Former Prime Minister David Cameron once described small and medium businesses (SMEs) as the "lifeblood" of the UK economy. His Business Secretary, Vince Cable, went a step further and declared SMEs to be the future of business. With such accolades, you would expect entrepreneurs to have an easy time getting capital to expand their businesses.
Yet nothing could be further from the truth. After the 2008 financial crisis, traditional lenders became reluctant to finance SMEs, a trend that continues to this day. However, alternative lenders stepped in and filled the gap left by banks.
According to a Future Trends on UK Banking report, alternative lending is one of the fastest growing sectors of the finance industry. In fact, by 2020 the sector will be worth £10 billion, the report adds. However, even if the sector is booming, non-bank lenders like Merchant Money are only one of a few FCA authorized lenders to offer loans under £25,000 to sole traders and unincorporated partnerships. And while alternative lenders make it easier for SMEs to get funding, you still have to be financially viable and follow the steps.
Here are some tips for SME owners looking to secure financing through an alternative funding source.
Before you meet any potential investor, be clear on how much capital you need to borrow and the period of time you need to pay it back. Also know where in your business this money will go. Having this level of clarity inspires an investor's confidence and increases your chances of partnering with them. Only remember that clarity comes if you have a solid business plan in the first place, so ensure you have one.
You may have a solid business plan, but without the assurance that they will get a return on their investment, investors will not put money into your business. So, prepare to demonstrate your company's financial strength to investors. This means giving them an analysis of your company's revenue through the years, and detailing the factors behind its growth.
Keep in mind that they will be keeping an eye out for any potential warning signs, the most common being complex bookkeeping methods. A savvy investor knows that underneath all that complexity often lies poor performance.
Another red flag is if your company is not a single holding company, a sure sign that it has a complex company structure that is difficult to understand. This makes it a financial risk. The last sign is if your business has many small loans, which points to financial troubles.
Be as transparent as you can about your company's strength and future prospects. Detail any past mistakes and failures, such as bad debts. Contrary to what you might think, being transparent does not paint either you or your business in a bad light. It does the opposite.
Investors know that they can trust you, and that your business is capable of overcoming problems. They also know of the problems to expect in the future, and can therefore make an informed decision on whether to invest in your business or not.
After the 2008 global recession, traditional lenders make it harder for SMEs to access credit. Were it not for alternative lenders, SMEs would still have it rough today. But before entrepreneurs can get access to this alternative, they must prepare in advance.
They must know how much money they want, how they will use it, and how they will pay it off. And when they meet potential investors, they must demonstrate their business's financial strength while being as transparent as possible.