Is it time to look outside your bank for finance that can grow with your business? Jon Hughes, commercial director – asset-based lending at Independent Growth Finance (IGF), looks at the other potential options.
Demand for SME finance is undoubtedly strong. However, accessing finance can still be a significant challenge for SMEs.
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Businesses are often faced with long convoluted forms, delays on approval, and extremely rigid criteria – particularly when looking at traditional loan or overdraft finance options.
MYRIAD OPTIONS
Some SMEs can be driven away before making an application if they lack awareness or understanding of all the financing options available to them.
Around 110,000 firms in 2017 wanted debt funding, but did not try, according to a UK SME Finance Monitor report. Others believe banks will not be able to understand their business or provide a solution to fit.
This is despite the government’s Bank Referral scheme which requires nine of the UK’s biggest banks to pass on the details of SMEs they have turned down for finance to alternative sources of external funding.
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By GlobalDataSo, what are the different options available to support business growth? There are myriad finance options available for ambitious growth companies, including bank loans, peer-to-peer lending, crowdfunding, asset finance and asset-based lending. Many appear complex, which makes choosing the right finance option difficult.
SMEs need to be focused on retaining a healthy cash flow, although not all funding decisions require new equity investment.
In fact, what is needed for most SMEs is access to working capital to maintain the day-to
day operations, so the business can function effectively and grow steadily over time.
MOVING AWAY FROM BANKS
Many UK SMEs feel underserved by banks, and research has shown that only 20% of SMEs believe their bank’s advice always meets their needs.
As a result, the take up of short- and medium-term loans and overdrafts has continued to decline.
Loans can often be an unsuitable facility for SMEs. For example, loans can end up limiting growth as the business has to operate within the funding facility provided by the bank. SMEs can, therefore, end up constrained by a funding facility which is too tight and has no capacity for growth.
ALTERNATIVE LENDERS
Alternative lenders should not be viewed as taking business away from traditional banks. Instead, these providers offer complimentary services that recognise that SMEs need different forms of finance at different stages of development.
Alternative finance gives businesses greater flexibility and choice in the way they grow, providing seamless and hasslefree access to working capital. There are lots of alternative financing options across both short- and long-term loan providers.
What is important is that SMEs invest time to understand the right option for their business.
For example, crowdfunding and peer-to-peer lending can have low ‘entry’ requirements, needing little information. This can seem like the easy option for an SME.
However, this financing option is not able to grow with the business and will not support an SME through its various stages of growth. But for startups with an appealing offering, crowdfunding can be a good alternative.
GROWING WITH A BUSINESS
Ambitious growth companies seeking a flexible financing option that will grow with their business should consider an asset-based lending (ABL) solution. ABL and asset finance are financing solutions secured against a business’ assets.
The flexibility of an ABL facility allows companies to be funded against existing plant and machinery, property, and stock, acquiring additional funding as it grows. A good asset-based lender will provide a single point of contact who will develop a deep understanding of the business requiring funding.
By understanding the dynamics of the business, a lender can effectively advise on the right financing options and flex with the businesses’ needs. Access to senior decisionmakers is also critical to ensuring the lender can react quickly to changing business needs.
THE RIGHT OPTION
There is no shortage of finance options available to growing businesses. However, it pays to work hard and find the most suitable finance facility.
If all a finance provider requires is for a business to fill out a form, then it is unlikely that they will understand the business being funded.
This means the finance being provided is unlikely to work for the business long-term.
ABL can be an attractive, bespoke, option for those looking for finance to aid long-term growth.
