Why bolt-on loans are a win-win for IF lenders and clients

IF providers know better than most that loans represent a poor long-term funding solution for most SMEs. The good news is that IF providers are also best placed to offer a better alternative – if they grasp the opportunity. 

The problem with unsecured loans 

It’s easy to see why SME’s turn to loans to fix funding gaps. They’re quick to put in place, simple to understand and transparent in structure. Businesses know what they’re getting and loans solve funding problems rapidly. But only in the short term. 

IF lenders’ frustration comes from the fact that unsecured loans are often poor answers to an SME’s needs. For a start, they often have very high interest rates. Second, they’re often not a real solution to firms’ cashflow or working capital problems. Third, they can be difficult to pay back on top of the cashflow demands of a working business. 

A chequered history of unsecured loan use can cause challenges when SMEs seek more permanent working capital solutions later on. An IF lender may reduce or prevent access to invoice finance when they review the SME’s inflows and outflows and see one or more unsecured loans. If an IF lender does say yes, they will often need to restructure the funding of the borrower business to deliver an effective solution. 

In other words, a problem for the SME becomes a problem for the IF lender – a potential blocker and certainly a pain point. 

The problem is also an opportunity

The fact that SMEs frequently turn to unsecured loans is not only a pain point for lenders, though. It’s also a commercial opportunity, and a big one. Apart from anything, it’s an opportunity to take advantage of the high interest rates that can be charged.

For IF lenders, the solution here is a bolt-on loan – a standard loan combined with an IF facility. A bolt-on loan has all the flexibility and features of a standard loan, but the bolt-on loan is set up in the same group structure and shares risk exposure with the accompanying IF line. The loan can be paid down by the adjoining invoice finance facility.

The IF facility and loan complement each other, to create a sophisticated funding solution. The IF line supports the businesses’ cashflow needs, while the bolt-on provides additional, structured funding for specific purposes. 

The risk question 

There’s a complicating factor here. The additional risk. Providing an unsecured loan clearly causes a lender to take on more risk. Is this a good enough reason to walk away from the opportunity? 

Perhaps, but the interesting thing is that combining an unsecured loan with an IF facility actually makes that risk significantly more manageable. More on that below.

The fact is, SMEs are regularly taking unsecured loans. When this happens, would you rather give the revenue opportunity to a competitor, potentially compromising your ability to provide invoice finance to the SME? Or could you take advantage of the opportunity, increase the value you offer your client and earn more of their wallet share in the process?

The stakes are higher still for lenders with existing invoice finance clients. If a client seeks an unsecured loan from elsewhere in addition to their IF line with you, you’ll be left holding additional risk while another lender earns the upside. Lose-lose. 

What’s the benefit to borrowers?

For IF lenders, bolt-on loans represent a readymade market opportunity. For borrowers, a bolt-on loan provides flexibility. 

Even with an IF line, a business can experience a need for short-term funding. When a big tax bill arrives or an acquisition opportunity appears, there may not be enough headroom in the availability generated by the SME’s receivables to deliver the required funds. By providing an IF + bolt-on facility, lenders can help borrowers to better prepare themselves for these types of scenarios and deal better with surprises, which are a natural part of business. 

For the SME, this type of arrangement also offers simplicity. Picture a business that has accumulated several loans. If they move to an IF provider, the lender can use a bolt-on loan facility to tidy up and provide structure to these loans, consolidating them in a single loan. Meanwhile, the IF facility provides working capital.
 

The combination works for lender and borrower, because the loan is repaid by the self-liquidating character of the IF facility. Even if the client goes overpaid, the lender knows the IF facility will return to formula as new invoices are raised or collections are received. The lender doesn’t need to chase payment of the loan, because this is handled on the IF-side.

How do bolt-on loans work for IF lenders?

The beauty of invoice finance is the way the debt is revolving in nature. Combine it with a loan, and this is intrinsically safer for the lender than a plain unsecured loan where the borrower must ensure they have the cash for their regular loan repayment.

But the manageability of risk with an IF facility goes further than this. The IF lender has exceptional visibility of the SME’s finances, especially when using Open Finance. You can see if they’re financially stressed and running into problems. You know if risk is increasing. 

And the lender has control. You’ve got control over the risk situation, and you’ve got the appropriate security backing it. In effect, this combined facility type creates an ‘all-encompassing’ security basket. If there are problems, the lender can throttle the funding that goes out. 

With Dancerace, you can do it today 

If you’re a Dancerace lender, you can offer bolt-on loans today. The functionality is available in your system at no additional cost and it’s proven, having been simplified and enhanced following lender feedback. 

You have the flexibility to structure the bolt-on loan to meet your borrower’s needs. You can easily put in place loans with various interest charging methods and offer flexible features like repayment holidays, early settlements, support for overpayments and bullet repayments.

You also have flexibility over the repayment structure. You can choose to offer a traditional repayment structure, or you can allow the loan to be repaid by the IF facility. This second option is low admin and offers good predictability. You still need to manage your overall exposure, but you have an effective repayment strategy in place.

If the SME’s circumstances change again, the bolt-on loan structure can be tweaked again. So, lenders can offer a loan facility that continually makes sense for the business – not just on day one, but throughout the life of the business. Bolt-on loans can also be set up on a revolving basis, which can be useful for supporting SMEs to make domestic and international trade purchases.

If you’re an existing Dancerace user, it’s simple to get started with bolt-on loans. No need for integrations. No additional charges. All in a platform that you know how to use. 

IF + bolt-on loans are a win-win for borrowers and lending businesses

A bolt-on facility via the Dancerace platform fulfils an SME’s short-term working capital need while also offering the lender tight and sophisticated control over the structure of the facility over the long-term. 

Sometimes putting a little bit more funding out in the right structure is lower risk than having a business in cash desperation or cash restriction. They get the flexibility to focus on running their business. For the lender, bolt-on loans make your proposition more sophisticated and appealing, and give you a new revenue stream. As above, they also prevent you from carrying another lender’s risk if an existing client goes looking for an unsecured loan from elsewhere.

So how do you implement this type of facility?

IF lenders looking to adopt bolt-on loans in their business should start with a Project Initiation Document (PID) to frame the opportunity for stakeholders. 

Our IF experts can help here and at each step of implementation. Get in touch today to discuss your objectives and understand how bolt-on loans could work for your business.