When the banks say no

Failing to get a high street bank loan isn’t the end of the world. Plenty of other options are available, as Swoop’s specialists explain

YEARS AGO, ENTREPRENEURS who wanted a loan didn’t have much choice in the matter. As a rule, the decision rested with their high street bank manager.

These days, however, the landscape has changed radically. The big-name banks aren’t quite so interested in SMEs – but a wide range of alternative lenders are.

The old-fashioned model, which normally requires collateral in the form of property, has diminished in importance, according to Rhys Cunnah, Swoop’s head of unsecured debt.

“Usually, traditional banks have had the first point of relationship with opening a business,” he says. “To function as a business, you need a business bank account, which is typically where the main source of SME funding has been placed.

“Now, there are many bespoke products that aren’t necessarily offered by a mainstream bank, and these include a variety of products that potentially don’t require bricks and mortar.

“They can be for sector-specific products, they can be for a short duration, they can be for the long term, and they can be much more bespoke in terms of the guarantees that are needed. There’s a lot of challenger funders, or lenders in the market that offer much more competitive terms than we’re seeing from the traditional banks.

“The appetite from the high street bank has shrunk, so you can no longer walk into your local branch and see your bank manager. Usually for SMEs, you speak to someone in a call centre over the phone. And in any case, there’s a much bigger opportunity outside of mainstream banking.”

The list of alternatives is long and varied – but for the moment, let’s run through some of the more popular and innovative options.

Grants

Before you try borrowing, it might be worth applying for a grant. “If you’re on Swoop, you can check the whole UK market to see which grants are available to you,” says Swoop’s head of equity, Neil Dillon.

“The application might take the form of a competition, and these can be quite onerous. You have to put in some money to begin with, or some time and effort to write a good application.

“But at the end of the day, you’re not giving away any of your business, you’re not strapped with debt after it and you’ve got a huge cash injection for nothing, really.”

Start-up loans

Another popular choice is the government-backed start-up loan, worth between £500 and £25,000 per director. With a maximum of four business partners, that’s up to £100,000 in total.

The loans are unsecured and designed to pay for concepts, testing, designs, prototypes, machinery, plans, legal needs, premises, marketing, staff costs and more. Their ultimate aim is to bring a seed or early-stage business to life.

Start-up loans can be repaid over a period of one to five years at a fixed interest rate of 6% per year.

VAT loans

SMEs use VAT loans to pay off HMRC’s quarterly VAT demand. “What these do is split the cost across three, six, nine or 12 months,” says Rhys.

“It means that HMRC are being paid ahead of any other creditors that the SME may have.”

The sum you can borrow, ranging from £5,000 to £5 million, will depend on your eligibility and your business’s unique circumstances. The typical APR for borrowers with good eligibility is 2.9% at present.

Merchant cash advance (MCA)

This relatively new form of loan suits businesses with a high volume of card payments. Essentially you borrow a lump sum, which you then repay as a fixed percentage of customer card receipts.

“It’s great for seasonal stock,” says Rhys. “So, if you are a corner shop and you want to purchase stock for Christmas, the lender will take a percentage of future sales.”

A variety of factors, such as your turnover, industry sector, business credit rating and volume of card receipts, determine the cost of borrowing. This typically ranges from 7p to 35p per £1.

Revolving credit facility

A revolving credit line is rather like a flexible, open-ended loan.

This means you can borrow cash, pay it back, borrow some more and so on, for the agreed duration of the term.

The maximum you can withdraw is usually equal to your business’s monthly turnover.

Revolving credit facilities provide a fast, flexible form of funding that doesn’t require security and works out much cheaper than a business credit card. On the downside, they are shortterm and charge higher interest rates than fixed business loans.

Unsecured business loans

If your business lacks assets, you may want to consider an unsecured facility – one that doesn’t require collateral, in other words. Secured loans, by contrast, are the stock in trade of high street banks.

Unsecured loans from less traditional lenders are usually more expensive and depend on your business profile –that is, your trading history, turnover and credit score. They are, however, quicker and cheaper to arrange than the secured type.

“We’re seeing more lenders come to the market where there is less need for the trading history,” explains Rhys. Companies that have traded for as little as three or six months may be eligible.

R&D tax credits

R&D tax credits encourage businesses to invest in research and development. The scheme allows a proportion of a company’s R&D spend to be recovered as either a reduction in corporation tax or as a cash payment.

HMRC’s broad definition of R&D projects includes investment into technology, IT systems, data and cloud computing. Indeed, sectors as varied as agriculture, construction, engineering, architecture, food and cloud computing could qualify.

The last word

A common mistake that SMEs make is to lose heart and give up when their high street bank refuses them a loan.

“We do deal with the high street banks when there is a high street bank deal, but many funding options aren’t available from them,” says Rhys. These banks in particular “do like bricks and mortar”, he notes.

His advice is to consult a specialist about exactly what you’re looking for. “Many brokers, many intermediaries and many bank managers may not know the ins and outs of every product,” he adds.

“At Swoop, we have specialist divisions – whether that be asset finance, unsecured lending, commercial mortgages, equity investment or grants - because we have such a broad range of options.”

To find out more, visit: swoopfunding.com

Focus on property

There’s a lot more to Swoop than just securing loans and grants.

Later on, we’ll be talking about equity. But as well as that, there’s property to think about.

If you’re looking for a commercial mortgage, Swoop can do the hard work for you.

Its experts will use all their experience and skill to present your deal to lenders in the best shape possible, opening up more options and reducing the interest you’ll be charged.

Commercial mortgages cover three scenarios:

• You’re a business that trades from and owns the property you wish to borrow money against.

• You’re a property owner who receives an income from a tenant or licensee.

• You own a portfolio of properties.

In every instance, Swoop’s specialist brokers are on hand to work with you and support you in your objectives.

It’s worth pointing out, however, that commercial mortgages have become harder to achieve in the current economic environment.

Swoop’s Rhys Cunnah cites contributing factors such as rising interest rates, inflation and business costs.