With bank credit not easily available, a UK company has taken a twist on the idea of angel investing by arranging loans from HNW individuals for companies.

The credit freeze last year forced companies to seek alternate finance and, even if conditions improve, new sources of credit that draw funds from wealthy individuals will not fall out of fashion, predicts the founder of a UK-based brokerage business.

Such is the disenchantment among firms with some banks, that new credit facilities that have come into the market to meet demand will not vanish, William Flatau, the founder of First Funding, told WealthBriefing in a recent telephone interview.

His company channels loans from high net worth individuals to firms that need the cash and depending on the level of risk involved in deals, returns can vary from around 6 per cent to 20 per cent or higher, giving these deals an edge over many other asset classes, Mr Flatau said.

His business model is a twist on the investment angel networks that are now a relatively established part of the investment scene in nations such as the US and UK. However, instead of investors taking equity stakes in a portfolio of firms, First Funding investors use a credit model instead.

“At the moment, there is a great deal of interest in what First Funding is doing because there are companies out there that just cannot get credit,” Mr Flatau said. “Also, I think that in the future, high net worth individuals will be looking for a lot more control over what they can do with their wealth. The attraction [of First Funding] is being able to understand and secure against the assets you are putting money into,” he said.

First Funding has been operating its web-based “matchmaking” service since May this year. To date, it has helped to fund a total of 11 companies, comprising total loans of £1.9 million. For example, Asad Khan’s India Dining Restaurant took on a loan of £280,000 after the bank pulled out of a commercial mortgage deal. The ARN construction company in Derbyshire found a funder who will help it develop their business, for example.

First Funding earns revenues by taking up to 5 per cent of the gross value of a loan or other credit facility that has been agreed. On larger loans, the fee may be reduced, he said. There is no minimum size of a loan that First Funding gets involved in: Mr Flatau said the “sweet spot” for such loans tends to be from £50,000 to £350,000.

The process works in the following way: entrepreneurs apply online to borrow money, giving their preferred interest rate and term of the deal. Potential lenders browse the list of applications online. Lenders and borrowers can proceed once they have agreed terms.

First Funding argues that loan finance has advantages compared with equity financing: borrowers do not have to surrender ownership stakes in a business and argues that debt financing is also typically cheaper in the long run.

A perusal of the firm’s website shows a variety of firms with requests for loans. At the time of publication of this article, there were examples such as the case of a London-based company, which was seeking a two-year loan of £150,000, offering 10 per cent interest per annum. Another firm was seeking a five-year loan for £400,000, also offering 10 per cent per annum. The loan sizes vary considerably: some requests were as low as for £50,000, while one loan request was for more than £1 million.

The “angel” market in loans is still in its infancy, relatively speaking, and First Funding’s Mr Flatau certainly does not see his business model as displacing banks, especially if or when credit market conditions substantially improve.

But his business model, which plays to the increasing popularity of the private lending approach, should continue to hold many attractions among investors who want to get closely involved with a firm, and for companies that have fallen out of love with banks.