Businesses vary dramatically, but one thing is common to all – the need for capital. Whether to cover basic company costs, buy further stock or equipment, invest in research and development, or put serious growth ambitions into practice, at some point a small business owner must decide how to raise the money needed. And most will opt for some form of debt finance.
Small businesses strongly favour debt over equity finance, research shows, with the average boss preferring to borrow rather than take on investors and relinquish control of their enterprise. Once upon a time, the answer would probably have been to apply for a loan from the bank. But recent experience has shown the large financial institutions are not always willing to lend to their SME customers.
Non-bank debt finance has been one of the big growth areas in the business lending arena since the economic downturn took hold in 2008. When the banks started saying no to loan applications, those business owners who looked around for alternatives found a range of options available. Bridging finance has existed for years, of course, with many firms familiar with raising cash by selling invoices to factoring firms, for example, or negotiating trade credit from suppliers. Asset finance has also long been a popular way to spread the cost of large purchases and retain liquidity.
But, today, SMEs also have the option of online debt finance, including peer-to-peer lending platforms and fast, short-term business loans such as those offered by us at Boost Capital. What makes our own model novel and somewhat unusual is that our type of debt finance is unsecured – we don’t make loans against a business’s collateral. We aren’t reliant on credit checks to assess a company’s eligibility to borrow, but we do look at the firm’s sales and ability to generate revenue. Our business finance options give SMEs greater flexibility and speedy access to much-needed funds. Importantly, the loans are designed to be repaid quickly, within 12 months, so it’s a quick in-and-out approach that allows firms to get on with important day-to-day business with the minimum of hassle.
It’s just one form of debt finance and it won’t necessarily be the right one for every business in all situations. But our experience is that small firms are increasingly taking a piecemeal approach to borrowing, picking and mixing the lenders that best suit individual needs at any one time. Business leaders are weighing up what they need money for, the period of time over which they want to borrow and whether they are able or willing to provide any kind of guarantee against a loan. This might mean they arrange a leasing agreement to buy a new vehicle, then turn to invoice factoring to cover staff wages in a month where cash reserves are low. Or they may choose us because the want to renovate their premises and need funds quickly so that business isn’t disrupted more than necessary.
The joy is that there’s room for all of these types of debt to sit comfortably alongside each other, as my colleague Norman Carson, Boost Capital’s director of business development, recently pointed out in one of his blog posts. It’s to the undoubtable benefit of SME owners there’s now so much choice in borrowing for them. It’s understandable a startup will want a different offering to an established medium-sized firm. A manufacturer with a factory and plant machinery is differently placed to borrow than a retailer who rents premises and has few valuable assets. Circumstances vary and, as said, all businesses differ. But, the good news is today there’s a greater chance for every firm to find a type of finance that really fits.
Willem van Lynden is director of sales and marketing at business finance provider Boost Capital.
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