Applying for a business loan can be disheartening, with more and more companies being rejected by mainstream lenders. High street banks have a very strict set of criteria, and no matter how hard they try, the majority of businesses can’t jump through the endless hoops. Unfortunately, many business owners find themselves in the position of having a loan application rejected. Read more →
Businesses are faced with a choice when it comes to funding; they can apply for a bank loan or look for less conventional forms of finance. With such a huge choice of business loans and the alternative finance sector booming, it can be difficult to know which path to take. So why are non-traditional finance solutions proving so popular? They are easier to access and often deliver faster payments than the banks. Yet both types of lending have advantages and disadvantages, so it’s important to understand the terms and with a greater supply of finance than ever before, choose what’s right for your business.
We’ve put together this useful short guide to the pros and cons of alternative finance options and traditional bank loans.
Because there are so many different types of alternative finance available, it is hard to group them all together and differentiate the pros and cons. However here are some general points to note:
The main downside to using this type of funding is the higher level of risk. Instead of borrowing from a large financial institution which is fully regulated and protected, you will be lending from individual investors or a group. Also, the risk is high on the side of the investors which means interest rates can be higher with some products.
While a bank loan seems like a great choice, the main con is that the majority of SMEs and start-ups will not be eligible to apply. There is a long application process with lengthy paperwork, and businesses usually have to be established and profitable with the support of historical accounts. To get a business bank loan you’ll probably also need strong credit and capital to secure the loan.
Want to find out more about your alternative finance options? Contact our commercial finance brokers today.
SMEs are likely to need financial support when starting up or in the first few years of trading – yet it’s at this crucial time when high street banks often reject their loan applications. Banks and financial institutions have tightened their lending in the uncertain economic climate, and because of the higher risk of lending to start-ups and SMEs it is often impossible to secure a business loan.
Some businesses are set back after being rejected from a bank, and give up on finding the funding they require. Nevertheless others keep trying, and many have found suitable financial solutions from the alternative finance market. Non-bank loans are gaining popularity firstly because SMEs are being pushed into this type of lending by the banks who refuse to lend to them. Secondly, alternative finance providers can provide a wider range of finance and sometimes match the interest rates of high street banks.
In the Close Brothers report ‘Banking on Growth: Closing the SME Funding Gap’ which is based on a survey of 1,000 financial decision makers in UK SMEs, the main reasons these small enterprises were refused finance were:
With many high street banks not even considering SMEs for loans, or having extremely strict criteria, it is easy to see why other forms of lending have grown in popularity.
Thankfully for start-ups and SMEs, new products have become available on the alternative finance market. Peer to peer lending, crowdfunding and asset finance allow small businesses to access vital capital in order to grow and succeed. These “non-bank loans” and unconventional forms of finance are acting as a lifeline to British start-ups which wouldn’t be able to trade without a significant cash injection.
But it’s not just snubbed SMEs who are turning to alternative finance – the market is thriving and supporting a range of businesses, investors and individuals. In 2015, it grew 84% according to Nesta, to £3.2 billion. Many alternative finance providers offer a multitude of advantages to small businesses in addition to being more accessible. The SME-friendly loans are forms of fast cash – sometimes applications can be approved and the money transferred the same day. Some forms of finance can also offer lower interest rates and more flexible repayment terms because you’re not tied to a bank.
Want to find out more about non-bank loans? Speak to our experts at Genie Lending today.
