The cat’s out of the bag. The UK’s small businesses have figured out that they’re better off looking beyond the banks to finance their growth, with SME confidence in bank loan approval on the decline.
Findings of the 2018 Small Business Finance Markets report from the British Business Bank shows that banks are still the predominant funding channel, but has found that small firms are increasingly using alternative finance sources.
Although net bank lending volumes remained positive (£0.7bn) in 2017, they were significantly weaker than in 2016 (£3bn) and 2015 (£2bn).
This is a trend that only looks set to continue as more SMEs become increasingly aware of the alternative funding options available to them.
What’s turning SMEs off bank loans?
The main disadvantage of a bank loan is the security that usually has to be given to the bank over the assets of the business. The bank becomes a secured creditor with collateral over the business assets, or sometimes the business owner’s personal assets. If the business fails, then the bank has first call on what’s left (before the shareholders).
Unsurprisingly, this doesn’t sit comfortably with SME business owners. In a 2018 Barclays’ survey, almost half (47%) of business owners said they’d be put off from taking out a substantial loan against their home, with almost a third (31%) saying they’d rather pay a higher interest rate than have to use their home as security.
Business owners also find themselves frustrated at the lack of flexibility when applying for a bank. For example, a growing business might take a loan out for £500,000 but finds it only needed £250,000. That means that interest is being paid on £250,000 of excess finance.
Knowing what’s the best thing to do for the business can prove challenging, to say the least – more than one in ten business owners (13%), and approximately a quarter (24%) that have used a bank loan, said applying for a business loan is more stressful than getting married or buying a home!
The loan application process is clearly in need of shake-up. But it’s not within banks’ interests to do so, which is why small businesses are diversifying in their choice of finance.
Leasing: finance without the stress
If it’s new equipment that you need in order to grow your company, leasing could be the answer.
Think of leasing like renting an office or retail space: you can’t call it your own, but you’ve got full use of it for the length of the agreement. At the end of the lease, you can choose to renew the agreement – and possibly get an upgrade – or buy the equipment outright and own it for future use.
Leasing is less of a commitment than other finance options because you don’t have to put down any sort of down payment and, if you have a good credit rating, you can usually borrow without the need of any security (collateral or a personal guarantee).
It allows your business to acquire equipment at the point at which you need it, rather than waiting until you have the finance available to buy it outright – by then, the opportunity may have passed.
Leasing also enables you to go for the higher-quality option without worrying about how it’s going to impact cash flow for the month. Fixed monthly payments mean you know exactly what the equipment is going to cost you every month for a set period.
So, before singing any finance agreement, make sure you’ve considered your leasing options. We can guarantee one thing: it’s much less stressful than attempting to take out a bank loan.