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Get Your SME Finance-Ready – 5 Actions to Improve Your Business Loan Eligibility

Looking to get an SME loan? Avoid these common mistakes to immensely improve your chances!

Taking the entrepreneurial leap of faith might well turn out to be the most rewarding thing in your life. The sheer joy of seeing a plan, a concept – a dream, indeed – materialise is indescribable. But to get there, you’ll first need to take off the rose-tinted glasses.

The world of business is ruthless beyond measure. No industry, no sector, no niche is devoid of competition. Therefore, your business – like every other business – will need to withstand this competition day and night in order to survive, thrive and, eventually, succeed. And this process invariably involves scaling up your business – a point at which drawing strength from your personal savings or seeking help from friends or family just isn’t enough. This is when you, as an SME, are most likely to seek external funding and financing. This, also, is when you have every chance of seeing multiple business loan applications turned down.

How does a young SME go about securing a business loan that’s both substantial and fair?

That’s a question that needs to be discussed in multiple blogs. For now, we will take a look at the steps that you can take to give your business the best chance of getting business loans. Before that, however, it will be more prudent to understand how the lenders perceive SMEs.

SME Lending Is Changing

  • The lending landscape is fast changing.
  • Open Banking will make getting business loans less difficult for SMEs.
  • Banks’ isn’t the only voice that matters.

SME Lending in the UK – A Stat Check

  • Asset finance, general business loans, equity finance & most other commercial SME loans have grown in size since 2015.
  • As many as 7 in 10 small-business loan applications were approved by lenders in 2017-18.
  • 62% of all SME finance applications in 2017-18 stated business growth as the principal reason for the loan.

British Business Bank SME Finance Report 2017-18

UK Finance Quarterly Reports

Liberis Business Survey 2018

Regardless of the narrative or the wider picture, it’s safe to say that the lenders have always dictated the terms of the commercial finance game. They have had the absolute right – at times, an unfair proposition – to accept, modify or reject business loan applications from SMEs as they see fit. While this isn’t likely to change anytime soon, there are definitely some levellers being introduced by the government to make the playing field more even.

The first amongst this is the rather dramatic arrival of Open Banking (better known as PSD2 across mainland Europe) earlier this year. This purported game changer will not have as much of an impact on everyday banking as most thought. The lending game, however, has been forever changed since its introduction. Thanks to the absolute customer-side control of finance data, your business can now request – nay, compel – big banks in the UK to share your 12-month financials, credit history and other data with private, P2P or overseas lenders. While such data sharing isn’t a new concept, the edge lies in the fact that Open Banking will let the borrower have more control over their data. What this means, essentially, is that getting your SME finance-ready will be much, much easier now than it was five years ago. The lenders will be able to make better, more informed lending decision based on this data – just about as seamlessly as personal loan or credit card applications work.

This development is in perfect alignment with the Small Business Enterprise and Employment Act of 2015 that had made it mandatory for banks and institutionalised lenders to share finance data with alternate credit partners for SME loans.

The fact of the matter is – if you run an SME in the UK, you have a great chance of securing a business loan today than ever before.

What Does It Take for an SME to Get a Business Loan in the UK?

The lending criteria differ from one lender to another. They also depend upon the type of the loan you seek. Some of the most common and fundamental lending criteria for SMEs in the UK are:

  • The borrower should be a registered business entity (Sole Trader, LC, LLP or PLC).
  • The business should have a ‘demonstrable’ trading history of 18-24 months.
  • The director(s), owner(s) or proprietor(s) should be able to furnish personal guarantees if required.
  • The business financials should be able to demonstrate a certain minimum turnover (subject to the amount of the loan).

Understanding Why the Lenders Are Forced to Say ‘No’

Despite the lending atmosphere that’s gaining in positivity as far as SMEs are concerned, quite a few business loans are still routinely declined. In this light, it’s important to understand the common reasons why small-business loan applications fail to get approved. This will help you eliminate a major hurdle in getting finance for your business.

The Business Isn’t on Top of Their Credit Score(s)

Countless SME loan applications fail to pass the very first check that banks perform – the credit check. What’s more astounding is the fact that many SME owners aren’t even aware of the credit trail they leave while their business is trading.

The Business Has Problems

It’s a vicious cycle but that’s how it is.

Most businesses apply for loans when there’s a cash crisis. And lenders don’t like such situations. This Catch-22 is perhaps the biggest hurdles SMEs face in getting approved for a business loan. Along with cashflow problems, other problems such as a questionable business plan, a history of poor business decisions, lack of expertise at the helm and inability to prove the growth potential often lead to loan applications being turned down.

