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DOES IT MAKE SENSE TO HAVE MULTIPLE BUSINESS LOANS?

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Does it make sense to have multiple business loans?

Every small business is different, and consequently has different borrowing requirements. Some may find that a credit card provides all the finance – and all the flexibility – they need, whilst others might benefit from a line of credit or invoice factoring or discounting. Others may prosper from a combination of all three.

In short, there are no hard and fast rules. However, there are clear benefits and drawbacks to taking out more than one form of finance at a time.

What makes multiple business loans a good idea?

Carl Faulds

Carl Faulds

The first factor is flexibility. It’s often very difficult to predict when you will need to borrow. Customers can come and go, opportunities for investment can suddenly arise – and, of course, an unexpected cash flow crisis can unexpectedly stop you in your tracks. If you have access to multiple sources of credit, you can react quickly instead of applying for a new loan and waiting days or even weeks for a decision. This can literally mean the difference between success or failure if you’re dealing with a sudden shortfall in cash.

Secondly, you will have more choice. If you have multiple sources of finance at your fingertips, you can use the most advantageous business loan at the most appropriate time. In fact, it’s just like having revolving credit, which you can use and repay whenever you require. What’s more, you can spread out your debt payments, creating a smoother cash flow, instead of having to ensure that you have enough money to meet a single, large repayment on a fixed date each month.

What’s more, if you take out lots of finance – and more importantly, use it responsibly – you will improve your credit score. A good credit score means you can access further finance if and when you need it, and equally significantly means you will pay lower rates of interest.

Finally, you will have a safety net – if the business runs into trouble, you know you have several sources of cash on hand, and can even use one form of finance to pay back another.

What makes multiple business loans a bad idea?

From the foregoing, taking out multiple loans simultaneously sounds an excellent idea. However, like everything in life, it has its drawbacks – and some of them are pretty significant.

Firstly, you have to consider the cost. If you have three different forms of borrowing, that means three different monthly repayments and three interest charges. That means that if your cash flow goes belly up, you may struggle to keep on top of all those commitments and may soon be looking at liquidation.

Secondly, can you trust yourself? We’re not suggesting that if you have a line of credit you will suddenly turn into Imelda Marcos in a shoe store, but having borrowing available could affect your decisions on whether to invest in stock, people and premises. Business owners who struggle to say no to new financial commitments can soon find themselves in serious trouble.

You also need to consider your level of financial understanding. All forms of business credit are not equal, and some are significantly more complex than others. Make sure you read up on business finance and the advantages and drawbacks of the different options available. For instance, would an unsecured or secured business loan work better for you? (The former are safer from the borrower’s point of view, as the lender cannot simply seize an asset if payments are missed, though interest rates consequently tend to be higher.) Would you do better to establish an overdraft to deal with cash flow problems or could you benefit from invoice factoring and discounting? (Factoring involves borrowing the bulk of the value of your invoices as soon as you issue them, with the finance company dealing with your debtors and repaying the loan when they pay you. Invoice discounting involves the same process, except that you keep control of your debtor ledger.)

Finally, do you actually need access to all that money? If your business can operate equally comfortably with a single source of finance, it’s pretty pointless to make life more complicated than necessary.

By considering all the criteria above, you should be able to decide whether multiple sources of finance – and of course, which sources – are right to take your business forward.

Carl is a business recovery specialist. As Managing Director of Cashsolv, he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business.

Finance

Why You Should Take On Debt To Stop Dilution

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Why You Should Take On Debt To Stop Dilution 1

By Blair Silverberg, CEO of Capital

Imagine an exciting space dominated by two major companies, each growing and developing at about the same pace. To get ahead, they keep raising more money, but interest rates are low and the global stock of wealth is at an all-time high, so there is unlimited money to raise. Soon enough, their employees are dealing with substantial dilution because each round of equity wipes out the growth in valuation between rounds. Both companies become unicorns and announce their IPOs, but employees are hardly seeing the payoff.

This is happening right now in SaaS, meal delivery, ridesharing, and dozens of other spaces that you and their employees might not even realize.

What if it didn’t have to be like this? What if one company could get ahead without diluting their employees’ shares?

This is why most companies raise debt — and it’s only a matter of time until venture-backed companies do, too.

Why Dilution is Bad for Your Company

When the venture industry was small and companies like Google and Amazon went public after raising less than $50M, dilution was miniscule and thus not often a top concern for executives. The world has changed, with some companies raising billions before ever going public, but mindsets haven’t caught up.

