The SME lending market has undergone something of a transformation in recent years. It wasn’t long ago that banks dominated the landscape, but since the financial crisis of the late-2000s they’ve been joined by a plethora of forward-thinking online business funding options that are offering a fresh approach to business funding. But what can these new lenders provide your small business that banks can’t? Here’s how they compare with traditional lenders in five key areas.
It’s never been easy for small businesses to be approved for a bank loan, and most high-street banks have further tightened their lending criteria since the recession. This has restricted access to bank funding for many smaller companies, especially those that have been trading for less than two years.
Alternative lenders are typically more lenient with their criteria. Many will happily consider businesses that have been trading for a few months and, rather than declining a company because of a patchy credit history, they will take a number of factors into account when assessing an application. They may even lend to a company with a CCJ on its credit file if the company fits the bill in other aspects.
As a result, it’s not uncommon for a business to secure funding with an online lender after being declined by a bank. In fact, under the government’s bank referral scheme, which was launched in November 2016, banks are now compelled to refer businesses they were unable to fund to one of four designated platforms that match companies with alternative lenders.
The majority of alternative lenders use cutting-edge technology to deliver a far quicker application and approvals process than banks. Although they’ll still carry out some manual underwriting, initial applications can usually be submitted online in a matter of minutes, and businesses will generally be asked for a lot less supporting documentation. Depending on the type of finance you’ve applied for – whether it’s a merchant cash advance, business loan or invoice finance – your business could have the funds it needs within a day or two of applying.
The sheer size of banks means that loan applications are normally subject to a far lengthier approvals process. The major high-street banks are often tied down by a huge amount of bureaucracy and still follow systems that have been in place for decades. As a result, a business could face a six-week wait for a meeting, only to be told that the “computer says no” or words to that effect. In contrast, most online lenders are agile startups that combine automation and human decision-making to expediate the lending process, and will assess each company on a case-by-case basis.
Of course, if your need for funding isn’t that urgent, a bank loan might still be the best option for your business. However, online lenders are probably a better bet if you require an injection of capital at short notice; whether it’s to manage cashflow or purchase stock while awaiting overdue payments, or to take advantage of an exciting business opportunity.
There’s a common perception among businesses that bank funding is cheaper than the alternatives. While it’s certainly true that banks offer lower interest rates than some online lenders, there’s every chance your business could secure an equivalent rate with a non-bank lender, especially if it can demonstrate healthy revenue and a strong credit history.
Additionally, it’s worth bearing in mind that many banks will charge you if you wish to repay your loan early or pay more than your fixed monthly amount. There may also be an origination or product fee, which will either be payable upfront or added to the total loan amount. On the contrary, numerous online lenders won’t charge any additional fees, and some will even recalculate interest to ensure that a business only pays for the time it had the loan if it decides to settle early.
So, even if a bank’s interest rate is lower, the overall cost of borrowing might be higher with the addition of fees. A rate comparison tool will help you check whether the quote you’ve had from a bank actually works our cheaper than those you’ve had from other lenders.
When approaching a bank for funding, a business will be limited to the bank’s own product range, from overdrafts and fixed-term loans to asset finance and bridging loans. It can also be difficult to compare the cost of bank products online, which means you could end up waiting weeks for a decision from one bank before having to approach another, and so on and so forth.
In contrast, most alternative lenders are listed on price comparison websites, meaning businesses can enjoy greater choice simply by heading online. In addition, there are several brokers and web platforms that specialise in alternative finance and work closely with a whole range of lenders. Not only can they help take the legwork out of sourcing funding, which can prove invaluable for time-poor business owners, but they’ll also be able to give you a range of quotes within days.
As lots of alternative lenders offer shorter-term options and specialise in their own specific finance types, they tend to have more appealing terms, with flexibility built in as standard. Rather than penalising you for repaying early, they tend to reward you with faster decisions or cheaper interest rates on subsequent loans. There is a time and a place for the use of different finance types, and specialist lenders are very happy to just serve one market and not be a one-stop shop like banks.
If you’d rather not be tied into fixed monthly repayments, you could find a more flexible repayment plan with an alternative lender. As well as fixed-term loans, some online lenders also offer a form of revenue-based financing, which aligns repayments with a company’s monthly revenue.
Instead of paying back the same amount each month, this type of finance lets companies share a percentage of their monthly turnover with a lender until the loan is repaid in full. Because the percentage is agreed upfront, and never changes throughout the term of the loan, it means a company will repay less in months when sales are lower and more when they’re higher. This can be ideal for small businesses with seasonal sales fluctuations, such as hotels or pubs.
Businesses can also enjoy other flexible features when borrowing from alternative lenders, such as top-ups, repayment holidays and penalty-free early repayments. These sorts of perks are rarely available from the larger high-street banks.
Peter Tuvey is co-founder and managing director of Fleximize.