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.
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.