Banks have been accused of deliberately making it difficult for small businesses to borrow via crowdfunding sites by delaying paperwork and charging high fees.
Crowdfunding sites like Funding Circle, which has arranged more than £100million of lending to firms, said that it is dealing with several cases of firms forced to wait months to receive funding because of hold-ups by high street banks.
The problems arise because most loans arranged through crowdfunding sites require a charge over the firms assets in the event that the firm defaults on the loan. When the loan is accepted a charge is registered by Funding Circle at Companies House.
In most cases, firms will already have a charge, typically from their bank, which means that the business has to get permission from the bank to enter a new loan agreement.
As the first charge lender, banks will often ask for a deed of priority, a legal document that ranks creditors if there is a default, thereby safeguarding their own investment.
But many firms say that their banks are delaying the process by getting lawyers involved unnecessarily, or demanding bespoke negotiations for each case rather than using standard procedures sometimes charging as much as £2,500 to draw up deeds of priority.
In the worst cases banks have refused outright to draw up such deeds, effectively blocking firms from borrowing through a crowdfunding site.
As difficult as it is for SME’s to attract funding to grow their businesses today this is just one headache small business owners can simply do without.
4oceans recommends that before embarking on any fundraising exercise you make sure your company is “investment ready” and that would include making sure that there are no obstacles to you accepting any proposed investment.
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