The impact dilution can have on employee morale and retention can be substantial. When employees are first hired, they’re often excited to receive shares as part of their employment. But after repeated dilution, they’ll be asking HR, “Why aren’t my shares worth as much as they used to be? When will I get more?” Some companies start giving out bonuses and extra shares to placate everyone, but this can only go on for so long. Giving out more shares to combat dilution leads to more issues; those shares have to come from somewhere. Usually, these shares come from the founders, who eventually give up so many that they might only own 1% of their own company. That’s a major blow to those who worked so hard to get the company off the ground.

For employees, dilution means they may leave the company if they decide their shares are worth too little, especially if the competition can offer them a better deal. And if employees determine that this problem is industry-wide, they might leave the space entirely. The downside to tech becoming mainstream is that dilution has become unsustainable to employees and founders alike.

The Solution: Raise Debt

Companies are generally funded in one of two ways: equity financing or debt financing. Equity requires giving up a share of the company in exchange for capital. The biggest benefit is that this money doesn’t have to be repaid. Debt, on the other hand, does have to be repaid with interest. But while debt comes with a repayment obligation, it doesn’t come with dilution. Once the debt is repaid, the lender has no further involvement in your business. You aren’t selling a part of your business to get funding.

Understanding your capitalization options can be essential to getting ahead of the competition. When your competitors are raising equity to finance their business, they’re giving employees one fewer reason to stick around. If you raised debt instead, you could still offer employees valuable shares while receiving much-needed financing. You could also stand out from the pack by creating a candidate-friendly brand around prudent wealth creation. Once you start using debt intelligently, your access to credit capital expands, giving you a permanent head start over the competition.

Why don’t more companies raise debt?

Outside of tech, most companies do. It’s normal to raise debt once a company has a working concept. But the tech space hasn’t always looked the way it does today. Early on, it was so inexpensive to start technology companies that raising debt wasn’t necessary; equity financing was miniscule compared to the ultimate market value of these companies at liquidity events. Over the years, it’s become ingrained in tech culture to pursue equity funding, with such a heavy focus on raising the next round that many founders forget you even can raise debt.

But times have changed, and financing will, too. We saw this shift before with Mike Milken, who was a major player in the development of the high-yield bond market. In the early 1970’s, Milken noticed that risky turnaround businesses could be financed with “junk bonds” — bonds with higher interest rates than those offered to more creditworthy borrowers. He famously calculated that despite their higher default rates, the higher interest rates on these bonds produced sufficient compensation for the higher risk. This opened up financial capital to a group of companies previously financed only by equity and created a market that today is worth more than $2T. From the emergence of the high-yield bond market, we know how powerful access to debt financing can be. It gave rise to legendary investors and operators from Carl Icahn to T. Boone Pickens as well as iconic companies from Time Warner to Hilton Hotels and Safeway. For companies who have a kernel of a working business model, the benefits of debt financing are massive. Eventually, tech will go the way of all other industries, leaning on debt as a major source of financing.

Final Thoughts

Debt financing is one of the best alternatives to taking on equity, especially when trying to mitigate dilution. If you want to attract and retain top talent, then ensuring you don’t dilute their shares will go a long way.  The transition to debt financing is coming. Soon, it’ll be common practice across the entire tech space. If you start using debt intelligently now, you’ll have a competitive advantage. You’ll be able to get one step ahead of the competition with access to capital that others refuse to utilize. This not only benefits your employees today, but also your entire organization in the long run.

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Britain to publish new weekly consumer spending data

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Britain to publish new weekly consumer spending data 2

LONDON (Reuters) – Britain’s statistics office said it would publish new weekly consumer spending data from Thursday, based on credit and debit card payments information collected by the Bank of England.

The figures come from Britain’s CHAPS high-value payments data and cover the proceeds of recent credit and debit card payments made by payments processors to around 100 major retailers.

The ONS said the figures would provide greater insight into spending on social activities and other consumer services that are not captured by its monthly retail sales data.

(Reporting by David Milliken, editing by Elizabeth Piper)

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Kenya slum dwellers battle COVID-19 downturn with virtual currency

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Kenya slum dwellers battle COVID-19 downturn with virtual currency 3

By Kagondu Njagi

NAIROBI (Thomson Reuters Foundation) – Sitting on a low bench at her shop in a Nairobi slum, Grace Wangari sifted through a handful of grains that a waiting customer had just ordered.

As she poured them into a shopping bag, the customer scrolled through her phone to pay for the purchase.

Normally, Wangari would have been paid in shilling notes, Kenya’s hard currency, but in some ways she preferred the digital payment that was instantly transferred to her phone.

