Finance 14 October 2015

Why small businesses should bank on more than just loans

The difficulty in taking bank loans has strengthened the position of the alternative finance marke
The difficulty in taking bank loans has strengthened the position of the alternative finance marke

Syscap’s MD explains why small firms looking to grow and maintain a competitive edge, should consider options other than the banks when it comes to external funding.

A recent study by BDRC Continental found that 43 per cent of small and medium-sized firms in 2014 were “permanent non-borrowers”, compared to just 34 per cent in 2011 – and the decline of borrowing money exists in businesses of varying ages. As it becomes less commonplace for small and medium business owners to aid expansion through external finance of any kind, the “non-borrowing” culture is a cause for concern if we want the small business market to continue to grow and prosper as the fulcrum of our economy.

It might be a fair assumption to think that the economic downturn has instilled a fear of borrowing into small business owners. As banks have become more reluctant to lend money, and getting a cheap loan is now a thing of the past, many SME owners naturally have fallen into an attitude of non-borrowing.

Despite this, 78 per cent of small business owners reported being profitable in BDRC’s study. While it’s reassuring that SMEs are keeping afloat without external finance, there’s the worry that entrepreneurs have fallen into the trap of just keeping the wheels turning rather than trying to move up a gear. Growth is essential for firms who want to respond to a changing market place and maintain a competitive edge, and external funding can enable a significant step up to the next level.

Traditionally, smaller business owners would turn to banks as the first port of call when enquiring about external finance. As the financial institutions that feature on the high street, banks were often the key relationship-holders with SME owners. This doesn’t mean that entrepreneurs had a preference – it was more a case of working with them by default rather than by design. And now that bank loans are less accessible, some owners of small businesses see little way of gaining external finance and face their business remaining static as a result.

The difficulty in taking bank loans has strengthened the position of the alternative finance market. A report published in 2014 by Cambridge University and EY found that alternative providers now dominate around three quarters of the finance market. Smarter business owners have begun to understand the plurality of financial solutions on offer, and how they can often go beyond a bank’s “one-size-fits-all” approach. Entrepreneurs serious about growth should examine the alternative finance market to find a specialist who can best enable their business ventures.

In working with a broker, who can get an understanding of your position as a business and what you want to achieve through greater funding, you can establish right type of funding. Provided you present a good business case, some investors will see potential in your plans for growth, and those specialising in venture capital can support you with a specific project. Owners of small firms may consider putting themselves on peer-to-peer lending platforms, which typically involve high-net-worth individuals and businesses looking for investment opportunities that take the form of growth strategies.

The market you operate in could influence your choice of financial solution too. Crowdfunding is a worthwhile route for businesses who work in a socially-driven environment, and who receive extensive public support. But it’s up to you to strengthen the case for your business strategy and ensure that it’s a project that investors will want to get involved with.

Just remaining profitable simply isn’t good enough for firms looking to expand. Playing it safe will never create sufficient grounds for business evolution and keep Britain’s small businesses at the heart of a healthy economy. Take the difficulty in acquiring a bank loan as an opportunity to forage for the various financial solutions on offer and the specialists who can aid you in finding the right one. Just like a bank, alternative finance providers will scrutinise your business objectives, so before approaching them you should ensure a strong justification for your growth strategy.

Philip White is the managing director of financial provider Syscap.

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