Alternative Sources of Finance

The Department for Business, Innovation and Skills issued a consultation paper earlier in the year – SME finance: help to match SMEs rejected for finance with alternative lenders – and on the 6th August announced “The government has decided to legislate for a mandatory process in the Small Business, Enterprise and Employment Bill, where SMEs will be forwarded on to platforms that will help them be linked up with alternative lending opportunities”

An excellent idea as shopping around for a suitable finance solution is not something that is done naturally. However, this is not new. The National Association of Commercial Finance Brokers (NACFB) members have been doing this for years and offering SMEs choice in the market. After all if your existing bank says yes, how do you know you have a good deal? If they say no where do you go?

In recent years the finance market has evolved offering alternatives to the high street providers. These alternatives provide choice ranging from secured lending offered by ‘challenger banks’ to unsecured lending from peer to peer lenders. All bring something different to the marketplace. NACFB members have access to these providers – some solutions are only available through NACFB members – and these professionals can assist you in finding the right finance.

The NACFB were active in the consultation process helping to provide information that could assist the DfBIS reach its findings.

The Alternative Finance Providers offer short term working capital loans, secured long term loans, development finance and invoice finance. Some lend to limited companies others to partnerships and sole traders. Other providers take an equity ownership in the business. All provide different solutions at different costs. Invoice finance is different to mainstream providers. They offer the opportunity to ‘dip in and out’ by financing single invoices when cash flow requires.

The most important thing to remember is these alternative lenders want established, good profitable businesses for client.

The Department for Business Innovation and Skills publish statistics on the UK SME market on a regular basis. In one of their most recent studies they found that 80% of SMEs think about funding only 3-4 days before the money is needed. Of these they found that the SMEs spent on average less than an hour researching their options for finance.

Typically SME’s approach their existing bank for financial support but if they say yes, how do you know whether this is a good deal or not? Do you buy a mortgage for your house from the first provider or buy a car without research? So why not give your business that same opportunity?

At best you will have an hour to present your proposal to your bank and to convince the manager you have a proposition worth backing. Often the presentation is ill prepared and questions that a bank will ask, not answered in the proposal.

However, too much shopping around can go against you also if you use several mediums to access finance. A bank receiving a request for the same case from different introducers can be damaging.

In order to give your business the best chance plan ahead. Most commercial/business finance deals take around 3 months from start to finish. Utilise professional advice to help you build a business plan and forecasts. A good adviser will challenge your assumptions and forecasts to make them realistic and robust.

To access finance use an independent provider such as a member of the NACFB who have access to the whole market. Indeed some lenders only offer their products via NACFB members. These members have a large network of lenders who they can talk to about your individual case to ascertain the lenders appetite for the deal and structure it in a way that is more likely to be approved. Overall this will improve your chance of success and ensure that you have choice and a good deal.

A professional adviser will also get you funding ready. That is to say work with you to ensure the business performance is being improved or maximised. A profitable business is vital if you are to require finance and this might take a little time to achieve depending on where you start. Your accountant will ensure you pay as little tax as possible, which is quite right but those accounts won’t satisfy a lender. Planning ahead is vital to get the business performing and profitable. This will improve your chances of success in obtaining finance and as a result keep the cost of borrowing as low as possible.

Want more information? Contact Andrew Craddock on 07737 859 463 or email Andrew@commercialfs.co.uk for a no obligation chat.

Commercial Finance Solutions UK Limited

August 2014