The group’s business model is a “hold to collect” model in which financial assets are held to maturity to collect cash flows of principal and interest, rather than holding them for sale.
The main business is providing credit to businesses and consumers to enable them to spread the cost of their insurance premiums, professional fees or other services over a period of up to one year.
In addition, this year we have begun to make longer term loans – up to three years for gap insurance and up to seven years for asset finance.
Despite the fact that we now have longer term lending, the nature of our products is so alike in terms of risk, reward and processes that any segregation would not give meaningful information to users of the financial statements. Our underwriting and debt management procedures are so similar that we have not disaggregated results arising from our several markets. We believe that to do so would obscure material information and reduce the understandability of the financial statements. We therefore still report a single trading segment – lending.
Lending limits to our customers are set by reference to financial information (credit reports, regulatory and other requirements) and by reference to other qualitative information for both our introducing partners and for the end borrowers. In addition, an annual review process, including regulatory permissions and credit checks, is conducted for each introducing partner and each partner is monitored monthly for the group’s financial exposure to that entity. The majority of our lending gives us recourse to the introducing partner, is through regulated introducers and no cash is passed over until at least the first repayment is received. In the case of insurance, the customer can have their cover withdrawn for non-payment with any refunds being paid to the group. In the case of longer term lending, the procedure is more vigorous, making use of open banking technology. Indeed, we have turned down potential borrowers because they did not fulfil our strict requirements
During the year the group refinanced its borrowings. The interest rates charged (excluding associated costs) were lower than was previously being charged.
The group has borrowing facilities up to up to a maximum of £20m for general lending. In addition Orchard Finance has a facility of up to £7.5m to be used exclusively for lending in respect of products from the provider of those funds.
Of the general facility, £9.83m was unused at the year end, Of the restricted facility, £5.42m was unused.
The balance of lending is provided from group resources. At 31 July 2021 the group had net current financial assets (receivables plus cash in hand less current liabilities) amounting to £14.15m.
The group’s average cost of finance was 6.03% of funds borrowed in the financial year to 31 July 2021 (4.86% on the same basis in the year to 31 July 2020). Cost of funds includes arrangement and legal fees payable for access to funding and fees for non-use of the facility. There is some distortion this year as costs were incurred for a facility which was not used by the year end. If only interest were included in cost of finance the percentages would be 3.03% for 2021 and 3.63% for 2020.