The ideal SME finance deal
For a business, the big advantage of borrowing over equity is control. With a loan, although there is a cost in the short term, the owners do not have to dilute their stake in, and control over, the enterprise.
A study of more than 500 individuals from across the SME spectrum by Saxo Payments Banking Circle revealed that 92.5% had accessed business finance in the last five years.
However, according to the British Business Bank (BBB) 2017 Business Finance Survey, 40% of smaller businesses only approached one of the largest four banks when looking for finance, with the most popular products sought being a bank overdraft (40%)or credit card finance (35%).
Find a lender
In recent years, the landscape of SME lending has changed a great deal, and continues to do so. But one question remains constant: how should an SME go about seeking finance?
Graeme Fisher, MD, Policy and Communications at BBA, said: “Our business finance guide and online information hub for high-growth businesses both set out the finance options available. They’re interactive and direct businesses to options that not only include bank loans, but also alternative sources, such as leasing and hire purchase. There’s information on how to apply for debt or equity, and dedicated sections on equity crowdfunding and peer-to-peer lending.”
Appoint a good accountant to do the hard work for you, so ensuring you spend your time doing what you are good at.
Juliette Peyraud, Senior Account Manager at Spotcap UK, added: “Industry associations such as the Federation of Small Businesses and Enterprise Nation, as well as local growth hubs or chambers of commerce, could also be a great first point of contact for businesses keen to find out more about the options.”
Other ports of call include a loan broker and, of course, an accountant. Louise Grant, Partner at EQ Chartered Accountants, said: “Appoint a good accountant to do the hard work for you, so ensuring you spend your time doing what you are good at with your own business.”
Iain Walker, Director of Corporate Advisory at French Duncan, commented: “Corporate advisers will make the process of raising funding easier, through drafting/critiquing business plans and forecasts, making introductions to potential lenders and reviewing/advising on offers.”
Make the pitch
While the players have changed significantly, according to Gareth Magee, Partner at Scott-Moncrieff: “The good news is that the old principles apply - when pitching for a loan, success can be achieved by anticipating the key questions around how much, what the funding is for, when it’s required and how it will be repaid."
So what should the SME do? We asked a number of lenders - both long established and relative newcomers.
Barclays claims to lend to a UK SME every four minutes. Stuart Brown, Head of SME Scotland, said: “It’s important that any company pitching for a loan has a good business plan and a clear vision. You need to understand what you will do with the money and how this will benefit the business. This includes having financial projections that are well thought out and, crucially, realistic.
"You also need to understand what I call distribution - how you are going to reach your market and attract customers. Things like social media and marketing can play a critical role and be tailored to match the resources of the business.
“If you are asking for support for a new venture or project it is even more important to be able to demonstrate why it is a viable proposition for the bank, through solid market research which evidences consumer demand and profit potential.”
The majority of unsecured loan providers require the business to prove that they are trading profitably. New-start businesses will need to provide something in lieu.
Peter Nolan, Head of Credit for 1pm, which provides non-bank lending services to UK SMEs, stressed the need to “consider the loan application from the lender’s point of view”.
He said: “Typically, a lender is looking for proof of affordability and in some cases a security to support the funding package. When the SME approaches the lender it is approaching someone that will have very little to no knowledge of its business. It needs to ensure that it is fully prepared to delve into all areas of the business.
“The majority of unsecured loan providers require a minimum time trading for the business to prove that they are trading profitably, and that the SME can afford to repay the facility. New-start businesses will need to provide something in lieu of trading history, such as the offer of a good, tangible security.”
SMEs must ask questions too
Louise Grant recommends that SMEs find out whether the lender has an appetite to lend within their sector. She added: “It’s also useful to understand what terms the lender can offer, the interest rates and charges etc. Also, can the lender offer a capital holiday?”
Juliette at Spotcap UK agreed: “Businesses need to ask lenders certain questions: How long will it take a lender to make a decision once I have submitted all documents? What’s the annual percentage interest rate? Are there any upfront costs? How high will my monthly repayments be? Is the lender registered with the Financial Conduct Authority?
Businesses might also want to take the time and check a lender’s social media channels.
"Once businesses start asking themselves these questions, they will soon get to know which lender is honest about their terms and conditions. Businesses might also want to take the time and check a lender’s Trustpilot page, their social media channels and generally research the company. Any lenders with a bad reputation will be detected quickly that way.”
1pm's Peter said SMEs should always consider their plans for the business and urges them to ask lenders a number of questions, such as: Are there penalties for repaying a loan early? What are the total costs for borrowing the money? Is there a more suitable option available through a different product (e.g. hire purchase, finance leasing or invoice finance)? And what am I personally liable for if the business is unable to repay the facility?
Just as the lender needs information about a business, so does the SME about the lender and the loan products on offer.
The full version of this article is available in the October 2018 issue of The CA magazine.