You don't have to wear a tie to visit the bank eager to prove you are capable of running your own company. With so many alternative lenders offering better products and terms there are smarter ways to use a business loan than going to the bank.
Not only do alternative lenders offer finance based on different criteria than the banks, but there are so many lenders in the market offering a range of tailored financial packages it isn't even necessary to visit your bank.
Why Use An Alternative Lender?
Business loans from alternative lenders are growing at a higher rate than traditional bank loans because they have changed the way borrowers access finance.
Alternative lenders use vastly different criteria when qualifying you for a business loan. It means you get quicker decisions than what you‘d expect from traditional bank loans.
Some lenders have reduced this waiting time to a matter of hours and in other cases, less than 24 hours.
The reason why they can process these applications so fast is the way they approach your application. They take a look at your business financials, creating a clear picture of your background, how you pay debts, the industry sector you are in and your future financial projections.
Based on this they can offer you a quote without referring it back to other departments for approval and sign off, which would otherwise delay your loan application.
Inclusive Business Loans
Business loans for everyone. Acceptance that every business, however small, has the capacity to pay back a business loan.
Traditional banks may cut short your loan application based exclusively on credit ratings, whereas alternative lenders will look at the wider picture. They might not offer huge loan amounts (although some do) and interest rates might be a little higher, but they manage to offer practically any business some level of funding. Usually a lot more than you‘re expecting.
Better Credit Scoring Criteria
Alternative lenders are able to offer most businesses a loan because of how they calculate your credit score. Credit scoring isn't the be-all and end-all of a loan application. Your business has a lot more variables to take into consideration, which alternative finance are increasingly prioritising over your credit rating.
Alternative lenders are also quick to explain that their credit scoring and rating methods are more sophisticated than the banks’. They don’t have to deal with numerous different branches or operate costly IT systems or even take into consideration their capital or liquid assets. This makes them more efficient than banks and therefore means they can offer better or equal rates to borrowers.
Best For Short-Term Finance
Most businesses aren't looking to secure hundreds or thousands of pounds, many are interested in small, short-term loans. Banks often focus on larger loan sizes because a bigger loan usually means bigger profits for them. But many small and medium sized businesses need smaller loans of tens of thousands (not hundreds of thousands) to get them where they need to be.
The speed of agreeing alternative funding is a big benefit, as is the convenience of having an online account and not having to visit the bank to discuss changes.
With alternative finance everything can be done online from application to amendments, which is a lot more business-friendly than having to fill out forms and wait forever for a decision.
Businesses (like the rest of us) have turned to online search for finance and they are more likely to find acceptable loan terms from an online alternative lender, compared to a traditional bank.
Access to Private Equity/Peer-To-Peer Funding
Look closely at the funding behind alternative lending and you'll find investment banks, commercial institutions, private investors and even government-backed funding agencies.
Alternative loans have become so established that even traditional banks are offering to fund the alternative finance industry itself, instead of offering equivalent loans directly.
There have also been initiatives set up by the government (like the Business Finance Partnership) which has invested hundreds of millions into the lending market. Much of this has been matched by private sector investors who are much more willing to invest in SMEs than the banks.
How To Use Your Business Loan
If you've managed to get an unsecured business loan, well done, because it isn't always easy for SMEs. Having finance can bring a bunch of other problems - like how to use that funding in the best way possible for your business.
There are two key questions to ask before you get the finance you want:
- How will I use the loan?
- How am I going to pay it back?
How you pay back that loan is largely determined by what you are going to use the loan for. You need a well-thought out plan on how to use your unsecured business loan, which may or may not be a part of your business plan.
One capital finance company who did their own research on how their lending was used by their customers makes for some interesting reading:
30% - Buying inventory
28% - Expanding the business
19% - Administration and overheads
12% - Capital investment
7% - Refinance and debt consolidation
4% - Other reasons (withheld)
Getting credit to purchase stock and product is also known as Inventory Financing. This type of funding is great because it serves as its own source of collateral. It is a solution for any business that has seasonal fluctuations or when it needs to take advantage of short time periods to sell an increased amount of product and fulfil immediate supplier payment terms.
Expanding the business
Three reasons for expansion include developing new products, investing in new markets and building or moving into new premises. Increasing your productivity can also mean expanding your workforce (both junior and senior positions) and investing into research and development. Building or moving into new premises means relocation costs and buying new equipment.
