“Banks are not lending!” You’ve all heard it before, and the calls are getting louder and louder, even as the recession has given way to a recent period of growth. Certainly, credit has tightened and many high street banks have become far stingier with their money than in those whimsical days before the Great Crash. Recently, however, debate on the topic has surfaced, with Demos – a London-based think-tank – and others arguing that the small lending crisis is in fact a myth. Do you agree?
What is for sure is that traditional bank loans are coming up against a lot of competition. Below are a few new ways that businesses can find finance.
To start, many British business owners to use business overdraft facilities and personal credit cards more frequently. Such finance does offer some advantages over traditional lending. In particular, borrowers can access funds much faster than the weeks it can take to borrow money from banks. However, getting an overdraft can be difficult and interest rates can also run much higher on unpaid overdrafts than the usual loan interest. Additionally, borrowers can endanger their personal credit rating by using their own lines of credit for business purposes and banks are beginning to clamp down on personal bank accounts being used for businesses.
• Unsecured lending: If you trade online and/or offline, a number of new businesses offer short-term loans based on a range of factors, including a business’s sales history and credit, and do not ask for security on the business. Interest rates can run relatively high compared to traditional bank loans, but the terms are usually quite short and loans can be transferred within hours in some cases. So these can be great options for inventory purchase, new hiring, marketing costs, or any other purpose that requires capital quickly.
• Revenue-based finance: This is similar in speed, length and amount offered by unsecured loans. The big difference is that repayments are made as a percentage of each month’s revenues. This means that if a business makes less than usual one month, repayments drop to stay in line with lower revenues. If you’ve got variable revenues, this can be a useful way of managing cash flow.
• Asset-backed finance: Loans are tied to physical assets under a business’s administration, popularly inventory or equipment/machinery. Often the financing will be used to purchase particular machinery that then stands as security for the debt. Where a large initial capital injection is needed for equipment that will permanently boost revenues, this can be a good option.
• Peer-to-peer: This class of alternative finance is normally reserved for start-ups and very early stage businesses. Often, businesses will need to give some equity in return for their crowdfunded investment. Where this is not required, interest rates generally run higher than bank funding but lower than overdraft/credit facilities. It can be difficult to secure funding through this medium, as it is reliant on a large number of investors agreeing that your proposal for growth is viable. It can also take a while to receive funding, and is better suited to companies in search of tens or hundreds of thousands of Pounds.
Small businesses have access to several options to finance your business, from banks to public funds and increasingly through alternative finance. Because the terms of each are so different, you’ll need to be sure of the precise purpose for which you need capital. As soon as you know what you will need the money for and how long you will need it, it should be easier to sift through your options to find that which is most appropriate for your needs.
If any of you have experience with any of the above, leave a message below to let us know how it worked out!