“I am happy with this transaction because there is no risk of losing my stock to conmen or people who have come to take goods on credit,” said Wangari, a middle-aged trader in Mukuru Kayiaba, one of the city’s poorest slums.

The transaction happened through Sarafu, a blockchain-based community currency that is helping thousands of Kenyan slum dwellers pay for food, water and sanitary items as they battle through the COVID-19 economic downturn.

Each week, families are issued with virtual vouchers worth 400 Kenyan shillings ($4), which they can use to buy essential goods, said Roy Odhiambo, an innovation officer at Kenya Red Cross Society (KRCS), one of the groups behind the project.

Vendors can then send the vouchers to Grassroots Economics, the Nairobi-based social enterprise that co-developed Sarafu (“coins” in English) with U.S.-based engineering firm BlockScience, and redeem them for cash.

Odhiambo said more than a third of the vendors in Mukuru are already signed up to the project, which launched in 2019 with the aim of helping struggling families get hold of everyday basics without worrying about having cash on hand.

Now the project is providing a lifeline for families trying to cope with the financial pain of the pandemic, he noted.

Antony Ngoka, a field coordinator with Grassroots Economics, said thousands of slum residents, who are mostly casual workers, have lost their jobs during the pandemic.

Unable to get loans from traditional banks, many become easy prey for loan sharks, he added.

But, blockchain can help poor Kenyans avoid economic exploitation, said Nelson Ochieng’, a rights activist and social worker in Kibera, Nairobi’s largest slum.

“Blockchain can foster local trade by tapping resources that are ignored by mainstream businesses. It also increases levels of trust among struggling communities,” he said.

SECURE AND TRANSPARENT

In Mukuru Kayiaba slum, about 5.5 miles (9 kilometres) away from Nairobi city centre, some 4,000 residents have registered with Sarafu, according to Odhiambo of KRCS.

Developed with funding from global government donors, the platform can make an average of up to 1 million Kenyan shillings ($9,0000) in daily transactions, Odhiambo said.

Unlike cash aid, which can be spent on anything, Sarafu can only be used to pay for essentials such as food, health supplies and educational resources, he explained.

And, he added, because the platform runs on blockchain, meaning all transactions are tracked and transparent, that ensures people are spending the money only on necessities.

Odhiambo said KRCS is currently working with the Danish Red Cross and Innovation Norway, the government’s business development agency, to roll out Sarafu across Kenya.

But, seeing the platform as a threat, loan sharks are using political and financial manipulation to lure Kenyans away from it, said Ochieng’, the rights activist.

Informal lenders recruit people to spread rumours that blockchain is a Ponzi scheme with no backing from local leaders, a tactic that has successfully stifled the uptake of other blockchain-based projects in the past, he explained.

“The aim of loan sharks is to divert people from innovations that are helping them access basic services in the slums without having to pay interest,” Ochieng’ said.

They also pull in customers by offering much higher sums than they can get through Sarafu, with exorbitant interest rates, he added.

Violet Muraya, who sells water in Mukuru slum, said informal lenders can offer loans up to 10 times larger than anything available through the community currency.

“When people have emergencies and need huge amounts of money, they cannot use Sarafu. So, they go to loan sharks for help and end up being trapped in financial slavery,” said Muraya.

Odhiambo said the Kenya Red Cross Society is running education and awareness-raising campaigns in areas where the project has been rolled out, to reassure users that the platform is safe and fair.

“At first there was resistance … because of the propaganda. But the community has accepted this cashless transaction because they know it is not some type of betting or loan facility,” he said.

‘NO ONE IS GOING TO SLEEP HUNGRY’

At Isaac Makavu’s food kiosk in Mukuru, customers lined up to order his steaming rolls of baked flat bread, chatting about an upcoming Premier League football game and sharing funny stories about their day.

Makavu said Sarafu has helped people in his community avoid eviction during the pandemic by allowing them to save their cash.

Some come together to pay each other’s rent through table banking, a form of savings scheme where a group contributes a set amount of money every month and then uses that money to help members who need it.

Charities say evictions have been rife in parts of East Africa during the pandemic. In one instance in May 2020, Human Rights Watch reported more than 8,000 people living in two Nairobi slums were evicted from their homes.

“But there have been no evictions in areas where Sarafu is being used by slum communities because they were able to pay their rent on time,” Makavu said.

“No one is going to sleep hungry here because they have community currency.”

($1 = 109.9000 Kenyan shillings)

(Reporting by Kagondu Njagi, Editing by Jumana Farouky and Zoe Tabary. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)

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