The Time Just Isn’t Right

You cannot apply for a regular SME business loan if your business is just starting up. Most lenders will want to see a trading history of no less than 2 full years. Similarly, if you’re applying for a business loan and your business has been trading for 20 years with little to show for it in terms of growth, the lenders won’t take a liking to your application.

There’s No Collateral Provided

Unsecured business loans attract closer scrutiny from lenders. So, for an SME that doesn’t have a great deal of creditworthiness, it becomes imperative to provide additional security. Business loan applications that aren’t backed by adequate collateral or guarantees usually get declined.

The Plate is Already Too Full

Just like personal loans and mortgages, you cannot expect to get a business loan for your SME if you already have a number of repayments to take care of. A business loan application from an SME dealing with a plate full of loans is almost certain to get rejected, leading to a soft credit enquiry mark that further worsens the situation.

Steps You Need to Take to Improve Your Business Loan Eligibility

There’s no telling what the lender will think of your business loan application. Perception is a strong phenomenon and is still relevant despite much of the work being handled by tried-and-tested credit algorithms. You can, however, take the following steps to make sure that your application stands a very good chance of finding takers.

1. Make Sure the Foundation of Your Business is Strong & Convincing

You want the foundation of your business to be sound, strong and stable. This is vital not just to secure a business loan but also to achieve profitability in the long run.

When you know that your business has a great shot at success, you should be able to convince other people of the same. To convince lenders, you will need a great business plan – especially when your business is relatively new. A good business plan should be accompanied by a cause-and-action plan. This will involve a good explanation of why your business needs a loan, how you plan on using the funds and what your repayment schedule will be like.

A fully customised proposal with all the relevant details shows the lender that you’re serious about the business. This always works in your favour as lenders perceive you as less of a risk and more of an opportunity.

2. Get Your Business Financials in Order Before You Apply

Many businesses get this wrong – but you shouldn’t. Never apply for a business loan if you don’t have an independently audited, tax-certified financials for at least two years in your possession. These financials typically include the tax returns, quarterly balance sheets, cashflow analysis and profit/loss statement.

It’s common for lenders to also request projections over the loan term. So, it’s a good idea to prepare revenue, profit/loss and assets/liabilities projections for up to 5 years before you approach a lender.

3. Know and Understand Your Credit Scores

Regardless of everything else, most lenders will eventually take a look at the credit history of your business before making a decision. Any obvious red flags on this report – from delayed payments and missing records to frequent enquiries and grave defaults – will hurt your application. So, it’s important to know and understand your credit scores before you apply. This includes building a solid credit history for your business as well as personal accounts.

Less than 20% of all SMEs in the UK proactively monitor and assess their credit scores – you don’t want to be a part of that group!

Some useful steps in this regard are:

  • Checking your business credit score once every quarter
  • Filing for corrections when you spot inadvertent mistakes or errors
  • Using a dedicated business account for your business activities
  • Utilising credit facilities such as overdrafts and credit lines judiciously
  • Making timely repayments
  • Not making ‘hard’ enquiries for credit unless you are ready to submit a full application

4. Let the Lenders Know That You Are Invested

A commonly ignored and often decisive mistake is the failure to demonstrate your involvement in your business. Many businesses – especially the ones not registered as Sole Traders – face this problem, just because there’s no ‘face’ attached to the business.

An easy way to avoid this is to make an offer for a collateral. This shows the lenders that you are willing to share the risk with them. Secured loans are always easier to go through.

5. The Time and Timing – Both Should Be on Your Side!

As a rule of thumb, you shouldn’t go searching for a business loan when your business finds itself cornered with nowhere to go. This will only lead to you ruining your credit history with multiple rejections. Having enough time at your disposal is the key. This is where good business intuition and experience will come in handy for you.

As far as getting the timing right goes, you should be well aware of the market situations before applying for a loan. Has the industry your business operates in been faring poorly of late? Have there been any major changes in the lending landscape recently? What has been the trend in the interest rates being offered over the last six months?

Answers to such questions will give you an idea about whether you should apply for a loan right away or it’ll be wiser to wait for a few weeks.

Getting a Business Loan is a Process and Should Be Treated as Such

Many loan applicants think that lenders are prone to making arbitrary decisions. While true in rare scenarios, this usually isn’t the case. The lenders are also in the business – the business of lending money. The more businesses they lend to, the more money they end up making. So, as long as you have taken care of the ‘risk’ factors discussed in this article, you will have little to worry about when you apply for an SME loan.

Applying Left, Right & Centre – A Big No!

The biggest – and unfortunately, the most common – mistake that SMEs make is to apply for credit with no plan of action. Applying at a dozen places will not only lead to simultaneous rejections that will do your credit score no good but also handicap your business from accessing finance when you need it the most. Before applying for any business loan, you should be aware of what your options are – without making hard credit enquiries.

