There are options for business loans beyond the banks that can facilitate SME growth. Conrad Ford explains.   

Everyone seems to agree that the success of small businesses is crucial to the success of the UK economy.

After the credit crunch, small and medium-sized enterprises (SMEs) had a hard time getting loans from the major banks, whose hand was forced by strict new regulations designed to make the global financial system safer. Then, a new wave of alternative finance arrived to help a wider range of businesses that the banks could not.

But although we’ve seen a massive increase in the finance available to SMEs in the last few years, understanding of these options remains low. Closing this knowledge gap is key to helping SMEs get finance, as many of them will only apply for bank finance, not realising that there are other options that could help. And increasingly, it’s obvious that access to finance is hugely important for the growth, not just survival, of smaller businesses.

Finance is key to growth

Our research revealed that SMEs with higher levels of borrowing grew their turnover by 57 per cent on average over the last 5 years, compared with just 6 per cent for those that didn’t borrow at all over the same time period. The research also showed that there is a strong connection between the level of a company’s debt as a percentage of its assets (gearing) and growth in average turnover. In a nutshell, businesses that borrow more tend to grow more.

This strong correlation between a business’s use of finance and its future success tells us that helping small firms to get the right funding could have a huge impact on the economy. Alternative finance offers a range of options for many different business situations, so let’s have a look at a few of the products that could help.

Unsecured business loans

Assets are central to business finance, and for a long time, businesses without significant assets, such as commercial property or machinery, found it difficult to raise finance. Unsecured loans don’t require security, and are based on the strength of the business and the directors involved.

It’s difficult to get more than about £50,000 unsecured from high street banks, but alternative lenders can go much higher, lending upwards of £250,000 to businesses with the right profile and growth trajectory – so you can equip your business with a meaningful lump sum to invest in growth projects.

Revolving credit facilities

Revolving credit facilities are an alternative to overdrafts – another area where the banks were forced to cut back after the financial crisis. They work in a similar way, with a pre-approved credit limit that the business can dip into when it needs cash, with interest calculated on outstanding funds. Aside from the initial setup fees, it’s usually free to have a credit facility sitting unused, which means it’s a useful buffer to have in place for seasonal or unpredictable businesses.

Unlike bank overdrafts with a revolving credit facility, there’s no bank account attached, so it’s technically more like a loan that you agree in advance of actually drawing funds. For this reason, you could also think of revolving credit facilities as a way of getting unsecured funding on a more ad-hoc basis than a fixed-term loan.

Merchant cash advances

Merchant cash advances are a great example of how alternative finance providers use different metrics to assess the creditworthiness of a business applying for finance. They’re designed for firms that make money via a card machine, such as retailers, bars and cafes, which are traditionally quite difficult for the banks to fund because of minimal assets and unpredictable revenue.

Lenders offering merchant cash advances use technology to better understand the businesses they’re considering lending to. The lender works with the payment provider to access card payment data at source, and then the advance amount is based on the last few months of card sales. The advance amount is usually around a month’s average card revenue, and rather than having fixed repayments, you repay the lender based on a percentage of future sales. This means that the business knows the total cost up-front, but repayments go up and down flexibly with daily takings.

Although they can be significantly more expensive than standard fixed-term loans, merchant cash advances unlock valuable growth funding for firms that may not be eligible for more traditional forms of finance.

Online invoice finance

Another good example of the fresh approach of alternative finance is in the invoice finance market. Traditional invoice finance is based on a business’s entire sales ledger, and is notorious for lock-in periods, service fees and opaque pricing structures. So although it works well for many firms, those businesses that would prefer to finance invoices only occasionally are left with a dilemma of whether the commitment is worthwhile.

Modern invoice finance providers allow you to fund invoices on a one-off basis, with a simple all-in price and no contract attached. This is a good solution for businesses that want to access the cash tied up in one large invoice early, perhaps to invest it in a big new contract as quickly as possible. With this kind of invoice finance ‘account’ in place, you’ve effectively got a revolving credit facility for invoices – upload invoices you’d like to finance, and continue with the rest as normal.

Final thoughts

These are just a few of the types of finance that smaller businesses can use to grow. Although we’ve still got work to do in raising awareness and understanding of these alternatives to high street banks, it’s clear that businesses have more growth finance options than ever, even if their sector is traditionally difficult to fund. For the economy’s sake, I hope these forms of alternative finance make it into the mainstream.

About the author

Conrad Ford is chief executive of Funding Options, recently described by the Telegraph as ‘the matchmaking website for small businesses and lenders’. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. Follow @FundingOptions