Raising Finance

SME lending: What happens when you can't bank on your bank?

6 min read

23 October 2014

Raising finance isn't easy. What options are available when you can't rely on your bank for a loan? Here are some alternatives.

Getting access to financial lending hasn’t been easy for small and medium sized businesses since the 2007 financial crisis. Even now, banks seem reluctant to part with their cash. 

Recent figures from the Bank of England for example showed a £700m drop in net bank lending during the first quarter of 2014. Despite this, results from this quarter’s SME Finance Monitor indicate that small businesses can thrive without the help of banks. 

Three out of four of the 5,000 UK small businesses surveyed reported profits in the last quarter. And, 80 per cent of all those companies described themselves as happy non-borrowers of traditional funding. This suggests that banks aren’t the be all and end all for SME owners wanting to get that all-important cash injection. So, what are the most popular financial alternatives? 

The government funded Start Up Loans website can provide loans, as well as mentors for entrepreneurs. Since its foundation it has helped over 18,000 businesses and lent nearly £100m to SMEs. In addition, we are also starting to see payments providers such as PayPal offering loans to small businesses. 

However, despite the payments industry’s and government’s best efforts to improve the situation, many SMEs are still likely to face resistance this way. So, what other options are there? 

Turning to your peers
Peer-to-peer (P2P) lending is fast becoming a popular method for SMEs to give their business a boost in cash. This is where a business can use a website to borrow money from individuals who have invested in the service. Recent data from the Peer-to-peer Finance Association showed that UK businesses benefited from over half a billion pounds at the end of the first quarter in 2014. 

Gaining traction from the masses
Raising capital online through a variety of backers, also known as crowdfunding, is also growing in popularity among SMEs and already we are starting to see success stories coming through via this method. Notably Scotland’s largest independent brewery BrewDog raised £4.25m in December 2013 as a result of crowdfunding, which has enabled the company to expand their presence nationwide. 

Approaching financial experts
Recent research found that over two-thirds of SMEs expect their accountants to provide strategic business advice, as well as their standard bookkeeping services. These experts are ideal sources to ask about the best ways of seeking funding, while helping you through the process.

Using personal finances
Interestingly, this quarter’s SME Finance Monitor also revealed that 30 per cent of the respondents are using personal funds for their business. Although it can’t always be a long-term funding option, it should be considered if the business owners are in a financial position to do so, particularly when other funding channels are exhausted. 

Any entrepreneur knows that a smart investment can make a huge difference to growth. They just need to make sure they’re able to keep going and that the business will be successful enough to get the return. 

Keeping finances at the heart of your business
Once an SME has funding, it’s vital to make sure they manage their finances effectively to sustain the business. This involves staying on top of critical processes such as invoicing, cash flow and forecasting. 

Many SMEs default to paper-based records or Excel spreadsheets to do this, but they can be time consuming and complex to manage. Those that are really getting to grips with their finances are turning to cloud-based technology with their accountants that enable all processes to be managed from one place, automatically updated and accessed online.

Smarter bank lending
Although this quarter’s SME Finance Monitor suggests that the majority of small businesses aren’t using bank loans for funding, they should still be considered. 

To help with this, the government has backed the recently launched Business Banking Insight website that allows businesses to benchmark banks against each other and make recommendations from their experiences. 

According to a recent paper by the Department for Business, Innovation & Skills over 80 per cent of UK small businesses only have relationships with the four largest banks. As the new website includes several challenger banks that are less well known to SMEs, it presents more options for businesses that can learn from peers and act upon their insight. 

Last week’s report proves that the future is looking bright for entrepreneurs. Whichever way you choose, it’s critical to remember that managing your finances is very much an ongoing process, which will determine the success of your business. In this way, SMEs can prosper regardless of the current banking situation and keep their bank balance firmly in the green. 

Rich Preece is VP and UK country manager of Intuit UK.