating companies seeking finance, based on my experience:
1. How does the business work?
For many companies, peer-to-peer finance is new uncharted territory and those looking to secure finance via pee-to-peer platforms need to understand how the process works. It’s critical that companies select a peer-to-peer business that can explain exactly what it is they can offer them.
Companies seeking finance need to ask what sorts of applicant does the platform accept and reject? What range of deal-size does it fund and over what term? What rates do companies pay to raise finance through the platform? What gross and net returns do funders make? What fees does the platform charge to each party? Who is liable in the event of a non-payment? This initial communication will help companies identify which platform they should pursue further conversations with.
2. Open communication
Ongoing open communication is absolutely critical to streamline the funding process, to both the companies seeking finance and the institutional investors and peer-to-peer platforms facilitating finance. Communication from the institutional investors and peer-to-peer platforms will focus on the company’s performance, its customers and payment history.
Once technology companies have conducted initial research into how peer-to-peer finance works, it’s their responsibility to continue proactive communication. Technology companies should research where they source finance to ensure they are getting the most lucrative deal, by asking the right questions.
For instance, does the platform make it clear how to complain and set out details of its complaints policy and processes? What reporting does the platform make available to funders? Does the platform offer guided demonstrations of how the funding process works? By asking these questions technology companies can save time by quickly identifying the right peer-to-peer platform it should work with.
3. The people
People are an important, and often overlooked aspect of the finance sourcing process. Technology organisations need to be prepared to identify their key members as most investors and peer-to-peer lenders want to know who they are funding, how experienced they are, and how they operate in their sector.
Although online peer-to-peer finance for companies is a very young industry, the products it offers have been around for decades. Technology companies should also investigate the staff of these platforms conducting due diligence. Working with a senior team with at least 20 years’ finance experience – and 30 in my case – inspires confidence that the peer-to-peer platform has the knowledge and experience to secure the funding your company needs.
4. Risk management
Peer-to-peer platforms and institutional investors will conduct thorough research on any organisation they are funding as it is at the heart of what matters most to them.
When technology companies apply for funding on peer-to-peer platforms, the platform’s risk management team will conduct checks on the directors and owners of businesses apply for funding.
Thorough peer-to-peer platforms will document the process they follow to assess the creditworthiness of each business it accepts, and – in the case of invoice discounting platforms – the creditworthiness of the customers that are due to pay the invoices that funders are being invited to buy.
When deciding which peer-to-peer platform to partner with technology companies should investigate whether they can be provided with examples of the documentation process. If the peer-to-peer platform obliges and shares their documentation process with the business, the business can prepare all the necessary documents, speeding up the company’s access to vital finance.
Not every peer-to-peer platform will be as forthcoming with this documentation process, but standard documents that will be required and parallel across all platforms is proof of genuine invoices. Each platform will also check how invoices are being paid to an organisation from its customers. If companies can provide this evidence quickly they will speed up the due diligence and funding process.
Institutional investors and thorough peer-to-peer platforms ask huge numbers of detailed questions and if technology companies can provide robust answers with supporting documented evidence they will strengthen their reputation and appeal to funders.
Successful due diligence preparation will foster longstanding, transparent relationships with funders, and technology companies that conduct pre-emptive due diligence can help streamline the stringent due diligence process and speed up their access to finance by following these guidelines.