By Steve Richardson, Reparo Finance.
Businesses, particularly SMEs, face a huge funding gap that makes accessing financing difficult.
The Bank Referral Scheme should have helped, but in practice it merely glossed over the problem. From November 2016 to June 2019, nearly 30,000 small businesses were referred by banks for alternative funding, yet only 1,700 went on to secure the money they needed.
The situation is unlikely to improve soon. The impact of the pandemic and Brexit will see SMEs struggle in an uncertain market. Business leaders will find it harder to access the capital they need to move forward.
Nonetheless, there will still be opportunities available for well-prepared businesses. Owners considering a loan should take steps early to understand all of their options, including alternative sources of finance. This helps them act fast if they end up needing cash.
As an alternative lender, we understand the funding challenges facing businesses. We also know the mistakes business leaders often make when applying for loans.
In this article, we’ll lay out some of the factors you must get right when looking for cash.
Finding the Right Lender
The best source of funding will depend on your business. So you first need to decide which options to explore.
For example, invoice financing can increase your cash flow, but it only works if you have invoices that financing companies are willing to lend against. Businesses with established audiences may look to crowdfunding.
Many specialised lenders operate within specific industries and specialise in a particular lending product. Look out for sector-specific lenders, which will often have a deep understanding of the challenges facing companies in your industry.
Many alternative lenders will provide loans against business assets, including real estate or machinery. Lenders will consider a range of assets – many will take the time to value assets that traditional lenders won’t be willing to accept as security.
Key to working with alternative lenders is to reach out early. Starting discussions helps you understand your options, so you can make an informed decision should the situation at your business deteriorate.
Preparing Your Application
You must be able to prove that your business is a viable candidate for funding. Showing you understand your finances and have a solid plan to repay loans will help convince alternative lenders of your viability.
If you are looking into asset-backed financing, find out the value of your assets or at least make sure they are in a position to be valued. This will provide an accurate estimate of how much they are worth ahead of your application.
Also, create a plan for all scenarios. Lenders know you can repay the loan if everything goes well, but what happens to their investment if it doesn’t? Show your repayment schedule will survive multiple scenarios, from the best-case to the worst.
Not all loans exist to address problems. If you want to borrow money to take advantage of an opportunity, show you have a detailed plan. Highlight your expertise in the area as well as all the reasons you know you can make the business a success. Convincing lenders of your vision is key to getting funding
Whatever you do, avoid the temptation to hide or gloss over problems that you think could put off lenders. Lenders typically have robust due diligence processes to uncover issues. Facing these roadblocks head-on ensures that both parties can work together to create a solution.
Negotiating Favourable Terms
A significant benefit of alternative financing providers is their flexibility. You’ll likely have far more leeway than you would with a bank.
When negotiating, prove your repayment schedule is realistic and that it will survive any bumps in the road. Avoid going in with a plan that is overly-optimistic as this could generate pushback from lenders.
You may be able to put renegotiation terms into the deal. Having an option to restructure the loan after a certain period if conditions are satisfied is one example of this. Another is providing the option to clear payments early.
Reparo Finance has a fast lending process that can help companies secure loans of up to £1 million. Check out our website to find out more.