Having a business loan application declined, or being informed that your overdraft has been halved overnight, is not a nice moment in the history of your business. That crucial cash injection that could make all the difference just will not be approved, or in some cases there is the horrendous surprise when, after years of being the perfect customer, the bank wants half your overdraft paid back as a matter of urgency, which the business doesn't have. What can a business to do in these scenarios?
In many cases, not all is lost. Below is the 6 step process you can follow in order to move forward:
1. Stay positive, and do so for good reason.
It's highly likely that you are feeling down, frustrated, or even worried sick about the future of your business.
It is important to understand two things quickly. Firstly, the bank may not be the only lender or funder that you could approach. The non-bank business finance marketplace has, and is, undergoing a rapid change with many new entrants offering a variety of products, with approval often based on different criteria to the banks. Secondly, just because the bank said no, it does not mean an alternative lender will necessarily say no too.
The main point to understand about the banks is that whilst they are typically offering the cheapest form of finance, they are also the most conservative of lenders as a result. Most would agree this is right considering they lend using the general public's deposits! During the last ill-fated credit bubble of a boom, we became conditioned to believe that cheap finance should be for everyone, regardless of the risk, and that is not how finance usually works. Finance is a risk and reward game. Low risk, low reward(interest), and that is the game the banks are in.
Furthermore, whilst experience is important, the banks only really look at one measurement, which again is aligned with a low risk approach; debt serviceability. That is to say, can the business repay the loan each month, does the business have enough surplus each month to repay the loan should costs go up/sales go down, and does the business have a track record profit-wise, over a period of time, to suggest the likelihood of the loan being repaid in the future is strong?
So banks, due to their low risk profile, are essentially looking to lend to fairly successful, established businesses, that typically can provide some security, and are deemed of little risk of failure. Whilst this doesn't help in the short-term, it is important to gain an understanding of where the banks are, and to also understand that there are many more options available to get funded than there were even 3-4 years ago. Stay positive!
2. Conduct a Review, and see if a small tweak can work
As the cheapest source of funding in the marketplace, if you were close to an approval it's important to see if you can change anything to improve your situation. With so many different businesses in different sectors its impossible to be generic here. However, there might be some answers. For instance, can you change to a cheaper supplier so you pass the bank's debt serviceability criteria? Can you change terms with a supplier so you pay them later, which could remove the need for a larger overdraft? Can the Directors invest monies in buying a commercial property, so as to get access to a commercial mortgage of say twice the amount invested? Each situation is different, and a specialist may be able to spot an area that could be worked on.
3. Find out if the alternative lending marketplace will help
As mentioned earlier, the number of lenders and funders you can approach has expanded enormously. Some are general business lenders, and some are very specialist, providing funds for such activities as paying deposits on stock purchases, buying leases, financing service businesses like pubs and restaurants, funding property developments, flips, renovations, or financing long invoice periods.
This marketplace is very different from the banking space because the criteria can be very different, and because of the differences, these lenders are taking higher risks to lend. Some will lend to business with bad credit, and some will lend to start-ups for instance. Some will lend to businesses who make a loss but can put up some form of physical security. As a result many will charger higher rates of interest over a shorter period, provided the business should profit by having the finance in the first place. This is absolutely key. In terms of risk/reward the physical goods sector is a good example. For instance, there is a much greater risk of theft, damage or deceit than there is with land/property, which is why rates of interest are higher. However, where a bank will not fund stock purchases, an alternative lender might, providing a strong margin is in place, and the likelihood of orders are strong. This is only one example, but it is well worth the time spent to get to know what options exist and how they might help your business and your specific sector.
4. Compile the possible funding options
The next step is to start talking to different funders and specialists about what is possible. Get online and start looking for lenders that might work in your sector, or providers of specialist products, such as alternative business loans, or overdrafts.
You will find that some will probably be interested, and some won't be. Each lender, or funder, has a different risk profile, and criteria for deciding whether they would like to lend. What's important is that you speak to as many routes as possible, so that you can start compiling what opportunities exist.
5. Compare the options properly
Absolutely make sure that you have an understanding of each finance product, how they compare, and what you are actually trying to compare. This is an area, in my experience, which needs some improvement. The reality is every lender will only ever sell themselves, and are unlikely to try to compare themselves objectively to the rest of the marketplace. In some cases they can't. In particular, understand the fee structures, when fees are paid, and how. Also have a good handle on how lenders secure themselves against your business. For example, there are different types of Personal Guarantees. How do your options compare on that?
6. Go for Objectivity over Subjectivity
Whilst you may be excited to see that some new funding routes do exist, it can be a daunting, and frustrating process. What you now have is a choice between making this an objective decision making process, and a subjective one. Dealing direct with lenders only means your evaluation and decision making process can be greatly prolonged, and prone to errors. As mentioned above, most lenders will only look to sell themselves, typically won't know who else you are speaking to (unless you tell them), and usually are not great at comparing themselves with their competition. Even if they do, it will be slanted towards the more favourable aspects of their product. The question is: do you want to approach a lender once you've ruled out competitors on an objective basis, or do you want to approach them ad hoc and hope you can compare all the products correctly?
A non-fee charging business finance broker gives you a number of advantages. Firstly, a good one should provide your business with an objective overview of the marketplace, so you don't have to go through it yourself. It may be that you end back at a lender you could have gone directly to, but now you can engage with them with confidence, knowing they provide what you want. Secondly, they may be able to educate you on new sector products, that you did not know existed. Thirdly, they will be able to show you have to compare aspects of each products properly, so can more effectively decide which avenue suits you best. Thirdly, a good specialist will have access to a number of different sources, many of whom do not advertise, and cannot be found on Google. Fourthly, in most cases, a good specialist will not charge you a broker fee, as they will be getting a part of any arrangement fee that would already be getting paid. It is not always this case, but in most cases it is possible! Ultimately, good business finance brokers save you time and energy, and are more likely to direct you to the right type of funding than going it alone.
So if the bank has said no, or you're thinking that finance is not possible, it may be time to think again. Get started with this 6 step action plan, and by the end of it, you may find that the crucial funding you need is available after all.
If you want to find out what the market offers, as quickly as possible, fast-track your funding search by clicking on the link below:
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About Chris Davidson
Chris Davidson is Managing Director of Discover & Invest Ltd.
He believes passionately in providing businesses with market-leading financial insights that have a positive impact on the bottom line. As a result, Chris helps get the best rates and terms available at any one time.