DTI backed loan scheme

[Cougar]

As some of you will know, the UK DTI offers a scheme whereby you borrow money from a bank which is guaranteed (up to a point) by the DTI. There are various conditions as to what qualifies for such a loan but basically the DTI guarantees a % of the loan so that if the loan is not repaid the bank gets reimbursed by the DTI.

I have been seeking such a loan to acquire a successful small business of 25 years standing. This is a qualifying purpose. In my case I have been seeking 100k and the DTI would back 75% of the loan. If the business failed, the bank's risk is 25k. I am putting in 120k. The existing business owner is also accepting part payment of 60k by way of an earn out over 18 months. So the risk is spread 3 ways but is mostly mine.

3 banks have now rejected the request for a loan. They all say this is an excellent business idea, you have a strong business plan, you have the background and experience to make it a success, it sits extremely well with your existing business and we like the spead of risk around all parties ..... but unfortunately the business you want to acquire has no tangible assets (its a goodwill and intangible assets purchase because its a service offering). Therefore there is nothing for the bank to secure its 25% risk against. Good bye!

I am already using a broker so it is not that my inexperience in how to approach and deal with banks that is the problem.

Does anyone else have experience of the DTI loan scheme in relation to businesses that have no physical assets? Am I wasting my time?

Thanks for making time to read this!

[peterjhale]

I helped raise a DTi loan for an existing business that had no assets - they were importing product and re-selling. OK they had to buy stock but they had no other assets.

The owner approached the bank direct. After a few goes with the business plan we raised £120k. The owner did not have to put up any guarantee.

I can't remember the bank but it may be worth approaching the bank yourself (your business bank first) and talking with them.

Really discuss the idea and pinpoint the real reason for rejection. What you have said so far does not gell with my experience.

Good luck

[Ian J]

There is a possible way around this in conjunction with a factoring facility if that is a suitable method of finance for your business and you are interested in proceeding down that route.

If that is of interest please contact me.

[Cougar]

Thanks Peter.

I already had discussions before coming out of the closet on this forum; it is not really what I wanted to have to publicise!

I had discussed extensively with the broker and with the business development managers at 2 of the 3 banks concerned all of whom backed the deal but were thwarted by their underwriters. These underwriters say they do not want to risk lending to a non-physical asset based business. What I find odd is that the business ... with a proven 25 year trading history, well established with national coverage and with major global corporates as its clients ... has a brand value. If I was a bank, I would take my comfort on my 25% risk from the fact that if the loan payments were not made (which is the only issue here for the bank), then the brand name has value and the business could be sold by the bank to realise their £25k. As the purchase price falls exactly between a very conservative and very aggressive valuation, then there is no financial risk that cannot be covered under some sort of charge over the sale proceeds of the business' value if it ever came to that point. It is then risk free for the bank.

I know bankers have to evaluate and manage risk but this degree of conservatism makes me wonder how my existing consulting and training business and the target acquisition can ever access funds for growth!

I will explore Ian's suggestion direct.

Thanks for your input and sharing your experiences. I will report back to this forum what eventually happens so that we can add to the collective sum of our knowledge in this area.

[peterjhale]

Let us know how you get on

I did read some months ago the DTi were scaling down the amount of lending - so it might not be your specific situation, just the fact the DTi don't want to do this any longer

[Ian J]

Philip - I have sent you a PM but you appear not to have read it. I wouldn't like you to think that I had ignored you.

[Cougar]

Well some good news to report further to my confusion and frustration over the DTI loan scheme (recorded in this forum) last autumn. Today I heard that a well known high street bank has agreed my loan request and has even got to the point of obtaining DTI approval before telling me! I am not getting 100% of what I set out to obtain but it is enough to make a revised deal structure viable.

All I have to do now is get my personal contribution sorted out so that I can proceed.

It also shows that if you have time to play the long game and have a great deal of perseverance and belief in your idea, then you can win out. However it's clear that as a new business faced with a sudden and unexpected business opportunity unless you are already backed by a pile of cash, then the cash burn is so ferocious that you may never get to completing the deal before cash dries up. It also takes time away from earning profits because you cannot easily sell and delivery your established services while pursuing the acquistion unless you work 18hrs+ a day - which is what I think I was doing last autumn when I look back.

It has also boosted my confidence that my proposed deal is sound - or at least sound enough for one of the major banks to back it.

Although my financial intermediary was well recommended to me, the experience has taught me that I should have more confidence to, yes take some advice, but manage this type of process myself. There is nothing they have done that I could not have done and I would have been more efficient. For me, this DTI scheme is not a difficult process in itself but it is time consumming and not at all quick. "Decisions in principle" are only indicative; until you get an offer, you are no where really.

It raises that key question that we come against time and time again in business and which we all wrestle with: outsource (and pay for the cost of that service) or keep and do yourself (and spend time on non core matters).

So a success and a learning experience!

[Ian J]

Originally Posted by Cougar

It raises that key question that we come against time and time again in business and which we all wrestle with: outsource (and pay for the cost of that service) or keep and do yourself (and spend time on non core matters).

In terms of fund raising there is probably little that specialist brokers can do that you can't do yourself but as you say it is time consuming for people who don't know the market and you can waste a lot of time talking to the wrong people.

I am pleased that ultimately you have been successful even though I did tell you two months ago that I could have arranged the funding that you required at no cost to yourself and I would guess, considerably quicker than you have achieved on your own.

[inbakumar]

Hi Cougar,

I'm glad that you got the DTI small firms loan in the end. As you have experienced (this is typical), it is a long drawn out process which is one of its main shortcomings. I was talking to someone the other day, who said it took over 6 months to get the approval and swears blind that he will never do it again. As a business, we do tell our clients who are eligible for it but never undertake to do the processing ourselves. There are a few firms out there who charge a lot of fees to produce the required business plan but do not guarantee any success.

Moreover, as an educated professional person, it is possible for you to handle the application process in-house but for most small business owners it is not an option.

Good luck with your new venture .

Regards,

[kenny]

hi ian
i read the message about the bloke who was struggling to get the dti loan,well i am in the exact situation can you help