Being an ex-banker looking after small businesses, and now a small business owner myself I have seen working capital management from both sides.
Not so long ago, if your bank turned you down for an overdraft, that was the end of the matter – there was nowhere else to go short of friends and family. Now, the traditional banks’ monopoly on providing overdrafts to smaller, ambitious businesses is no more – thanks to the establishment and rapid evolution of an alternative finance industry that is eager to provide the competition that many, including those in Government, have said the financial services industry badly needs.
The beauty of alternative finance is that, where an overdraft from one bank has always been pretty much the same as an overdraft from another, there is now a wide choice of flexible options available to suit different circumstances. There is genuine competition in the market place. No longer are small business owners at the mercy of banks, which have demonstrated an alarming tendency to alter terms, charge fees, reduce facilities or, in some cases, even withdraw them altogether if the economic environment turns nasty, but things are changing.
Now entrepreneurs have options
Growth Street, for example, provides business loans of up to £500k and only charges interest (average 1.3% per month, 15.6% APR) on what is drawn down. The borrower is free to borrow and repay as often as they like within the agreed terms of the facility.
Another small business loans specialist is Boost Capital which will also lend up to £500k, even to so-called cash businesses such as pubs, restaurants, hotels, garages and retail. Boost is not overly concerned about what the money is used for – it could be for marketing, an equipment upgrade, expansion or simply to aid the cash flow of companies with a seasonal bias. Nor is it particularly focused on financial history; it is only interested in the current health of the applicant’s business. Naturally, that approach comes at a cost when it comes to interest rates, but the important thing is that finance can still be available.
Elsewhere, Credit4 will provide flexible finance facilities for growing SMEs where capital amounts can be withdrawn and repaid throughout the term up to the agreed limit. Interest is paid fortnightly with the outstanding principal sum being payable in one lump sum at the end of the term. The facility is therefore designed to recognise the practical reality of fluctuating trading patterns, rather than insist on fixed monthly payments, irrespective of how the business is faring.
Credit4 also offers a Dual Growth Funding facility: 50% in a fixed term loan and 50% in a flexible revolving facility. Both products only require directors’ guarantees as security.
Yet another model is provided by Just Cashflow, which does not seek a long-term commitment from borrowers, but will charge interest daily for a revolving credit facility. Crucially, it will lend against the security of a wide variety of assets, ranging from individual invoices to whole debtor books and from commercial property and fixed assets to pensions.
The marketplace now offers an enormous array of alternatives, but the common denominator is that, because the providers process and deliver their facilities significantly on-line, financial information needs to be available, accurate and easily presentable to them. According to Growth Street, SMEs normally struggle to access working capital for two basic reasons: first, the reluctance of the banks to provide it; and, second, because companies sometimes find it “difficult to present their financial information in a way that would maximise their chances of a successful credit application.” In short, successful borrowers will always need to produce good quality management accounts and realistic cash flow forecasts, which just happens to be Float’s speciality.
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