With some commercial banks prioritising their existing customers such as Lloyds, Barclays and Santander, many small business owners who do not bank with one of the major lenders are left without this funding option. Finding alternative finance options will be the route many small and medium-sized enterprises (SMEs) will take, so what are the options?
Microlending and Peer-to-Peer Lending
Microloans are funded by private individuals rather than a bank or credit union, meaning they can be funded by a number of people who contribute the lending amount. They can be ideal for those looking to start a business and looking for investment and are part of a wider network of peer to peer financing (P2P). Much like other forms of marketplace, P2P financing enables investors to come together to lend to SMEs and individuals avoiding banks altogether.
Those looking at this option can be matched with lenders who are willing to help and in some cases can offer lower interest rates than you can find with traditional bank loans if you have a good credit rating. The peer2peer Finance Association (P2PFA) that regulates the industry, was disbanded in January, which led to many of the major platforms in the UK forming a sub-group, named 36H, within Innovate Finance, the fintech trade body. P2P finance has become a popular option for SMEs and in 2018 platforms helped provide loans worth almost £3 billion.
Bridge Loans and Equipment Financing
A bridge loan is an alternative option for SMEs if they need to ‘bridge’ the gap between receiving a source of income. Usually used in the short term, they are commonly used when a business wants to move property whilst the existing one is due to sell, paying off the balance once this completes, but they can be used to help free equity within a company to provide a cash flow boost during a difficult period.
Last year saw £732.7 million in bridging loans transacted in the UK with interest rates falling year-on-year, dropping to a monthly amount of 0.76% compared to 0.81% in 2018. For some SMEs, the option of a bridging loan could help get through a difficult period, but how much you can borrow will depend on the value of your company.
There is the option of equipment financing or asset finance also if you need funds to upgrade equipment, however, this area of finance has seen a drop of 47% in April year-on-year. Being able to lease equipment rather than purchase can be cost-effective and worth looking into as an alternative to a loan.
As with any form of finance, SME’s should fully consider a range of alternative finance options and assess which is the most ideal for their circumstances, without rushing into any decision, especially during unprecedented times.
