Alternative Business Finance

5 Facts Every Business Should Know - Barbara Cacao

When advising clients on commercial finance I regularly find that not all of them are familiar with alternative funding. Unlike property professionals many business owners only come across nonbank lenders and challenger banks once their main bank rejects their funding application. Given that alternative finance has provided a lifeline to many businesses in the past seven years, including many of my clients, I thought it is time to share five often overlooked facts:

1. Higher Risk Appetite

One of my clients required a £200,000 unsecured loan to expand his business. Because his trading history was less than three years, the client had no collateral to offer and as the business was just turning the corner to profitability, high street banks would not lend. Too risky.

However, one of the revenue-based alternative lenders was willing to lend on the company’s draft set of accounts and the last three months bank statements demonstrating a revenue of at least half of the requested loan amount. Though their interest rates were clearly higher the business was able to demonstrate that it was able to afford the loan and could repay within five years.

Alternative lenders offer a wider set of eligibility criteria when assessing credit risk, for example to clients with adverse credit histories, in exchange for higher interest rates. In some cases, however, challenger banks can charge nearly the same tier 1 rates than a high street bank.

2. Specialisation

An interior designer wanted to fill a substantial cash flow gap caused by an outstanding payment for goods shipped to a customer abroad. A Letter of Credit (LC) was all that would have been needed in the first place to secure funds from a trade finance specialist. The boutique trade finance specialist I contacted handles the whole export trade finance process on behalf of clients, from producing and presenting shipping documents under the Letter of Credit to matching the issuing bank with a UK bank who has an appetite to confirm the LC.

Other areas of specialisation where established alternative lenders offer an advantage include acquisition finance, merchant cash advances, and soft asset finance.

3. Wider Funding Options

The one key question I use when liaising with potential clients is “Have you applied for funding with your business bank? What have they said?” Every business borrower should try their high street bank first for traditional funding. If the funding application gets rejected the alternative lending market opens wider options.

During a recession, high street banks tend to tighten their lending criteria and exclude certain risk sectors, like leisure and hospitality. Alternative lenders tend to look at each business’ individual strengths and their management teams when deciding on providing funding. Additionally, some specialist lenders accept security that your high street bank may not, such as card payments, invoices, and stock.

4. Faster Turnaround

If a business’ success depends on quick access to funding the cheapest interest rate may not be the key driver. For example, contractors landing major new projects will often require a cash flow loan to finance new material, equipment and staff. Especially smaller alternative lenders with state-of-the-art technology, established private funding lines and less red tape are more agile and can often lend within a few days, sometimes within 24 hours (invoice finance, merchant cash advance).

5. A Self-Regulated Industry

Why is commercial lending off the high street unregulated? Unlike with consumers, businesses are normally assumed to be able to understand and assess contracts they sign. In the case of smaller business borrowers such as sole traders, however, commercial lending of £25k or less is generally regulated. Unregulated doesn’t mean it’s the Wild West, however. To demonstrate this, the Lending Standards Board (LSB) oversees lenders’ adherence to a code of industry standards, both for regulated and unregulated lending to business customers. As such, the LSB is recognised by the Financial Conduct Authority.

And Lastly...

Commercial finance brokers and advisers usually deal with a variety of alternative lenders. A good broker authorised by the Financial Conduct Authority (FCA) has their finger on the pulse and will advise on the most affordable, and most appropriate type of finance, for any given funding and client scenario.