That is exactly what we at Commercial Finance Network, a leading whole of market broker, do for you. Working with some of the best-known and specialist lenders across the UK, we make sure that you get a loan offer that’s fair, fast and flexible.

The days of blindly accepting the first offer that comes your way are long gone. Let our team of experts curate the best business loan quotes for you. Call us on 03303 112 646 or contact us to speak with one of our Business Loan Specialists today!

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30 per cent of SMEs require funding to survive

New research by leading small business finance provider Liberis finds that nearly 30% of UK SMEs require funding simply to stay afloat.

Across a broad range of criteria made available for business owners, ‘keeping afloat’ scored amongst the top five reasons for finance requests; with ‘purchasing new equipment’, ‘keeping up to date’, and ‘other operating costs’ also scoring highly.

The research also found the most common sum of a request was of around £30,000 and was required to take the business to the next-level.

Today, there is an understood resistance from banks to lend to UK small businesses, prompting concern on the wider impact on UK small business survival rates. Liberis’ research also found there is a perceived reluctance among UK banks to invest in risk and innovation, indicating a demand for alternative financing options.

As the lifeblood of the UK economy, SMEs contribute more than £200bn a year, with this number expected to grow by almost 20% by 2025. Yet, without a vital cash injection, this 2025 vision will be severely stinted.

With 62% of UK small businesses viewing funding as a mechanism to grow, it is worrying that 55% are unable to access this required funding.  Concerned for the growing pressure and expectations on banks and other mainstream finance providers, alternative financing providers such as Liberis, can provide a simple, flexible and transparent funding system to help UK SMEs achieve their ambitions.

Partnering with companies including Worldpay, Sage Pay and JustEat, Liberis has a direct reach over 750,000 UK small businesses and supports SMEs in obtaining cost-effective funding.

Commenting on the report, Rob Straathof, CEO at Liberis, said: “In an increasingly uncertain economic climate, there is a greater need to protect our small businesses and provide them with much needed working capital. Liberis occupies a space which has been left empty by the traditional role of banks and lenders to provide financial support to small businesses. We’re on a mission to support small businesses and help them reach their goals.  From the local bakery to the neighbourhood pub, we’re here to provide a lifeline to keep them afloat.”

Earlier this year, Liberis announced a funding investment of £57.5million to support an estimated 100,000 jobs by 2020. The amount was secured in combined funding from British Business Investments, Paragon Bank, BCI Finance, and Blenheim Chalcot, the UK’s leading digital venture builder; and demonstrates Liberis’ long-term aim in supporting UK small businesses through such partnerships.

Straathof, added: “The traditional channels of business loans and funding are, in today’s ever-changing world, no longer able to operate at the same capacity at which they were once expected. In fact, the total amount of bank overdrafts and loans outstanding to small businesses has decreased by nearly £6 billion of the past 5 years according to UK Finance Q2 2018 research. This has enabled Liberis to protect UK businesses as we aim to provide much needed working capital – not only based on credit history, but business potential too – whilst delivering a trusted financial product through credible partners.”

Source: London Loves Business

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High street bank converts just 8% of SME loan applications

The average conversion rate of one high street bank for loans to SMEs is just 8 per cent, according to SME funding platform Code Investing.

This partly explains the £59 billion funding gap in Britain between money applied for by SMEs and loans agreed.

Across Europe, the figure is even higher with a £630 billion funding gap.

This year £580 billion will be lent to SMEs in Europe.

“Due to regulation, due to banks having huge cost structures, due to SMEs not having standardised data, there’s quite a big funding gap,” said Code Investing CEO Ayan Mitra.

Mitra was speaking at a breakfast briefing on digital disruption in the SME lending market at BNP Paribas Asset Management in London this morning.

For high street banks, one problem is that it takes the same amount of effort to provide larger loans compared to SME lending, said Mitra.

SMEs hoping to borrow money are often left waiting in what Mitra called “the broken SME borrower experience”, with an industry average of 144 days waiting for a loan to be agreed.

Code predicted a boom in SME lending from alternative finance (“alt-fi”).

Currently, alt-fi accounts for 2 per cent of the £11.5 billion UK SME lending market.

Code predicts that alt-fi will carve out a 9.1 per cent market share, worth £52.6 billion, by 2021.

The funding platform currently lends £171 million to SMEs, working with 65 institutions, of which 15 have extended loans to date.

Its conversion rate is 40 per cent of loans applied for, compared with the anecdotal 8 per cent figure from one unnamed high street bank.

By 2020-21, Code plans to lend £2.4 billion to SMEs in tranches of upwards of £500,000, addressing the mid-market SME sector.

