SME Business Funding: Perception vs Reality

A decade after the global financial crisis shook SMEs to their core, businesses are finally emerging from a more conservative approach to business funding. They are embracing the risks associated with debt in order to grow and expand. Tens of billions of pounds are now being lent annually as financial institutions are approving eight out of every 10 applications.

What’s most interesting is the fact that fintech has given SMEs a lot more options than just traditional bank loans. And yet, the average SME in need of business funding relies mainly on bank loans and overdrafts. Why is that? Some say it is a matter of perception.

Perceptions Limit Vision

The standard MO for SME business funding has long been one of relying on high street banks. For decades leading up to the financial crisis, banks were seen as the only reliable source of funding. That perception was only exacerbated by the financial crisis. Business owners would not dare to look to alternative sources of funding out of fear that those sources were not stable enough.

Such perceptions have resulted in bank loans and overdrafts continuing to be the primary source of business funding. Unfortunately, those same perceptions have limited the vision SMEs have for the future. The limited vision inevitably leads to limited confidence over future business funding and debt structuring.

There Are Other Alternatives

Financial experts have expressed the need to educate business owners and management about the many possibilities for business funding. As the thinking goes, a strong education effort will make it clear to SMEs that high street banks are not the only funding option out there. Whether or not executives will have the confidence to move beyond their banks is another question.

Part of the educational effort is to help SMEs understand the benefits of debt funding. What is debt funding? In simple terms, it is taking on some sort of loan in order to finance current needs without giving up control. Debt funding is preferable to selling stock if you want to keep a company private.

Banks continue to be the main source of debt funding. But there are other alternatives out there. Here is a short list of some of them:

• Fast Cash– Fast cash loans offer lump sums on a short-term basis. They are typically not offered by high street banks and other traditional lenders. They can be expensive.
• Flexible Credit Lines– A flexible credit line is the business equivalent of the consumer’s revolving line of credit. It extends a certain amount of credit that remains open as long as the business continues making payments.
• Invoice Financing– SMEs can generate funding by offering slow paying receivables in exchange for loans.
• Merchant Financing– This is similar to invoice financing except that loans are predicated on debit and credit card transactions.
• Government Financing– The government offers start-up loans through a programme operated by the British Business Bank.

If an SME is intent on going to a traditional bank for business funding, the two general options are secured and unsecured loans. Both kinds of loans are very similar to their retail counterparts.

A secured loan is predicated on the business offering some sort of asset as collateral. An unsecured loan provides financing without any collateral. The former is easier to get and tends to cost less while the latter provide based on the borrower’s good faith and credit.

Business funding is making a rebound after a decade of apathy. The problem is that too many SMEs still rely on traditional bank financing. They need a new vision going forward.