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