“We can provide an add-on function for institutions offering to arrange credit for SMEs,” said Mitra.

“SME lending will move online in much the same way that Google Maps has disrupted the old paper map market. Alt-fi will become mainstream within the next five years.”

According to BNP Paribas, 1.3 million small and micro entrepreneurs access funding from alternative finance with an average loan size of £95,000.

Another 34,000 larger SME businesses in Britain borrow between £500,000 and £1 million.

Stéphane Blanchoz, head of SME alternative financing at BNP Paribas Asset Management, echoed Mitra, saying that the volume of loans offered to SMEs had tripled in the last few months.

Source: SME Web

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SMEs to be allowed to borrow against unpaid invoices

Small businesses will be able to raise cash against unpaid invoices from the beginning of next year. The government reckons this will provide a £1 billion long-term boost to the economy, and that £9.5bn worth of SME invoice finance is waiting to be unlocked.

At present, small businesses cannot raise cash against unpaid invoices from large firms. Big suppliers use not paying invoices as leverage when negotiating with SMEs. New laws will arm small businesses against these unfair contracts, which stop them raising money from unpaid invoices. This will help strop larger businesses from abusing their market position.

Small Business Minister Kelly Tolhurst said: “These new laws will give small businesses more access to the finance they need to succeed and will help ensure they have a level playing field from which to set fair contracts with the businesses they supply.”

Larger businesses often use restrictive contract terms to maintain a hold over their suppliers; small suppliers are often unable to negotiate changes to the proposed contract because they do not have enough power.

From the start of 2019, SMEs can assign their right to be paid to a finance provider such as a bank in exchange for funds, typically 80 per cent of the value of the invoices. The initial advance is received within a few days and the balancing 20 per cent (less fees and charges) is paid when the customer settles the invoice.

Edward Winterton, UK CEO of Bibby Financial Services, was one SME lender who welcomed the news.

Winterton said: “Invoice finance is an essential means of growth funding for more than 40,000 businesses throughout the UK. However, the ban on assignment of receivables imposed by larger businesses can both limit and prohibit many SMEs from accessing much-needed working capital, stifling growth and placing pressure on cashflow.

“The government’s proposals are a positive development and will undoubtedly support the growth of a wider number of businesses throughout the country, in turn boosting economic growth.”

Source: SME Web

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British SMEs net £15m through alternative finance

Small businesses rejected by high street lenders have been able to source more than £15m through the government-mandated Bank Referral Scheme since the scheme was launched in November 2015.

Figures released this morning (31 August) showed in the last 12 months, 670 businesses raised more than £12m of funding through the scheme, four times the amount raised in the previous year.

Since it was introduced in November 2016, more than £15m has been sourced for businesses across the country and more than 900 British businesses have been matched with alternative lenders, the government said.

The bank referral scheme was created by the Small Business, Enterprise and Employment Act 2015 to allow the UK government to keep an eye on businesses and their requests for business finance.

It allows businesses rejected by a high street lender to have their details referred on to designated finance platforms, which will then seek to help them get a loan from alternative lenders.

John Glen, economic secretary to the Treasury, said: “From breweries to beauticians, more than 900 British businesses have been matched with the funding they need to grow since we introduced our scheme.

“Small businesses are the backbone of Britain, yet many give up on their plans to expand if they can’t get a loan from their bank. Now however, thanks to our match-making scheme, they have another shot.”

Under the scheme, businesses are automatically offered the opportunity to be referred to three online credit brokers, including Alternative Business Funding, Funding Options and Funding Xchange.

Each platform provides businesses the access to a range of lenders and products, including business loans, revolving credit, asset finance and invoice finance.

Over the past year, loans resulting from the scheme ranged from as little as £100 to £1.3m and the average size of a loan secured was £17,285.

But Alan Chan, director and financial planner at IFS Wealth and Pensions, warned businesses should read the fine print of Bank Referral Scheme loans to avoid making a “costly mistake”.

He said: “The scheme is a good idea in principle because banks aren’t the only place to get funding and there are a lot of specialist lenders that are not on the high street.

“As with any loan, it’s important to fully understand the repayment terms and to read the small print. If there’s any doubt as to what they’re getting themselves into, then they should always trust their instincts and get some professional legal advice before they make a costly mistake.”

Alice Hu-Wagner, managing director for strategy, economics and business development at the British Business Bank said: “One of our key objectives at the British Business Bank is to encourage and enable smaller UK businesses to seek the finance best suited to their needs.

“Just over half of smaller businesses consider only one provider when they need funding, however, with over a quarter putting their plans on hold or giving up altogether if they aren’t offered the full amount they were seeking.”

Source: FT Adviser