Small Business Enterprises Lending Trends in the Wake of Brexit in the UK

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As a result of the continued looming economic uncertainties of the Brexit referendum, it has become increasingly difficult for small businesses to garner the support they require in order to secure loans for their trade. In light of the current market atmosphere, several British charities and financing companies have been publishing reports on how small and medium businesses can prepare themselves for taking out a loan. This article will examine the data from government wings and juxtapose it with the information supplied by financial advice companies. This would provide a clearer picture to see what part of the information provided is relevant to the setbacks faced by small business owners and to the extent they are following up on the advice.

A recent comprehensive study carried out in 2016 found that during the last year, there has been the largest increase in the number of small business being registered in the past five years. The survey, undertaken by a large business financing company based in the UK, found that while there were fewer large businesses being registered compared to the previous year, the number of small businesses has seen the greatest increase since the recession eased off. There has been an addition of more than 97,000 small and medium businesses being registered with the authorities during 2016, an increase of nearly two percent on the previous year.

An analysis provided by the Citizen’s Advice Bureaux report published at the end of 2016, showed that this increase in small business growth has been primarily supported by the active availability of funding from a number of sources. The report published showed an increase in the number of calls received by the UK based charity on a year on year basis, with the largest increase seen in 2016. However, the report noted, most of the calls to the organisation were not because the small business owners had fallen into any financial trouble, but they sought advice on their financial management plans involving taking out loans.

The Procurement Department of the British Money Advice Service (MAS), confirmed their own findings with that of the Citizen’s Advice Bureaux. This department specialises in providing professional advice to individuals and small businesses in their plans to determine whether or not a procurement is feasible according to the customer’s unique situation. According to this organisation, the most common advice their Procurement Department had to deliver was to small business owners with regard to financing capital for their trade. About 68 percent of all such calls were related to understanding if it was better to secure funding from a bank or any other financial lender.

Analysis of Increase in Small Business Activity

A major online British financial consultation company has correlated the data from the government figures showing an increase in small business start- ups and the information supplied by public support organisations. They concluded that due to the ease of finding financing options for small businesses, it is more convenient for entrepreneurs to secure the funds for their trade.

This can be elaborated by the fact that a small business would not require a great deal of funding from lenders to either expand, or even start up their ventures. Therefore, lenders would not see a greater risk while determining their application for financing as compared to larger businesses. It can be reflected from the fact that although small businesses have seen a remarkable increase in numbers in the country during 2016, the momentum of large and even medium businesses have decreased. According to government figures, 84,000 out of the 97,000 new small and medium enterprises (SME) established during the last year, belonged to small businesses.
According to a Bank of England’s explanation about the criteria for approval of loans for small businesses, that lenders take into consideration the personal credit history of the applicant. This personal credit check of a small business owner makes up a part of the assessment that lenders undertake in order to gauge the feasibility of approving a loan for the company.

This overlap of financial checks has played to the advantage of small and medium business owners with an increasing number of banks and other lenders are becoming more and more reluctant to approve loans to large companies. This is primarily because a larger company would require a larger sum of money in order to realise their financial needs, therefore, posing a risk of a large default.

With Britain’s potential exit from the largest integrated economic cooperation in the world, there is an increased macro- economic risk for large businesses to made bold expansive decisions. This includes approval of loans to large companies that are willing to take a chance for either expanding or meeting expenses. Small enterprises have seized the opportunity and thrived in the business void left by their larger competitors.

Precautions for Small Business Owners While Taking out a Loan

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After the economic recession began easing its grip on financial progression in the U.K. in 2013, businesses began resuming their activity in expanding. However, not long after the economy started seeing a positive growth after a hiatus of several years, the uncertainty of Britain’s membership in the European Union created new hurdles in the financial planning of large corporations. This renewed slowdown in major companies’ trade activity was not mirrored by small and to an extent, medium sized enterprises. The Banks of England has recently published a host of economic performance data in the country, which also contains information about small businesses growing at a pace that has contributed greatly in keeping the economy afloat. As a knock on effect, public spending has also been boosted and the banking sector has reported a mushroomed lending activity.

Small business have therefore, taken full advantage of the number of financing options available to them which are, in turn not much use to larger companies. These include taking out small bank loans, personal loans and in some cases, short- term loans. All these financing options play an important role in the function of a small business as the capital required by it would not be very big as opposed to a larger enterprise. This has led to an additional 84,000 small businesses being registered in 2016 alone. However, as banks and other lender have increased their willingness to provide loans to small businesses, it has become even more important for them to understand when to utilise their financing options and when to employ their own resources.

Overview of Small Businesses in the U.K

In order to establish the grounds for any loans to be accepted or not, the environment that small business operate in must be constructed. This would depict a clearer picture of when and how it is advisable for small businesses to secure a loan.

Small and Medium Business Enterprise (SME) have recently had a very favourable environment to grown. However, as more and more financers are offering attractive lending packages to SMEs, the criteria for accepting one has to be kept in focus.

In 2016, there were more than 15.7 million employed in SME businesses in the country. That is a massive 60 per cent of the total private workforce in the U.K. According to the government data, 4.2 million small companies had only one (the owner) as an employee. With a competition that large, it would be essential to remain competitive in order to turn a regular profit. However, it also opens up non- traditional business financing options.

