Looking for alternative funding to banks;
Smallbusiness, 25 Jun 2013
The reluctance of the banks to lend is well documented, and entrepreneur James Benamor argues that looking for an alternative is now the order of the day.
On average micro-businesses need just £2,143 to set up. Doesn’t sound like an unreasonable amount in the grand scheme of things. But with more and more businesses unable to get off the ground, where is the weak link?
In recent years it seems banks have forgotten why they exist – to provide a service to the community. The scandalous truth is that, despite billions of pounds worth of taxpayers’ money being given to them, they're not lending to these entrepreneurs who are the life blood of our economy. Computerised credit scoring systems have shaken the lending industry, turning away thousands of businesses who will often go on to fail before they have even been given a chance.
For many small business owners, once they’ve been turned down by their bank they need to find the money elsewhere, sometimes resorting to extreme measures like taking out a payday loan. Our latest research showed that just 20 per cent of micro-businesses are funded through a bank loan and one in six have had to resort to a payday loan to fund their business. Just one in ten were able to secure a loan from the bank in their first year of trading with a third having to rely on their business acumen to get them through. It seems absurd that businesses who are starting out with nothing, are being screwed over by 4000 per cent plus APRs, which are undoubtedly to blame for their demise.
Yet what happens to those micro-businesses that don’t manage to secure a bank loan, and who don’t want to resort to a payday loan? Our latest research shows of those people who have had businesses fail in the past, a fifth believe it was because they were unable to get a bank loan.
What often gets overlooked are the impracticalities that micro-businesses, which are more often than not one-man bands, have to go through to be at the stage where they can present a case to the bank. They often need to produce detailed forecasts, show accounts, profit and loss and a lot of the time, they're just not equipped to do this. Even many peer-to-peer lenders require this type of input, asking borrowers to put a case to the lenders (the investor). It’s clear banks are dishing out cash to bigger, more established businesses who can present realistic forecasts based on previous profits yet failing to give start-ups a chance. It's clear that the ordinary hard-working people; the window cleaners, the mobile hairdressers, the freelance IT consultants, the driving instructors, (to name just a few) aren't getting the help they need and deserve.
There have been attempts by the government to inject some cash into small businesses but these initiatives seem to have been short-lived. The Funding for Lending scheme was originally introduced to give the economy a much-needed boost and give banks the push they needed to start lending again but it clearly hasn’t worked so far. The amendment to the scheme announced last month begs the question – will it be any different this time round? The Treasury’s new incentive measures of allowing banks to borrow an extra £5 from the scheme for every £1 they lend to an SME, and then up to £10 in 2014, when the scheme is extended, should make a difference in theory but the proof is yet to be seen.
What strikes a chord is that a staggering four in five micro businesses aren’t aware of the lending options available to them. There certainly needs to be more noise within the industry about the alternative forms of business funding available, whether that's guarantor loans, peer-to-peer or crowdfunding, so that small business owners don’t feel forced down a route which could jeopardise their whole business.
It’s vital that micro-businesses spread the word that being turned down by a bank is not the end and it certainly doesn’t mean they should run straight to the nearest payday lender. While there is still a lack of awareness about alternative lenders, unfortunately for the time being, businesses need to do their own digging around for an alternative lender who will support their business venture.
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