The Staircase of Funding for an SME

In this article, we are going to explain a concept called the ‘staircase of funding’ that depicts how a business’s credit profile places them somewhere on a staircase.

At the top of the staircase businesses with a strong credit profile can access a range of funding options whilst lower on the staircase businesses have worse credit profiles and less access to funding.

More Funding Options than Ever

Before we look in more detail at the staircase, let’s take a quick look at the main funding options for SMEs.

Since the 2008 recession, obtaining bank lending has been a challenge for many business owners. Whilst obtaining lending from banks has been hard to come by, a raft of alternative lenders have stepped in to offer solutions. Here are a few of the main alternative options for business owners:

• Personal Guarantee-backed lending: fast and flexible loans that are typically used for smaller cash injections, often for unforeseen reasons. Loans can normally be secured using personal guarantees and are available quickly.
• Asset-backed lending: loans are available for businesses that can provide security (plant, machinery, invoices and property). These loans can be used for many reasons, and lending from these providers is normally faster than obtaining a traditional bank loan.
• Crowdfunding: platforms that allow businesses to pitch an investment proposal to investors in return for debt or equity in the business. These processes generally take a long time depending on the attractiveness of the business.
• Invoice financing: a financing process of using unpaid invoices as security against cash advanced by a lender. This product is used for many purposes by approximately 50,000 companies in the UK.
• Peer-to-peer lending: these platforms allow investors to lend to businesses. Loans are given to different types of business depending on the investor’s risk profile.

There are now so many alternative financing options even businesses with poor credit profiles can often access capital. Because there are so many options, it’s important to understand what credit profile your business has, where that places you on the staircase and subsequently your access to capital.

The Staircase

As a business matures, becomes profitable and has a more stable profile, it ascends the staircase and can access different types of lending.

The better a business’s credit profile, the higher it sits on the staircase. Broadly we’ll define the staircase as having three levels, although there are many sub-levels:

• Low: businesses that have poor or no credit history; they find it hard to acquire financing without offering security.
• Medium: these businesses usually have some credit history, moderate trading success and some security available.
• High: these businesses are normally older, profitable, with a good balance sheet and have strong security to offer.

Often (but not always) business age determines where a business sits on the staircase, it can look like this:

• Startup (under 2 years trading; bottom of the staircase).
• Growth (2 – 5 years trading; middle of the staircase).
• Maturity (5+ years trading; top of the staircase).

Businesses can typically access different levels of capital at different interest rates as they ascend the staircase. This guide looks at appropriate financing options for businesses at each stage but first let’s take a quick look at what determines the credit profile of a business.

Factors Affecting the Credit Profile of a Business

There are many factors that affect a business’s credit profile – let’s take a look.

Age: typically older businesses have a stronger credit profile because the financial history can be analysed and it is less likely they’ll cease trading abruptly. However, businesses many years old may be at the bottom of the staircase if they are experiencing financial difficulty.

Stability: businesses with a clear operating model and predictable revenues are more likely to be near the top of the staircase. Those with fluctuating revenues or periods of poor trading will probably not be as high.

Security: a key factor in determining a business’s position on the staircase is the level of security it can offer. If a new business can offer a charge on a valuable asset it will sit much higher on the staircase.

Profitability: if a business can prove profitability over a period of time this will demonstrate a well-managed business and help to improve the credit profile.

Business case: if lending is required for a new venture, either a startup or some form of growth or expansion, then lenders will look at the commercial viability of the proposition.

Marketplace: some lenders will prefer to offer loans within certain sectors, so depending on the perceived attractiveness of the sector this will impact on how a lender views the business.

Owners: the experience, track record and financial circumstances of the owners will feed into the credit profile of a business. If owners have substantial assets they can use as security and a good track record, that can improve a business’s position on the staircase.

The Staircase: An Overview

Level on Staircase	Age	Stability	Security	Profitability	Business Case	Owners
High	5 years +	Consistent strong performance	Strong security that exceeds loan value	Highly profitable	Excellent plan with evidence to show success	Experienced and financially secure
Medium	2 – 5 years	Competent performance	Some but may not exceed loan value or be hard to value	Profitable or breaking even	Competent plan but with some element of risk	Some experience and some assets
Low	>2 years	Poor or no track record	None or difficult to value assets	Loss-making or trading not yet reported	Poor or non-existent plan	No experience and no assets

Access to Finance

Level on Staircase	Finance Options
High	Bank loans, Peer-to-peer, alternative lenders, asset-based lending, equity, cash flow plus most other sources
Medium	Limited bank lending, Alternative lenders, some peer-to-peer lending, some asset-based lenders.
Low	Crowdfunding, Government loans, family and friends

Some businesses may perform well in one area and poor in another. For example, a startup business may have an exceptional plan and experienced owners but without security won’t be able to access many areas of financing.

Many other factors may feed into the credit profile of a business, for example, its financial health. Using credit referencing software like Red Flag Alert helps lenders determine the risks associated with lending. Red Flag Alert looks at all available information and determines a business’s risk of insolvency.

Reparo Finance Helps Businesses that are at the Medium and High Staircase Levels

At Reparo we offer loans between £10,000 and £1m that are backed by either personal guarantee or business asset security.

If you are in a position to provide security, then we will take the time to understand your business and offer fast, flexible loans that provide funds on your terms.

Unlike traditional lenders, our lending criteria are very flexible (you can read more on our lending criteria here). Where most lenders have set criteria with little room for understanding specific circumstances, Reparo is completely different.

We take the time to understand your business and look at ways to make a loan work. For example, a lender may have criteria that you need two years trading. If you’ve been trading for less than one year but can offer security, then we’re often able to help.

Similarly, if a lender has rejected an application because the security doesn’t meet exact specifications, then we’re able to quickly complete due diligence on the security and come to a decision.

Also, we are quick; we complete loans within your timeframe, not ours. Here is an example of how we deliver loans in time-pressured situations.

Reparo Finance – From Application to Completion in Ten Days

If you need a quick loan to boost working capital, we provide these quickly and efficiently.

Get Fast Working Capital Loans with Reparo Finance

If you want a loan that is fast, flexible and personalised, please get in touch with one of our expert team on sales@reparofinance.co.uk or 0161 451 5714.