Applying for a loan with a major bank can be a weeks-long process — so getting a ‘no’ at the end of all that effort can make you feel helpless. Perhaps you wanted a loan to gear up for an exciting new customer, or maybe it was to cover an unexpectedly large cost. If so, the ‘no’ doesn’t just halt your plans; it could put your business at risk.
When they’re unsuccessful with their bank, many business owners will use other means to fund their business, like borrowing money from friends and family or using a personal credit card for business expenses. While perfectly understandable under the pressures of running a business, it’s a slippery slope that can do more harm than good long-term. Thankfully though, there are alternatives.
The Bank Referral Scheme
In clear recognition of this problem, the Government passed a law in 2015 that requires banks to refer unsuccessful applications to designated finance platforms, who’ll help them find an alternative. I’m pleased to say that my company Funding Options is one of them, and we’ll soon be adding bank referrals to the increasingly long list of UK businesses that we help find funding.
This means that when your bank says ‘no’, you can turn to a platform like ours and find another option, instead of dusting off your personal credit card to use for your business. But what are the options out there that might work for your company?
Alternatives to bank finance
Since the credit crunch, a huge variety of alternative finance has emerged to help fill the void left by the banks’ reduced lending to smaller businesses. Many of these are new ways of offering traditional products, but others are hugely innovative — whatever you choose, it’s easier than ever to find the perfect fit for your business profile, sector, and situation.
Revolving credit facilities
One of the worst pain points for small businesses in the last few years has been the reduction or removal of bank overdrafts — a previously dependable form of credit that could be dipped into when things were tight. Alternative providers offer a range of similar solutions, with some automatically calculated based on your accounting software, and others using daily interest calculations to give you a clear picture of where you are at all times.
Perhaps the best feature of these new products is the speed they can be set up. Some can be arranged within a day or two, but the market’s fastest products will allow successful applicants to draw funding within hours.
Invoice finance is a well-known business finance product that’s been given a makeover by alternative providers. As well as the standard products like confidential invoice discounting and invoice factoring, there are new versions that combine spot factoring with the online peer-to-peer model. This means you sell your invoices to ‘the crowd’ instead of one lender, which is not only faster to set up that bank finance, but can also be cheaper too.
As useful as the above alternatives are, many firms will want a straightforward business loan. Alternative providers are really innovating in this area: peer-to-peer lending has captured the imagination of the public, while local providers are proving that bespoke business loans don’t have to take weeks to arrange.
One reason the banks turn down businesses for finance is a lack of security — this is another area that alternative finance is improving, with creative uses of business assets becoming more common.
For example, a merchant cash advance is a type of revenue loan that’s based on card terminal sales and integrated with the payment provider — meaning the setup is quick, and repayments are taken at source as a percentage of revenue that goes up and down with the fortunes of the business.
These are just a few examples of the myriad innovation and expansion of the alternative finance market. In fact, I’ve written before that the term itself is becoming increasingly irrelevant as ‘alternative’ providers blur the lines between bank finance and new products, and the banks catch up.
Whichever type of funding you end up with, it’s clear that a ‘no’ from the bank doesn’t have to be the end of your search for finance.
By Conrad Ford, chief executive of Funding Options