An alternative view of funding – and debt

Guest columnist Stuart Lawson makes his case 

SMEs make up 99.9 per cent of the UK’s business population and are responsible for 61 per cent of employment, so their growth and success is going to be pivotal in driving the nation’s economic recovery post Covid-19.  

But many business owners are scared of debt, restricting the velocity and scale of potential growth for both SMEs and the wider economy. 

At a small business level, financial admin is understandably unpopular, so SMEs have historically been less creative in how they look at funding. This has created a core of permanent ‘non-borrowers’. 

Yet, the tide may be turning. Alternative finance providers are seeing more businesses approaching the subject of financing in a more open way – moving towards alternative lenders and the speed and flexibility they can provide.  

This has partly been out of necessity, as government-backed business support has not been substantial enough to facilitate growth, but as they say, necessity is the mother of invention.  

In being forced to seek quick funding from alternative lenders rather than incumbent banks, many business owners now have an increased awareness of the various funding options available to them. Those who are not aware, however, may experience a significant opportunity cost when it comes to growing their businesses. 

With the lifting of restrictions, Covid-related government support for businesses is coming to an end. If we are to move away from a national mentality of surviving rather than thriving, with many of the UK’s SMEs just about surviving the pandemic on the drip-feed of CIBLs and BBLs, then the mindset around business debt needs to change. 

Debt as a facilitator of growth, not a personal failure 

A change of mindset can perhaps start with a change of terminology. Concepts and perceptions are inherently linked to language use, so it’s no wonder that “debt” is so often viewed in a negative light. The word evokes images of failed repayments, debt collectors, government-mismanaged national debt, and recessions. 

But when managed properly, debt financing can boost your business. It can drive growth and innovation without the need for owners to relinquish their autonomy, unlike equity financing.

There simply aren’t enough investors around to drive economic recovery solely through equity funding. 

A cut in VAT and political rhetoric encouraged consumers to ‘spend, spend, spend’ to assist economic recovery after the 2008 financial crash. Giving the same memo to SMEs today would certainly boost the UK’s Covid-beleagured economy – but this has yet to happen.  

Telling SMEs to increase spending doesn’t mean that business owners should take on reckless debt. Rather, it means to ‘spend spend spend’ on the business itself, balancing debt and equity finance to drive growth and taking businesses to the next level. 

For spending on this scale, some level of business debt is going to be necessary. There simply aren’t enough investors around to drive economic recovery solely through equity funding. 

The fact that we are so conditioned to think of debt as bad could result in a significant opportunity cost for SMEs. Many are missing out on the opportunity to scale, and even more are missing out on the options made available to them by alternative lenders due to a lack of awareness and education. 

So how can a more positive mindset around debt benefit SMEs? 

It builds your credit score  It’s a bit of a catch-22 situation, but you need to borrow money in order to raise your credit score, and to borrow money in the first place you need to have a good credit score. But once you get past the initial hurdle of your first business loan, taking out loans and paying them back sets your business in good stead for future borrowing.  

Consider starting off with smaller business loans, paying them back in a timely manner, and gradually working your way to borrowing a more significant amount of growth-facilitating capital. 

It helps build credibility and confidence in your business 

Having debt can almost be like a form of networking. In the process of securing a business loan and paying it back, business owners can form relationships with financial institutions and other debt holders. Paying loans back on time will also increase your businesses’ credibility among these circles, reinforcing and growing your professional network. 

Why should you consider an alternative lender for your business financing needs? 

As with many other industries, the past year and a half has driven an unprecedented level of innovation and creative solutions within the UK fintech scene, in particular amongst alternative lenders. 

Many of these innovations make the process of securing and receiving a loan far quicker, simpler, and more efficient for business owners. One of these is increased use of Open Banking. Although it is not a particularly new development, Open Banking usage did see a significant level of adoption over 2020. 

It’s entirely feasible to get a business loan on your lunch break, something that would’ve been considered an impossibility not so long ago

How this benefits the business owner is that Open Banking minimises the amount of work applicants need to do to secure a loan. Rather than applicants needing to send bank transaction documentation to lenders, Open Banking APIs facilitate the immediate sharing of an applicant’s transaction history with lenders. This is all done whilst improving the safety and security of this information. 

This technology, in conjunction with others, enabled Funding Options to achieve a new record of just 20 seconds from loan application to credit approval via Funding Cloud, with the previous record being 2 minutes and 56 seconds.  

Developments such as this mean that it’s entirely feasible to get a business loan on your lunch break, something that would’ve been considered an impossibility not so long ago. 

In contrast, incumbent banks often have lengthy loan approval processes because they don’t have the technological infrastructure to expedite that process. According to Infosys businesses usually spend over 25 hours gathering the paperwork for applications before approaching several banks with their application. Successful applicants then have to wait for weeks, or even months, to actually receive the capital. 

So it is clear how much the alternative lending ecosystem has to offer SME business owners. But the problem is a lack of awareness. When debt is not considered to be a desirable mechanism of growth, business owners will do less research into the debt financing options available to them. 

But as we have seen, numerous members of the alternative lending space have been forced to innovate and adjust in order to survive the repercussions of COVID-19, improving their offerings for loan applicants in the process. 

This means that there is an entire ecosystem available to meet the debt financing needs of SMEs, but due to a ‘debt is bad and it should be avoided when possible’ mentality, many business owners are not aware of the speed and convenience alt-lenders provide and are therefore missing out on a significant resource which could drive growth for their business. 

Stuart Lawson is CRO of Funding Options 


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