Privately owned businesses are often called the powerhouse of the economy, after-all micro-sized enterprises (those with an employee headcount of nine or fewer) employ around 8.75 million people in the United Kingdom, with small businesses employing around 4.11 million people, and medium-sized ones 3.47 million.
So with over £16mn people dependent on these businesses for employment why when it gets tough, does it seem that Banks tighten their criteria for lending to small businesses? Making it difficult to obtain additional funding in order to keep businesses afloat or for growth and expansion.
In this post, we’re going to take a look at why banks may not lend to small businesses and what you can do if your business needs additional finance.
Why Aren’t Banks Lending to Small Businesses?
Banks have been under a lot of pressure lately not least with the various government support schemes from the pandemic (and it has to be said that without this massive “wartime” support many businesses would have failed), but with this volume of lending, the questionable ability of many businesses being able to repay and the high level of fraud has led to many banks becoming more risk averse, leaving them less willing to lend money to small businesses, who are now deemed as being too risky.
Like all of us, banks are worried about the current economic climate and how this will affect their business and their customers. For instance, if there is a recession, the effects of inflation, rising costs and further interest rate increases.
With balance sheets having been decimated by the pandemic, if you can’t prove you have an element of “immunity” to these outside pressures then bank finance starts to get harder to obtain. Many banks continue to use old business models for assessing companies, with their lending criteria for small businesses often deemed much too stringent.
Their application process at the smaller end tends to become a one-size fits all process which isn’t always indicative of modern businesses, their potential and how they are structured which is typically without many or any assets available. This can often lead to small businesses being declined for finance, even if they could be a low-risk proposition, leaving many struggling to access the finance they greatly need.
Finding a Lender Who Will Lend.
There are many other options available for securing additional finance. Online platforms would have you believe that often just a click of a button is required to access the entire funding landscape, but this is rarely true and often comes with little or no advice as to what type of funding is best for your business and the advantages and pitfalls of each.
A specialist commercial broker will tend to offer a more personal service and should be able to provide a level of guidance to ensure you are firstly looking at the right product for your circumstances and secondly to guide you to a number of providers they may work with.
Most will be independent of any lender and although not “whole of market” will tend to work with a selected panel of funders to fit most funding needs and service requirements.
Your accountant may also have established relationships with a number of funders and be able to sign post you to ones they have worked with successfully in the past, though this tends to be from a smaller pool than those that a broker will have access to.
Other Additional Finance Options Are Available.
Banks and alternative funders may be the principal source of finance for SMEs, but they are not the only ones, some alternatives are:
- Credit Cards – business credit cards come with high-interest rates as well as monthly and annual fees, though with their ease of application and use this remains a popular choice.
- Borrowing from Family & Friends – not everyone is in a position to do this, and it can put a strain on personal relationships if things go wrong.
- Private investors/Business Angels – this can be a good option and can bring sector expertise or contacts alongside the investment, but often comes at a high future price as investments made will require an equity stake in your business in return. This option is not a quick solution and requires an amount of due diligence on both sides. Where just a loan is sought this will tend to be quicker but at a premium price and may also require you to give up some shares.
- Using Personal Savings or Investments – is an option but it comes with risks and detrimental repercussions should the business fail, and you have no assets to fall back on.
Invoice Finance – The Small Business Finance Solution.
Fortunately, there is another alternative solution which is proving to be increasingly popular with small businesses. This solution is known as invoice finance. Invoice finance offers a financial lifeline to businesses by allowing them to release the cash tied up in their outstanding invoices. This can provide a much-needed injection of cash flow which can be used to fund day-to-day operations or to invest in growth.
By looking at the future of the business, its sales and its client base an invoice finance provider can often provide significant levels of funding to a business that other sources cannot match.
The benefits of invoice finance include:
- Providing businesses with around 80-90% of the value of their outstanding invoices straight away and receiving the balance (less fees) when their customer pays.
- Helping bridge the gap between invoicing and receiving the final payment.
- Managing peaks and troughs in cash flow as your business grows.
- A viable low-cost finance solution for growing businesses.
- Access to cash quickly – no need to wait 30, 60, 90 days or more for customers to pay.
- Freeing up time spent chasing overdue payments.
- Improving business cash flow and working capital.
- Straightforward and short application process.
- Flexibility in choosing which invoices to factor.
- No other assets or collateral are required.
Invoice finance is a popular choice for businesses that may struggle to obtain traditional financing. This is because invoice finance companies typically do not require businesses to have perfect credit or years of successful trading in order to qualify for financing, and nor do they generally ask for additional collateral such as charges on properties as the invoice finance company principally looks at the credit rating of your customers and the way you serve these.
So, if you’re a small business owner who has been struggling to access finance from your bank, invoice finance could be the solution you’ve been looking for. It’s fast, flexible and can provide you with the cash you need to keep your business moving forward. Contact us for more information and let us help you keep your business growing and moving forward.