In order to approve a loan for a small business owner, the lender would also take into consideration of their personal finances and credit history. This is because in a company this size, any change in the owner’s financial circumstances would have a profound effect on the company.

While The British Business Bank, a government body, welcomed the improved financial assistance availability to SMEs, it also cautions against their unnecessary usage. Keeping this point in view, the Money Advice Bureaux, a charity based in the U.K., has termed out a few handy pointers for small business owners to help them with their lending plans. Their advice, along with a few other opinions from financial advisors, can be summarised in several headings.

Making the Decision to take out a Loan

This point might take some thinking and would require plenty of planning. A small business owner might even be required to consult a financial advisor such as Money Advice Service (MAS). This would help the business owner to decide whether or taking out a loan is absolutely essential or whether it can be done without. Saving small amounts up over time can often provide a viable solution to an owner’s needs. However, if having a savings account would not be enough, the owner would have to gauge the importance of what they require the loan for. Whether it is a business expansion or operational expenses, the viability of the loan would have to be weighed against the importance of not having to be in debt.

Although, if the financial returns from the investment brought in by the loans is significant enough, it might be best to seek the financial help after all.

Selecting the Right Lender

This section would be of the greatest importance to a small business owner as it will be determined by the urgency of their financial need. A personal loan from a bank or another credit provider would most likely cover the amount required for a small business. However, such loans might require time to approve and more importantly, a personal credit check of the owner.

If the owner has a poor credit score they might be rejected for the loan or even be required to pay higher premiums. In such cases a short- term loan might be best suited for the purpose, if the owner is confidant in their ability to make repayments.

New and Alternative Lending Routes for Small Businesses

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With a rapid influx of various lending sources making inroads into the daily British lives, providing loans has become a lucrative business model. The Small Business Finance Markets Report shows a rapid increase in alternate financing with a 75 per cent to £1.32 billion by the end of 2016. This rise is only depicting loans provided by alternative lenders to businesses and personal loans are estimated to be close to matching this figure. The Bank of England has suggested that the government should be increasing the attention it pays to alternate lending and providing them with public exposure to generate borrowing confidence. Currently, about 80 per cent of business loans are provided by banks, with alternate lending, like peer to peer loans, making up only a small portion of the remaining 20 per cent, in spite of its growth. According to a recent survey conducted by an online finance information company, the primary reason for the lack of pivot towards alternate lending sources for small and medium sized businesses is a general lack of information as well as the presence of misinformation. This article will highlight some of the trending alternate lending sources and dispel several myths surrounding them.

Help to Grow Scheme

The British Business Bank, a government entity run independently, had setup a £100 million pilot fund small businesses, enabling them to increase their growth. According to their report published in 2015, about 46 per cent of all small business owners in the U.K. are planning on expanding their revenue base from their trade. The report further states that about 20 per cent of these businesses would require financial help in order to realise their growth.

This scheme was launched primarily to facilitate the small businesses that have no tangible collateral to offer lenders, or are facing difficulties securing a loan from a traditional bank. This could be due to a number of reasons including the bank deeming the business too risky to comfortably provide financing, or the amount required from the bank is too little.

As this pilot scheme proved to be popular with small businesses, the British Business Bank has decided to increase its lending options to widen its assessment criteria, allowing more traders to benefit from its loans. The Bank, additionally has increased its funding base by forming associations with other lending sources. The government has pointed out that these types of schemes are necessary for the continued growth of small businesses in the current economic atmosphere. Currently, only about 3 per cent of small businesses in the U.K. eventually scale up to become medium sized companies (that employ more than 50 people). With the rapid expansion of the Help to Grow Scheme with the £400m Northern Powerhouse fund allocation for the north of the country, this meagre percentage is hoped to grow.

Online Vendors Expanding Into Lending

During the past couple of years there has been a growing trend of online retail giants like Amazon and Alibaba deciding to finance small businesses by extending loans to them. Recently, companies like PayPal and Amazon has inaugurated their lending services in the U.K. allowing small businesses, especially sellers, to increase their productivity.

However, these programmes are still in their infancy stage and lending is still restricted to sellers who meet certain conditions that are novel to the company. For example PayPal would agree to extend loans to small businesses that have a long and established relationship with the company.

Short-Term Loans

This type of lending is primarily directed towards personal loans, however, since the financial situation of a small business owner and their business is often intertwined, it could be possible to take out a quick loan to meet certain immediate financial obligations.

This type of lending usually carries a hefty interest rate and should be considered as a back- up plan, rather than a regular means to finance the business. However, this type of lending has the advantage that if a business has been rebuffed by a bank for financing, a small business would always have this option as compared to the more limited paths available to larger companies. It also has a much quicker processing time and would not require the lender to secure the loan to an asset.

Mid-Term Funding Companies

A number of lending companies offer loans that can rival that of banks, however, their interest rates are generally higher. Most of these companies have a prominent online presence and can be compared using comparison sites and advice organisations like Money Advice Service.
These lenders usually offer loans within a few days of approval and although are tagged with a higher interest rate than banks, it is far lower than that of short- term loans. These loans are also customisable according to the financial requirements and situation of a small business.