by Mike Prendergast, Finance Director, Quick Capital
Easy and quick access to money is vital to helping your business not only grow, but survive. It means you can cover unexpected costs, replace equipment, buy more stock to increase sales, or simply boost cash flow during a difficult month.
It’s a fact that nothing can ruin a business faster than a lack of regular cash flow. A survey of independent business owners in December 2017, revealed that concerns with cash flow keeps 63 per cent of them awake at night, with a third claiming a lack of funds actually stunted their growth plans.
Where once the bank would have been the first port of call for a loan, the 2008 recession all but closed off this option for independent businesses – and it’s never fully re-opened. High street banks now insist on a detailed business plan and apply tougher tests and restrictions and for the party taking the loan to be in a position to prove, with increasing certainty, the ability to pay it back.
On top of this, applicants like small businesses are increasingly being categorised as high-risk and so will generally need to provide security (normally a home or car) or put in equity and arrange for all business banking and insurance to go through the lending bank. This can sometimes be nigh on impossible.
All of these factors combined are completely ruling out high street banks for many business owners seeking funding to grow, which is placing them under unnecessary pressure. A recent survey by the Federation of Small Businesses found that nearly two thirds (63 per cent) of business owners think they are unfairly disadvantaged by the banks.
But this doesn’t need to be the case. In the vacuum created by the big banks, many innovative and attainable alternatives have emerged that are much more suited to small business needs.
Here are a few:
1. Peer To Peer.
These are online services that match lenders directly with borrowers. Operating entirely in the digital space, their lower overheads compared to traditional banks means they offer lower interest rates for borrowers. According to the Daily Telegraph, £3.2bn was lent out by peer-to-peer lenders in 2016 alone.
The main downside – and one that could be a major concern – is that it is still a relatively new entity. Although the industry became regulated by the Financial Conduct Authority in 2014, this strand of lending has been plagued by defaults, which has led to threats of a crackdown from City watchdogs.
Going down this route also means you can’t choose who you’re borrowing from and your debt can be passed from organisation to organisation without you having any say in the matter. This may be one to avoid if you only want to deal with lenders who share your ideals and principles.
Thanks to sites such as Kickstarter, this form of alternative lending is very well known and popular. Crowdfunding enables you to raise money by asking the public to each donate a small amount of money in return for a reward or experience, such as shares in the product or company.
So far it has been used to raise funds for everything from movies to board games. It does tend to be better suited to those with unique ideas, but it has also proven a success for more ‘normal’ businesses recently such as restaurants. Earlier this month, a Cambridge-based vegan restaurant that used crowdfunding to open its first site in 2016, had once again surpassed its target to open a second restaurant in London, securing almost £378,000 from more than 380 investors.
3. Business Angels.
Think Dragons’ Den and you’ll know what this form of investment is all about. These angels are wealthy individuals who put up their own cash, often their expertise too – but who want to make returns from the loan. The UK Business Angels Association (UKBAA) says that each year around 18,000 investors collectively lend an estimated £1.5 billion to businesses. This makes it the UK’s largest source of investment for independent businesses.
The downside, as viewers of Dragons’ Den will testify, is the differing levels of involvement your investor might want to have in the business. So establish from the very beginning whether they are simply a silent partner or if they intend to be hands on and provide advice.
4. Business Cash Advance.
Also known as a merchant cash advance, this is a very straightforward form of lending for businesses that have at least 6 months trading history. Independent businesses can borrow anything from £500 to £300,000 against future credit and debit card turnover – the only requirement is that you accept card payments.
Unlike a bank loan, the decision on the amount of money and whether an application has been accepted is quick – no complicated business plan or security required. In fact, thanks to having no scrutiny on how you spend your money, the decision can take as little as 24 hours. If you are successful the money will be with you within 72 hours.
The agreed amount – most are around the value of one month’s card turnover – is then simply repaid as a percentage of daily card payment transactions. Repaying in this flexible way means removing any worry about whether or not you will be able to afford that month’s payment.
In conclusion, whatever your business, there are lending solutions out there that are right for you and a much better option than having to plead with the dreaded bank manager.
Mike Prendergast is the Director of Quick Capital, which he launched in 2015 after recognising a gap in the market for flexible alternatives to bank loans. Mike now directs a company that provides independent businesses with business cash advances – with repayments, crucially, tailored to customers’ incomes. In addition to his role at Quick Capital, Mike is also co-owner of its parent company, Merchant Rentals. The company – which he co-founded in 2002 – is one of the leading providers of outsourced electronic payments systems.