Retail School: Alternative Funding

So you have traded with a bank for an extended period. You have a good history with them. You are growing and they know it. Then you go to see them and say you are planning expansion, for which you will need finance. In essence, you want a loan, perhaps of significant size, to achieve the growth you are aiming for.

It’s a testing moment, but you have a sound business plan to justify that loan and how it will be repaid, as well as making you a more valuable customer. You may well be at the same time seeking an overdraft facility, or extension to an existing arrangement. The bank should say yes, shouldn’t they?

Unfortunately, it quite often doesn’t happen. Banks are increasingly looking to provide finance as risk-free as they can. As a case, a loan has to be secured against the business owner(s) personal assets, classically their home. They may well refuse an extended overdraft, recommending instead a factoring arrangement. They may also demand some hefty fees for what you want.

You walk out the door feeling dispirited and disgruntled. The immediate temptation is to ‘go next door’ to another high street bank. The aggro and cost of the switch will probably put you off, but the reality is that they are likely to be equally unready to back your sound proposal. What then?

Here’s a simple fact: the high street banks are not the only source of business finance. If your bank says no, it’s not the end of your expansion plan, it’s the start of finding the bank which will say yes.

The National Association of Commercial Finance Brokers (NACFB) was created in 1992 as a self-regulatory body for the Commercial Finance Industry. A not-for-profit organisation, its purpose is to help businesses find funding from a wide range of lenders and through regulated and reputable commercial brokers.

The lenders they work with are active in the fields of commercial mortgages, leasing and asset finance, factoring, vehicle finance, buy-to-let, cashflow funding and development loans.

Their 1,600 members are spread right across the UK, and SMEs can find the best broker for any given finance requirement through the website findSMEfinance (findsmefinance.co.uk).

The larger the business loan required, the more vital are the services of the broker. Borrowers who minimize the size of the loan they want – in the belief that large requests are more likely to receive a ‘no’ from the lender – may be heading in the wrong direction. It simply isn’t true that lenders don’t want to lend, it’s just that the wrong type of lender will still decline a loan application. Far better to work with a broker who can see the big picture and can say “have you considered x?” or “why don’t you try z?”.

In fact, some of the loan requests NACFB see are at least as much requests for advice as for money: small business owners wanting someone else to have a look around and spot what the next step should be.

The Association has met more than 50 new lenders in the last 12 months, all looking to fill niches within niches, bringing the number of lenders they work with to 140.

Demand is more than keeping pace with supply. To take an example, the Peer 2 Peer Finance Association (currently made up of nine lenders) reports that its members completed more than £2 billion in lending last year, around double the figure from 2014. Keep up that rate of growth, and soon Alternative Finance will have to manage the tricky shift away from being seen as Alternative. At the same time the Alternative Finance field is trying to find the right language to convey positively how different it is.

Providers are focusing more tightly on specific areas of finance. Hence there are options for pension-led funding, specialist funders for marine assets, lenders who will work with start-up businesses, lenders who want to target solar panels and so on. The volume of different lenders is crowding the marketplace and what that’s doing is pushing new lenders into the unoccupied gaps. All good news for small businesses who think they’ll get rejected by the banks they’ve heard of – there are plenty who are not household names and who have a positive incentive to lend.

Shorter term financing offers some non-bank routes that might make your hair stand on end – at first. I was told of someone who used his American Express card to start his business. Superficially, it sounds mad. But if the cashflow is there and growing, it could be a solution. This guy managed it with absolute care and saw it as a zero percent overdraft facility. Not to be sniffed at.

Would you go to a pawnbroker to help fund the business? Personally, I would have run screaming from the idea – until I talked to one. First, pawnbrokers are regulated by the Financial Services Authority. Second, they don’t charge arrangement fees like banks do. Third, you get your money very rapidly. Fourth, you can repay ‘Uncle’ before the end of the loan period with no premium. If buying with cash could significantly reduce your costs, this might be worth a look. You’d typically need some quality watches or jewellery as collateral.