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.

What are the reasons for SMEs being refused a bank loan?

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:

• Cash flow not strong enough
• Banks not lending to SMEs at all at this time
• Not enough capital
• Business plan not strong enough

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.

Non-bank loans: challenging traditional lending

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.