One of the major problems long dogging small and medium-sized enterprises (SMEs) in Britain has been the difficult in securing business loans.
The Centre for Responsible Banking and Finance, in an article published by the Financial Conduct Authority, goes so far as to describe that difficulty as an “intractable” problem that has afflicted small businesses for almost a century.
The difficulties seem to stem from the wariness of banks in lending to their business customers. Any application for a business loan is generally met by a demand for a detailed business plan, comprehensive cashflow projections and a rigorous assessment of the company’s financial status and prospects.
Whilst bank loans may be unsecured or secured loans – typically depending on the size of the loan and its agreed repayment term – the lender’s wariness and caution mean that any borrowing may take some time to set up.
The general problems in the relationship between banks and their business customers have been compounded by the overall decline in confidence following the financial crash of 2008.
Alternative cash advances for business
As banks have proven generally less useful, so alternative sources of funding have developed for businesses in need of a cash advance.
These alternative sources fall into three broad categories:
Balance sheet lenders
- these are lenders in perhaps the truest or most familiar sense of the word in that the money they lend is their own – and not that of third party savers or depositors, for example;
- business loans from balance sheet lenders may involve the least risk, therefore, since there is a direct line of contact between lender and borrower, founded on a relationship of trust on the lender’s part in the repayment of the loan;
- you are likely to find yourself dealing with the same team of professionals from your very initial enquiry, throughout the application process, the management of your loan and any discussion about your future borrowing requirements;
- these unsecured, fixed-rate, short-term loans are typically available for up to £100,000 with repayment instalments spread over three to 12 months;
Peer to peer lending
- in recent years peer to peer lending has grown in popularity;
- this is achieved through platforms typically set up online to match individuals and organisations wanting to lend with those who want to borrow;
- the peer to peer provider, therefore, risks none of its own money, but arranges the business cash advances at one remove from the actual lenders;
Merchant cash advances
- merchant cash advances are made by providers who purchase your expected receipts from credit and debit card sales;
- each time a sale is made, the provider receives an agreed percentage of the takings as repayment for the cash advance, and you retain the remainder, thus spreading out the eventual repayment schedule;
- the principles are explained in further detail in guidance published by the Department for Business, Energy & Industrial Strategy, which also mentions that your business must earn at least £2,500 each month from credit and debit card sales, but that cash advances of between £2,500 and £300,000 may be borrowed in this way by qualifying businesses.
In today’s fast-moving business environment, therefore, there are many alternative ways of securing business loans that do not involve the lengthy application processes likely to be pursued by your high street bank.