Early Stage & Development Loans

Companies that are relatively young but are trading profitably and do not have sufficient assets to secure a conventional loan may be able to raise development funding from a range of potential lenders. As these loans may be unsecured, they will tend to command higher rates of interest than standard, secured loans since they are riskier for the lender.

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The Informed Funding two-minute guide: Early-Stage and Development Loans

• What are early-stage or development loans?
  Businesses that are relatively young and are trying to accelerate their growth may choose to seek additional funding by selling shares or by taking out a loan. If they are still loss-making it is more likely that they will need to seek equity funding but for those that are trading profitably it may prove possible to borrow the money they need to fund their investment plans. There are a number of potential sources for this kind of funding, including banks (including via the Enterprise Finance Guarantee scheme), non-bank lenders and government-backed development funds, which are often regionally based.
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  • How much will I be able to borrow?
    Although some companies are able to access larger sums, most lending of this kind falls into the sub-£250,000 bracket because the borrowers are relatively small companies and are still in the growth phase. This kind of lending is frequently unsecured and therefore the amount you can borrow will be determined by the company’s present and projected cash flow, rather than the value of any assets that the business is able to use as collateral. Loans can have terms from as little as a few months up to five years, depending on the policies of the individual lender.
  • What does this type of borrowing cost?
    Unsecured borrowing is generally significantly more expensive than a secured loan because it is regarded as particularly risky by potential lenders, particularly where the company cannot offer assets as collateral and the owners are unwilling or unable to pledge their personal assets. Companies that succeed in taking out an unsecured loan to fund their growth should therefore expect to pay rates that can go well above 10%, reflecting the risk that they will fail to generate sufficient cash flow to service and repay the debt. This is particularly true if the borrower is seeking an interest-only loan, where the capital is not repaid until the end of the term. Many lenders are not willing to provide interest-only or “non-amortising” loans where there are no assets to provide security, and those that do offer this type of loan generally charge high interest rates.
  • What information will I need to provide?
    Any borrower will want to see comprehensive and up to date financial information on your company. Where the loan is being taken out to fund expansion, a robust and well-presented business plan that includes cash flow projections through the term of the loan will be vital. Ultimately, the lender will depend on your success in executing the business plan in order to get their money back. Loans may carry covenants that, for example, oblige the owners to inject further equity into the business if it fails to meet the targets set out in the business plan agreed with the lender.
  • What fees should I expect?
    Aside from the interest charges, you should expect to pay an arrangement fee when taking out a loan that will typically be up to 5% of the loan value.
  • Need to know:
    • It may prove easier to raise this kind of development loan if the company is also prepared to seek equity funding at the same time as this will make its balance sheet more attractive to a potential lender.

  Expert Tips:

  • Unsecured development loans at high rates will result in substantial finance costs in the accounts as well as significant cash outflows for the business.
  • Loan finance will increase the liabilities of the company and increase the financial gearing of the company. Finance providers will sometimes offer convertible loans, which could result in a lower rate of interest, at the potential cost of future dilution of ownership.
  • Details of any security given by the company will need to be disclosed in the financial statements, although a guarantee given by a director will not need to be disclosed if the company files abbreviated accounts.
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