Traditionally one such route are the high street banks, though with both local and global events in recent years, risk appetites have been curtailed. UK Finance’s latest Business review states that Gross lending by the main high street banks fell to a post-pandemic low of £3.7bn in Q1 2023 and whilst you may have seen webinars and articles explaining at great length what is demanded to be provided to these institutions, the time consumption, understanding of the requirement and ultimate outcome is not always a favourable experience.
What are the alternatives?
Outside of traditional choices, for SME businesses there are a variety of options such as finance brokers, challenger business banks & online facilitators and there are also those with a hybrid offering that include all those routes.
Competition amongst all these alternative lenders means they are becoming increasingly important, but it is not always clear who is best to approach to match the needs of the business.
For some SME’s, knowledge of the sector is vital, so there is real understanding of the business and its requirements. For others it is speed and quality of service such as an efficient application process and e-signature capability that is the primary driver.
With the Bank of England base rate remaining at 5.25% and inflation uncomfortably high, total cost remains integral to the decision.
Then there are the range of finance options including commercial loans, asset & supply chain finance. Invoice finance and asset-based lending advances increased sharply last year, according to UK Finance’s Annual Business Review, and businesses are looking more than ever at a combination of choices to use for different purchasing options.
So where to start?
Such decisions can be looked at in many ways, below is one simplified version of the steps that could be taken when either borrowing money to grow your own business, or alternatively utilised when raising finance for an acquisition.
Lender knowledge
It is incredibly useful for your lender to understand the industry when having that initial discussion with you. Whilst you will know your business intimately, the lender should have exceptional knowledge of both the sector and their own lending industry, so when conversations are initiated regarding the need for finance, the person having the conversation with you should be able to understand both perspectives.
Requirement for the Loan
Understanding the true requirement for the loan is vital, so it is important that the lender listens to why the finance is needed. We are seeing a trend towards a blended approach to lending, for example invoice finance requirement complimented with a short-term loan. Such multi layered finance needs can sometimes make it easier for the total request to be approved, so it is worth investigating.
Type of Loan
There are a wide range of loans and not every lender has access to the full suite of options available in the market. As with the loan requirement, a variety of options can satisfy a variety of needs, and if the lender can access numerous solutions, then all needs can be satisfied under one roof. For example, a short-term need may be fulfilled with a loan, whereas invoice finance may resolve a wider business need. Targeted 0% offerings can be hugely beneficial to aid the sales of a particular product, as part of a wider pricing strategy.
Whilst not an exhaustive list, an explanation of the types of loans available include.
Commercial Loan – Working capital and business development loans can be used for a range of purposes to help businesses with cash flow requirements. They can be secured or unsecured with Personal Guarantees typically requested on secured lending for Limited companies. Debentures may also be requested on larger transactions.
Asset Finance – Assets tend to be split into categories based on their recoverable value. For example, a category one asset carries less risk than a category four asset and this will be reflected in the pricing of the loan.
Invoice Finance – Gives the ability to fund up to a high percentage of the value of unpaid invoices, typically for 60 to 120 days. This allows the business to retain full control over the collection and management of their debtor book.
Asset Based Lending – Can also borrow a high percentage against unpaid invoices, stock, equipment, and property, with flexibility around how much or how little is borrowed under the facility. Can also be flexible for seasonal requirements.
Term and Amount of Loan
Terms can range from 3 months to 5 years, depending on the finance product offered and the amount of the business loan from typically £5,000 into the millions. Dependant on the finance provider approached, some will have limits as to what they can offer you through certain lines of business. Again, a provider that can multi-layer their solution for you, can match the term and size of loan to meet the need of that loan and keep interest payments at a minimum.
Cost of Loan
With interest rates rising so significantly in recent times, the cost of borrowing money has risen accordingly. Some of the finance options will also consider the risk of lending, so a well-supported proposal can be vital in gaining the best rate. More traditional providers tend to ask for significant information, which is daunting for some and certainly time consuming for many. A knowledgeable finance provider can reduce this burden significantly, with a solid grounding in the industry combined with an understanding of the finance market, tailored solutions can be found that keep the cost at a reasonable level.
In summary, a knowledgeable finance provider that takes the time to understand all the needs of those who are asking for support, and then can provide a whole of market solution utilising a variety of products, will go a long way to having certainty in that the solution matches the business requirement.