Trying to get finance for a small business is much easier if you know the options available - read on to get a run-down on the possible sources for small business loans. That doesn’t quite accord with the experience of many small businesses, which have found themselves turned away on grounds such as the business not being profitable enough, even when the business has an excellent payment record.
Perhaps also, many small business owners simply don’t bother applying to the big banks for a loan, because they doubt they will be accepted. Luckily, there are a number of alternative lenders that may have a more flexible attitude.
This is also called Marketplace Lending. A large number of investors will look at a business lending proposal and will then decide whether they want to lend the money, and what interest rate they would want to get on the loan.
Probably the best known of these lenders is Funding Circle. This was the first peer-to-peer lender to cater solely for businesses. It started in the UK, but now has operations in Europe and the US.
The investors range from big organisations to private individuals. Funding Circle has even received money from the government for lending to small businesses.
Small business loans from peer-to-peer lenders
The business owner applies online and then the lender’s credit assessment team gets to work. You should hear back within a couple of days whether you can proceed to the marketplace. If you are successful, the next thing that happens is that your loan is risk-rated and put into a risk band. Obviously, the higher risk the loan, the more interest the investors will want. At this stage, the term of the loan is also set.
Your loan is then advertised in the online marketplace, at a given interest rate. The money may be put up by one investor, or by a whole host of small investors.
The terms vary, but on many peer-to-peer sites, the business has to pay a fee for the loan facility before getting the loan - 2% is quoted. The investors also pay, but usually a smaller amount.
Once the loan is fully funded by the investors, you accept the conditions online (obviously print them out and read them though carefully first). The money is transferred within a day or two. In fact, the whole process is far speedier than with a traditional bank. This may be a great advantage if there is a business opportunity you want to take advantage of - for example the opportunity to buy some machinery at a great price.
The snag about Funding Circle for example, is that it doesn’t lend to start-up businesses. So what can they do to get the money to get their businesses off the ground?
Start-up loans from the government
Start-ups can benefit from government loans of £500 - £25,000, as long as the business has been trading for less than two years, and as long as the business owner hasn’t got debt problems already.
These are pretty good value loans, because the interest rate is fixed at 6%. Businesses can borrow the money for between 1 to 5 years, there’s no application fee and no charge if you repay the loan early. A new business will find it hard to get a better deal than this.
In some parts of the country, you can even get grants that you don’t have to pay back.
Government-backed loans for existing SMEs
If your business is not a start-up, and you need a considerable amount to fund investment or expansion, you may be eligible for help from the Enterprise Finance Guarantee (EFG) scheme.
The government uses the British Business Bank to finance the loan, and the government acts as the guarantor on up to 75% of the loan. This should make it easier for businesses to borrow the amount they need. Loans can be for anywhere from £1,000 to £1.2m. The good news is that SMEs that don’t have assets such as buildings or vehicles that they can pledge against the loan, are still eligible for this borrowing scheme.
Lending comparison sites
In future, when banks turn down a loan request from an SME, they will be forced to give them details of other ways they might get financing. These will include referring the business to sites such as Funding Options, Business Finance Compared and Funding XChange.
These sites are not peer-to-peer lenders like Funding Circle. Instead, they allow you to enter the loan you need, and see what’s on offer from other lenders.
This is a great step forward, and means that at last, small businesses may be able to benefit from some of the flexibility we see in the consumer market.