Administration & overheads
Not to be taken lightly, ensuring that there is enough money in the bank to keep the electricity on is a fundamental business requirement. If you're not sure how much this might cost you, then try calculating your overheads.
Gaining additional funding to achieve your business aims is often the most difficult kind to achieve. It can either involve buying fixed assets such as machinery and plant or just aligning the business and acquiring the expertise it needs to further its own business objectives.
Capital investment is the bedrock of long-term finance; it is finance that is used to future-proof business operations and pave the way for expansion.
Refinance & debt consolidation
It makes sense that borrowing money from a wide range of different lenders isn't usually as economical as having it bundled up into a single loan, with a single repayment.
Consolidating debt often includes reducing repayment and taking advantage of lower rates. But while it can be more straightforward to manage your debt in this way, it can also result in higher interest rates and increased overall repayment periods.
Being Smart With Alternative Finance
You must ensure that your finance works smarter for you. Here are some key considerations on maximising how you use your loan as well as how to pay it back.
Earmark your loan in a separate account
Putting your loan in your current account makes it tempting to be used for ‘other’ purposes. If you transfer it to another account you are more likely to only spend it when you need it, especially if the loan was taken out to assist with overheads like wages or utilities.
Temptations to overspend
Having a large loan amount in your bank account shouldn't be the green light for frivolous spending. You might have plenty of funds available but for a specific reason, not to cover careless purchases. Spending here and there can be the most destructive thing to happen to your company after receiving the go-ahead for a business loan.
Overhaul the rest of your finances
Now, more than ever,is the time to keep a good eye on the rest of your finances. Regardless of the funding you have received, it will pay going forward to ensure that you have a tight fiscal control on your current finances. Monitoring incoming and outgoing expenditure will minimise the need for further borrowing.
Anticipate future funding requirements
However, monitoring your finances aside, this doesn't mean you aren't going to need further finance in the future. If your loan is principally for one of the reasons set out above, then it won't preclude you from being subjected to unexpected financial problems. Always plan ahead for the next time you need credit and be prepared for the unexpected.
Don’t hide from debt
You will, at some point, struggle to make repayments on your loans (and other debts). We all do. It’s always best to remain upfront with your lenders and be honest when things get tough.
There is always something they can do to help you. They might offer more flexible terms, a payment holiday or offer to restructure your debt. They too would rather get paid than have to write off bad debt.
Use your loan like a private equity fund
Another option is to treat your business loan in the same way a private equity investor would. In private equity deals, finance is often distributed in chunks. When certain goals or achievements have been established, more equity is released.
This is done to ensure steady and consistent growth where finance is used in specific ways as per business planning and projections, but also to protect the money of the investor, to control the flow and incorporate a kind of investment safety valve.
Your business can essentially use funding in exactly the same way, creating your own funding pool and distributing money. You can do this in two ways; either by applying for the full amount of what you need long-term, and distributing funds as needed; or by splitting up your business loan application in stages, only borrowing what is needed at certain points.
Paying Your Business Loan Back
The smartest way in which you can use your loan should also include how to pay it back as quickly as possible. Borrowing money incurs fees and interest charges, so it's best to try and pay it back as soon as possible.
As with all other types of debt, business debt becomes more expensive the longer it is taken out because of interest rates.
Ideally, you will be wanting to get your business loan paid back as soon as possible. The best loans are ones that also allow early repayment without redemption charges.
If a loan is able to be repaid straight back then there wouldn't really have been any need to have the loan in the first place. Making good use of the loan (so long as you have planned well for it) can reduce the time taken for your company to be in a position to repay it back fully.
Getting a loan during a business crisis
These aren't always the best circumstances in which to take out a loan but are often necessary. Most businesses will find they cannot always 'buy' themselves out of a financial crisis. It usually takes a combination of planning, realignment and then funding.
Keeping finances in order before applying
Ensure you know where your money is tied up before you apply for your loan. This helps you calculate how efficiently you can pay it back.
Monitor your finances to avoid using it for unintended purposes and consequently applying for additional funding too quickly.
Capital is hard to come by, and when you get it, you shouldn't waste it. You should have a clear plan on how to make it work within your business - probably as outlined above - and depending on economic forecasts. You may not be in the same position again to access funding, so getting it right this time around is important.
Getting accepted for a business loan is often the hard part, but if you have been fortunate enough to access external funding, then it is important that you get this finance to work as hard for you as you did to get it.
If you have any questions on how alternative finance can help your business achieve its goals, call Access Commercial Finance.