How to finance your business plans

Banks are no longer your only option for a business loan. 796 businesses borrowed around £17 million through alternative financing in the last year alone; but how?

These figures are the result of the UK government’s bank referral scheme, launched in 2016 to help small businesses get much-needed finance. Through the scheme, when banks reject small business loan applications, they have to offer to refer you on for alternative funding.

Getting cash quickly can be make-or-break for smaller businesses. A recent study by Aldermore Bank found that nearly a quarter of UK SMEs missed out on opportunities as a result of finance issues in the last year alone.

“They need adequate cash to innovate, grow and keep up to date,” says Tim Boag of Aldermore Bank.

Is the bank referral scheme the solution?

We’ll outline how the scheme works, and highlight some other financing options available to SMEs.

What is the Bank Referral Scheme?

Launched in 2016, the Bank Referral Scheme requires nine of the UK’s biggest banks to pass on the details of businesses they’ve turned down for loans. These details go to one of three online brokers:

These platforms then “share their details, in anonymous form, with alternative finance providers.”

Research by Funding Options indicates that about 50% of companies turned down for bank loans will be eligible for alternative financing of some kind. So there is hope, but it won’t help everyone.

Economic Secretary to the Treasury John Glen said: “It’s great to see British businesses up and down the country accessing the funding they need. Now, I want to see more entrepreneurs use this scheme.”

However, there are concerns the scheme can encourage businesses to take on high-cost finance.

“It sounds good in theory,” said Kirsty McGregor, Chairman of accountancy firm group The Corporate Finance Network. “But the reality is, businesses are already getting desperate at this stage.”

“If they’re offered high-cost finance from another lender, they’ll be very tempted to take it to tackle a short-term need, while building up bigger problems for the future.”

Key takeaways:

  • through the bank referral scheme, the UK’s biggest banks must offer to refer SMEs to alternative online finance platforms, if they’re turned down for a loan.
  • but beware… it’s vital not to overstretch your business by taking on expensive financing.

How else can SMEs raise funds?

You don’t have to be an SME with rejected bank loan applications to get alternative financing.

There are a number of attractive options. The best one for you depends on the type of business you run, and the reason you need the money.

1. Informi’s Funder Finder tool

Informi, powered by AAT, has recently developed the Funder Finder tool in collaboration with Alternative Business Funding (one of the three online brokers involved in the bank referral scheme). This tool connects small businesses to alternative finance solutions based on your requirements.

Fill out the 5-minute form and you can quickly see the wide range of options available to your business, which are displayed in order of suitability.

Funder Finder is completely free to use and will not harm your business credit profile.

2. Crowdfunding

Crowdfunding – which lots of people use to invest in businesses and causes – can be a great way for start-ups to get a helping hand.

It’s created some huge success stories: craft beer manufacturer BrewDog raised £25 million via crowdfunding in 2015, while fintech start-up Revolut attracted close to £4 million.

Find out more by visiting some of the crowdfunding websites aimed at SMEs. Crowdcube, for example, offers loans but also equity funding, where investors buy a stake in the company.

3. Peer-to-peer loans

Peer-to-peer (P2P) business lending also gives SMEs the chance to borrow money from investors, rather than a bank, in this case via a platform called a P2P lender. 

The loans come with a fixed interest rate that depends on:

  • how much you need
  • how long you want to repay the loan
  • and how likely you are judged to pay it back on time.

They typically last between six months and five years, can be used for a range of expenses, and are often paid out within a matter of weeks.

However, some lenders only accept applications from SMEs that have been trading for a set period, or have a turnover of say £75,000.

Check out Funding Circle and Ratesetter for more information.

4. Asset finance for equipment

If you need new equipment to grow your business, look into asset finance.

With this type of lending, the provider buys the asset – anything from machinery to office furniture – and finances it back to you via a hire purchase or leasing agreement.

Asset finance agreements generally last between one and five years, although some can run for up to seven years.

Repayments are calculated in line with the income stream generated by the asset, and at the end of the term the asset is yours.

Providers to the UK SME market include Close Brothers and Wesleyan Bank.

Key tips

  • If you’re an SME with rejected bank loan applications, alternative financing options include Crowdfunding, P2P loans, and asset finance.
  • The type of financing that best suits your business will depend on a number of factors, including why you want to borrow.

In summary

There are lots of alternative financing routes available to SMEs. Those listed above, but also small business grants, business ‘angel investors’, community funding, and more. Some of these may even prove cheaper, quicker and more flexible than a bank loan, so should be your first choice from the outset.

Make sure you get the best deal by shopping around for the best interest rate, and above all, only borrow what you can afford to repay.

For more on running a small business:

Jessica Bown is an award-winning freelance journalist and editor.

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