Most businesses will, at some stage of their life, require funding: it might be to help fund expansion or cash flow, or it might be to purchase an asset, but in any scenario the challenge is not just to find the finance, but to find the RIGHT type of finance to meet the particular need.
In recent years, UK SMEs have found themselves deserted by the one place that would have catered for most requirements – the bank. The bank manager could be relied upon to provide the money and to advise on how the borrowing should be structured – or so we all thought. Now business owners find themselves very much on their own with these decisions.
The alternative finance market has developed at an incredible pace and provides SMEs with choice. From peer-to-peer lending to other innovative lending options (such as ours), each has been designed to fill an identified need.
But choice can be a double-edged sword. As well as providing options, it can bring with it confusion. Here are four tips for business owners to consider when they are looking to borrow money:
- Identify the business’s needs – It is extremely important to lenders that you are able to explain the requirement, both in narrative form and in a forecast. The wrong type of finance – or borrowing money for the wrong purpose – can ultimately be detrimental.
- What kind of funding? The definition of the ideal type of funding will vary according to what you want to use the money for. Do you need it to grow or for day to day cashflow? Do you require long term or short term finance? How quickly do you need it? What security are you able and willing to give? Are you willing to give up some equity? These are just a few of the questions to ask yourself. With the huge array of financing options available, you are likely to find there is a lender out there that can provide EXACTLY what your business needs.
- Ensure you have access to the whole market – If you know what type of financing you need, knowing who the potential lenders are is the next step. One way of doing this is through online comparison sites, which signpost you to suitable lenders according to the information you provide. They are free to use and I would urge business owners and their advisers to take a look at them.
There is, though, little substitute for the human touch and there are many knowledgeable brokers out there that have embraced the alternative finance market and, in many cases, are filling the important role of trusted adviser. Sometimes, input from a broker who understands the finer points of a particular lender’s criteria can make all the difference.
- Understand your responsibilities and obligations – the lender or investor will make the funds available, but it is the directors that have to deliver. You have a responsibility to do everything in your power to meet the terms of the contract you have entered into. If you are struggling, you equally have a responsibility to say so. Saying and doing nothing rarely helps and you might find that your lender has some constructive suggestions to make.
Ultimately, if you can properly identify what you need and secure it, then your business will be well placed to execute its business plan and grow.
Credit4 is a provider of short term, personal guarantee backed, growth funding to SMEs for amounts of between £15,000 and £50,000. For more details visit our web site at www.credit4.co.uk
First published in the Autumn 2015 edition of NACFB magazine