Despite all the talk of business growth, a closer look at the UK’s business lending reveals that access to finance is still a serious headache. Research from the British Banker’s Association published in December 2015 revealed that there was a £2.7bn drop in borrowing by UK companies – much of which will have hit small and medium-sized enterprises (SMEs) hard.
The alternative finance market has stepped up to help plug a large proportion of the funding gap left by traditional lenders, but wherever businesses source their finance, they need to ask themselves some tough questions before they borrow. Making the wrong decision can have long-standing repercussions and can seriously affect the long-term health of a business’s finances.
We all understand profit and loss, but do we truly comprehend the cost of business borrowing, and do we know what we should look for in a lender?
First off, ask yourself why you might want extra funds for your business. It could be that you’re in growth mode and need to buy more stock – for example, if you have an order for 1,000 tables which you want to get on sale-or-return – or you might need money for new equipment which will add value to the business in the long run.
Another reason might be issues with working capital – for example, if some of your customers are not paying you fast enough. Despite the Government’s Small Business Bill, which attempted to tackle the UK’s endemic late payments culture, big customers still use their buying power to squeeze smaller suppliers. For example, Tesco was recently caught out deliberately withholding payments from its suppliers. Smaller businesses are usually the losers in this scenario, as they feel they can’t challenge the terms of the deal for fear of losing the business.
If you’ve answered ‘yes’ to any of the questions above, then ask yourself whether there are any alternatives you could look at before committing to a binding finance agreement?
Ask yourself the following questions:
- Can you go back to your suppliers and see if you can get a better deal?
- Can you go back to your clients and negotiate a better deal on your payment terms?
- Are you clear about why you want to borrow the money? Is it in line with your business plan, or did you just run out of money for no apparent reason?
- Is there an alternative to borrowing the money? For example, if it’s for a vehicle – the value of which will depreciate – would it be better to lease it?
- Do you need the cash to be flexible or on a fixed term? For example, buying 1,000 tables which you plan to sell in a few weeks’ time may be best funded flexibly rather than signing up to a set term.
Once you’ve decided that borrowing is the right thing to do, you’ll need to look hard at all the options available.
The financial landscape has changed dramatically in the past five years and you’re no longer confined to borrowing from the mainstream banks. There is a wide variety of established and innovative Alternative Finance (‘AltFi’) lenders which operate more quickly and more flexibly than most traditional lenders.
Make sure you choose wisely – there are plenty of independent organisations which can signpost you to cost-effective business finance – such as the British Business Bank, the Federation of Small Businesses, and local chambers of commerce. You could also consider talking to an independent broker, financial advisor or accountant.
Understanding the true cost of business finance
Whichever type of finance you choose, you need to understand exactly how much it costs. Our research has shown that, in the UK, 40% of businesses are unsure what they are paying for their finance, while 30% were unconvinced the costs were transparent.
Are there hidden costs behind the headline rate?
It’s important to check the small print for any hidden charges. The headline rate may seem attractive, but the true cost to you may be much higher when you factor in additional costs. Additional fees can include:
- Penalties if you go over your agreed borrowing limit – even for one day
- A non-utilisation fee (some lenders charge this if you don’t use all or part of the loan)
- An admin fee to set up and manage the facility
- An exit fee if you leave
Other red flags to be alert for in your search for finance include:
- Borrowing on a business credit card. This may be convenient in the short-term but it won’t be cost-effective.
- Giving up when you’re turned down for a loan. Many business-owners don’t look for other options if their bank has turned them down, but not borrowing can mean you miss out on valuable opportunities to expand.
- Complicated facilities to set up and manage? You want to spend time running your business not in endless meetings or calls with your bank.
- Quality customer service. Make sure that the organisation you’ll be borrowing from is easy to contact and that there are humans you can talk to!
But the most important question is how you’re going to manage the repayments. Borrowing money is an emotional decision as well as a financial one, and you can burn a lot of energy worrying about how to pay it back and how to handle your repayments, which is energy you could be putting into your business. Taking time to examine all the details will pay dividends – it is one of the most critical business decisions you will make.
By Tony Morgan, CEO of Verus360