What funding is available to small businesses in the UK?
It’s a tricky time to get funding for your small business or startup, with many of the grant schemes previously available to UK businesses coming to a close.
Large banks – or tier one lenders – have been less inclined to lend to SMEs and startups since the 2008 financial crisis. These banks want to see evidence of assets and a steady track record of income in order to trust you’re able to service the loan.
This is often difficult to prove for small or young businesses, particularly if you have recorded losses, county court judgements or have a history of failed previous businesses against your name. In these cases, your application to a high street lender may not even be considered.
If you’ve previously been turned down by your bank, it can feel like all the doors are closing on you. But there are other funding options out there. In the place of traditional big-bank lending, the alternative finance community provides a valuable lifeline for growing British businesses.
The alternative finance community:
- Challenger banks
- Finance providers and lenders
The hierarchical nature of lending:
It’s worth noting that the UK lending industry is hierarchical in its structure. Tier one lenders provide low-risk loans with the benefit of lower interest rates. Lenders further down the tiers will lend more readily however, their money is more expensive as they charge more interest. This isn’t to say that lower tier lending isn’t a practical option. If it enables you to invest in your business and you know you can pay the loan back, then it’s a productive step.
Challenger banks:
Challenger banks are relatively newly-created banks that have been set up in direct competition to the established banks. They are considered to be tier two lenders. Banks such as Aldermore, Atom, Metro Bank, Shawbrook and Starling Bank provide secured lending services to small businesses.
These loans are slightly more expensive than those provided by high-street banks, but are a viable option for businesses who’ve been turned down by their bank. Their loans follow a similar risk profile to those the big banks were providing pre-2008; apart from sub-prime lending which unsurprisingly has disappeared altogether.
NB: ‘Secured lending’ is the practice of lending where the borrower pledges assets (e.g. property or machinery) as collateral for the loan. The loan is secured against the value of the collateral and the creditor takes possession of the asset if the borrower defaults.
Finance providers and lenders
When bank loans are not an option, alternative finance providers are the next port of call. These lenders regularly provide loans to small businesses and start-ups. They come in many different guises, some of which are listed below.
If you decide to go down this route, it’s useful to seek the advice of a business finance broker. This way, you will be able to discuss the options in detail and find a lender and loan that’s most suited to your business model.
Secured business loans
These are typically higher value loans that require some form of business asset as security. This could be land, commercial or residential property, equipment or vehicles. Because secured lending is viewed as less risky, borrowers may benefit from slightly more competitive interest rates and longer repayment terms.
Unsecured business loans
If you have no business assets you may be able to apply for an unsecured loan. Lenders ask for a personal guarantee, which is a signed, written promise from the business owner or executive guaranteeing repayments will be met. These loans are accessible but often expensive and generally not of high value.
Invoice finance
Invoice financing is the ideal solution when you don’t have any assets, but can prove you have invoices due to be paid by customers. This is an effective way to access funds in the short term and enjoy at the same time, a facility that will grow with the business.
Growth, working capital and bridging finance
Alternatively, businesses can look to fixed term loans for growth, working capital and bridging finance. These loans can help you raise funds when your bank won’t support your growth aspirations. For instance, when you want to fund additional stock or cover delayed payments from customers. These are usually short term loans provided for a specific reason.
VAT and corporation tax loans
It’s a reality that tax bills put added strain on a business’ finances and don’t always align with periods of incoming revenue. VAT and corporation tax loans are a short term solution to help businesses pay their tax on time. Lenders advance the tax bill and the borrowing company pays back the amount over a few months.
Loan flexibility considerations
With any loan, it’s worth exploring what kind of flexibility comes with the product. The terms of a loan determine how much it ultimately costs and this can affect your ability to keep up with repayments, especially if your business is seasonal. For instance:
- Can you overpay?
- Are the repayments always a set monthly amount?
- Will the rates change or remain the same?
- What are the penalties for early repayment?
Doing your research and speaking with professional business finance advisors enables you to educate yourself on these details from the outset. It’s the best approach for knowing you’ve selected the right type of loan, that’s affordable and suited to your business.
How long does the process take?
This will vary significantly between providers. The high street banks are notoriously slow. Generally, the bigger the lender, the longer it takes. Every lender promises speed and flexibility, but the reality is that only smaller lenders deliver what they say they will, as they have fewer management layers which inevitably causes delays. A week from an offer of a loan to receiving the cash is achievable with a small and efficient lender. Don’t expect any change from three months with a high street bank; although if you have the time, it is worth waiting for the cheaper money.
We hope this article has provided a useful overview of some of the funding options available to SMEs. It has been written in conjunction with One Stop Business Finance Limited, who provide secured loans for SME clients from their own funds and match client businesses up with business lenders through the services of their business finance brokerage.
One Stop Business Finance take their clients through a process, ensuring lending is always responsible and in the best interests of the borrower.