Setting up as a micro business or sole trader is a brave move for anyone – taking your career into your own hands and choosing to follow a dream or reclaim your work-life balance is a step that requires courage and a real dedication. The UK government has been vocal in its support for early firms – in January 2014, David Cameron described small businesses as “the lifeblood of our economy”. Despite this recognition though, micro businesses continue to face significant barriers to success, not least when it comes to access to finance.
My own experience of setting up a business in the UK is testament to that fact that it can be an extremely long and arduous process to gain access to even a basic bank account. With no bank account, a business can’t take payment, and with no payment, there is no business. I’ve faced barriers the whole way through my entrepreneurial journey and I’m keen to help make sure that those looking to set up are aware of the hurdles they may face, and they can overcome them.
Following the financial crisis in 2007-2008, banks closed access to banking facilities for many individuals, including sole traders and small businesses. Loans to poor-quality borrowers were identified as one of the key triggers of the crash and, subsequently, financial institutions were left embarrassed by their failings, and under intense scrutiny as to the measures they put in place to prevent a similar situation ever recurring in future.
However, this has had a knock-on effect for those looking to set up their own business. With limited trading histories, budding business owners fell into the category of the “unwanted borrowers” of the UK, leaving them unable to get their hands on bank accounts, business finance or funding. This often leaves sole traders and micro businesses in a catch-22 scenario – unable to gain access to a bank account due to limited trading history, yet unable to build up a trading history because they can’t get a bank account to start trading.
Held back by harsh credit checks
When setting out as a sole trader or setting up as a micro business, a business credit card is likely to be a key component of the set-up process. If a business owner is denied access to a bank account, it can often leave them having to use their personal accounts to make business purchases. This makes it hard to draw a line between business and personal spending, and so becomes particularly difficult to manage your outgoings.
Whilst banks have controls in place for a reason, these rules are not best set up to meet the needs of small business owners, and can subsequently stifle prospective business owners from the very beginning. For sole traders in the manual labour or creative sectors, it’s almost a necessity to have a business bank account – buying various materials is a basic aspect of the offering. Particularly in industries where you can claim back the tax on business materials, it can make the process even harder if you have to prove that a transaction made on your personal card really was a purchase that enabled you to carry out the work you needed to.
Seven months after I was granted a business bank account, and with over £7m worth of funding under my belt since APS’ launch, I was denied access to a company credit card. Even though on paper I could show that I had been entrusted with a sizeable chunk of money to grow my business, the bank still decided that I wasn’t worthy of one, again, down to my limited trading history.
Looking to the alternatives
This is where sole traders and micro businesses need to look to alternative finance providers in order to make sure they aren’t hampered by these restraints in the early days. Most people will automatically look to the high street for business banking options, or simply apply for an account with their personal bank, overlooking the fact that corporate banking can come at a higher cost, not to mention the stricter eligibility requirements which may mean your business may not even qualify to open an account.
Over the last few years, however, we have seen a range of alternatives emerge, stepping up where traditional banks can’t – to offer the same level of traditional account functionality with additional features and considerations that are specifically tailored to small business and sole trader customers. These new services are not hampered by the same regulatory and risk constrictions that the banks face, and are able to judge each business on a case-by-case basis. For example, when it comes to finance, each are able to expand the range of eligibility criteria beyond a simple view of credit history.
The banks have shown the space doesn’t have the flexibility to consider someone individually, whereas alternative finance providers are able to acknowledge that each business is unique. One of the primary reasons behind banks’ refusal to provide small businesses with basic banking is that each are not credit-worthy. Despite the fact that there’s no risk in a customer having access to a standard account if they’re not accessing credit, the issue at play is that the customer is not profitable, and therefore not worth having “on the books”.
Business banking should be accessible and affordable for everyone. Luckily, the financial landscape is changing. The ecosystem to support early business access to finance – not just at set-up but as the business grows – is becoming much richer and more comprehensive. A whole range of service providers are now simplifying access to financial services for micro businesses and sole traders, educating and advising along the way with regards to which type of finance solution will be most appropriate for the business need. My word of advice to those looking to start a business: think beyond the banks – there are plenty of alternatives out there willing to help you on your journey.
Rich Wagner is the CEO and founder of Advanced Payment Solutions (APS).
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