What to do when the bank says no

Here, Conrad Ford presents some alternate options for businesses that find themselves turned down for a bank loan.

Banks are not delivering for small businesses

Banks are not delivering for small businesses

At the end of a long-winded application for a bank loan, it can be hugely disheartening to be turned down. In fact, studies have repeatedly shown that when a business owner gets a ‘no’ from their bank, the most likely outcome is they’ll give up entirely. The next-most-likely outcomes are borrowing money from friends and family, or using a personal credit card for business purposes.

Sadly, it’s still all too common that business owners take these measures to help their business survive and grow. What’s worse is that much of the time, businesses seek loans for specific projects or costs, which means a ‘no’ isn’t just disheartening, it could also put your business at risk.

What are the alternatives to bank finance?

After the credit crunch, the banks’ appetite to lend to small businesses evaporated, and they started reducing or removing business overdrafts and saying ‘no’ to loan applications more often. To be fair, some of this was out of their hands, due to global banking regulations that were significantly tightened after 2007-8.

The good news is, it’s no longer necessary to depend on your bank, and there are too many alternatives to bank finance to name for one article!
Alternative finance providers sprung up to fill the gap, and there are now hundreds of products and providers available to business owners that are unsuccessful with the bank.

Alternative business loans

Many of the banks’ unsuccessful applicants are searching for straightforward business loans, and alternative providers are making this category more diverse than ever before. There are products with the loan amount based on turnover, and repaid as a percentage of it; other providers who offer short-term loans with interest calculated by the day; and overdraft-style facilities that can be opened within hours, using automated credit decisions that plumb into accounting software.

For many of these alternative business loans, you don’t have to have security available; alternative providers are offering £250,000 or more to businesses with the right profile (compared to a maximum of £50,000 or so with the banks), and even if you need security, the alternative lending market is coming up with more and more creative ways of finding it.

One example is the merchant cash advance, a loan that’s ‘secured’ against your recent card terminal sales, and repaid as a percentage of future card revenue. For businesses in the retail and hospitality sectors, which are especially difficult to fund using bank loans, they can be a much more accessible way of borrowing money.

Invoice finance

Invoice finance is another area of renewed innovation; as well as new providers offering the traditional products like factoring, there are also technology-based firms that use slick online tools to make invoice finance easier to manage.

Others have taken the peer-to-peer model of matching individual investors with businesses looking to borrow, and combined it with invoice finance, which means a pool of people ‘bid’ to buy your invoices, reducing the cost to your business.

Revolving credit facilities

As I mentioned above, if you’re turned down by the bank it’s likely you’ll at least consider using a personal credit card for your business – a common strategy, but not one I’d recommend. Instead, you could look to the wide range of credit facilities available on the alternative finance market. Many have largely automated credit decisions, which means they can be set up within a day or two, ready to act as a safety net when you need it.

The bank referral scheme

One more thing worth mentioning is the upcoming Bank Referral Scheme, which is specifically designed to solve the problem of ‘what to do when the bank says no’. The government passed a law in 2014 which will require banks to refer their unsuccessful applicants to alternative finance platforms.
I’m proud to say that Funding Options is one of the three chosen to deliver this matching service, pointing unsuccessful businesses to the other options that may be available to them. From the launch of the Bank Referral Scheme and beyond, it’s only going to get easier when the bank says no.

Conrad Ford is chief executive of Funding Options.

Further reading on funding methods

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