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Frustration with banks is driving businesses towards alternative lending platforms

With inflation leading to rising operating costs across every industry, many smaller businesses are feeling the squeeze as profit margins tighten.

An office block in London. — Image by © Tim Sandle
An office block in London. — Image by © Tim Sandle

Growing a business in the current economic climate is a challenge. With rising costs reducing profit margins and prohibiting growth, external investment has become almost a necessity for many small and medium-sized enterprises (SMEs).

Despite the increased demand for finance, a growing number of SMEs are turning away from traditional sources of funding, in particular from seeking support from the big banking corporations. A multitude of reasons are behind this, from banks’ tight lending criteria to a general lack of support from traditional funders.

In these times of economic uncertainty, non-traditional lenders are becoming an alternative for businesses to raise capital. Stuart Wilkie, Head of Commercial Finance at Anglo Scottish Asset Finance tells Digital Journal why so many SMEs are looking to third party sources of finance.

Wilkie explains that more than a quarter of UK SMEs have had difficulty accessing finance from their main banks and that 41 percent of UK SMEs feel banks’ lending policies haven’t kept pace with modern business needs.

Why are fewer businesses turning to banks for funding?

There are many reasons why banks have become less popular as a source of finance for UK businesses. According to Wilkie a report from the Bank of England in December 2022 identified rising interest rates, with no sign of tailing off. These rate rises have “caused the cost of borrowing to rise for households and businesses.”

Outlining the problem, Wilkie observes: “With the cost of borrowing rising, more than 25 percent of UK SMEs have experienced difficulty accessing finance from their main banks. The traditional banks still operate with a strict set of lending criteria, which can render many businesses ineligible to apply for finance. However, some of the alternative funders can offer SMEs easier access to credit. Alternative funders’ responses to applications for finance tend to be more commercially-minded, as they work with a more flexible set of credit criteria.”

It is not only the cost of borrowing that is rising, says Wilkie. He adds: “With inflation leading to rising operating costs across every industry, many smaller businesses are feeling the squeeze as profit margins tighten. As such, external forms of finance look increasingly lucrative for businesses looking to facilitate growth.”

One reason why alternative forms of finance are growing in popularity is due to banking polices, says Wilkie. He finds: “Overall sentiment towards banks remains largely positive, but amongst the economic uncertainty, 48 percent of people are concerned about their bank’s ability to help manage their finances in a recession.”

Evidence also highlights a more general lack of trust in traditional banks, both in terms of money handling and data protection. Here Wilkie finds that just 60 percent of British people feel like their personal data is safe in their main bank’s hands.

What other sources of funding are available?

With confidence in traditional banks dropping, there are other avenues that SMEs can explore in order to gain capital. Wilkie identifies these as: “Utilising alternative sources of finance, businesses may look to third party funders to facilitate growth or bridge finance gaps.”

Outlining the detail, Wilkie finds: “The source of funding most suited to an individual business depends on a number of factors, such as the business’ size, credit history, business objectives and more. For example, if time is of the essence, using a broker to help secure funding can be a good option. As well as providing the personal touch which many of the big banks no longer do, a good broker can ensure that you receive the most appropriate finance, and ultimately access the funding as quickly as possible.”

Another advantage is because: “Brokers have a wide portfolio of funders at their disposal, they’re not restricted by one bank’s specific lending criteria. For example, your business may not meet one bank’s criteria, but brokers have the ability to call upon other lenders, who may have different criteria.”

Identifying the right type of finance

Offering advice to SMEs, Wilkie says that “when identifying which form of funding is right for you, there are a few questions you should ask yourself before applying.”

These are:

  • What do I require finance for? Wilkie says: “The best type of finance for you will depend on what the money will be used for. For new machinery, office equipment or vehicles, asset finance is likely to be the most suitable option for you. Meanwhile, if you’re looking to manage your business capital or bridge funding gaps, a cash flow loan could be the best way to do so. If you’re working with property and require a short-term loan, a bridging loan could be used to cover these gaps.”
  • How long will I need to repay the loan? Wilkie  advises: “This will affect which type of finance is best for you. For example, unsecured cash flow loans are shorter-term loans that can be used for a variety of purposes (such as supporting business growth, covering working capital shortfalls, providing funds for a VAT bill that is due, and any other valid reasons a business may have for raising cash). Alternatively, a secured loan, such as a commercial mortgage, can be repaid over a longer period of time.”
  • How will the repayments fit into my business’s cash flow? With this key question, Wilkie proposes: “With profits in most industries narrowing due to inflation, this is a more important question than ever for small businesses. A finance repayment plan must fit within your budget going forward. In most cases, taking on finance is a risk, given that funding is usually issued with the express purpose of growing a business or increasing income. However, it’s important to ensure that you’ll be capable of making your agreed repayments in line with the payment schedule.”

Summing up, Wilkie, states: “It’s little surprise that SMEs are being forced to turn away from the big banks, particularly in the current economic climate. In many cases, third party funders’ more commercial view to finance can enable businesses that were previously unable to secure finance to grow.”

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Dr. Tim Sandle is Digital Journal's Editor-at-Large for science news. Tim specializes in science, technology, environmental, business, and health journalism. He is additionally a practising microbiologist; and an author. He is also interested in history, politics and current affairs.

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