Richard Waldman, Group Sales Director at Ultimate Finance
It's fair to say that the past ten years have been very tough on SMEs across the UK. It started with the financial crash of 2008 and has continued to 2018, where we're still no closer to finding out exactly what Brexit will look like. That's why it's so disappointing to see that just 69,300 SMEs received loans from banks last year, equating to just 1.2% of UK SMEs. Of those applications, around 20% of SME bank loans were rejected and considering that the Government's Bank Referral Scheme has only resulted in £15m of support since launching in November 2016,clearly more needs to be done.
The "Computer says no" approach
Since the economic crash, the focus of many banks and lenders has been to protect themselves. Unfortunately, this means many SMEs continue facing rejection due to being viewed as high-risk businesses. Some banks and alternative lenders have stringent criteria that SMEs must meet before they are considered for financial support. Lenders with this mentality will turn away SMEs that miss just one of those criteria. With the 'computer says no' attitude still rife, it's no surprise rejection remains high.
This attitude means many believe that there are a large number of "high risk" SMEs throughout the UK, but this isn't strictly true. The figures actually highlight that it is lenders who have tightened up their acceptance criteria. Being turned down for a loan shouldn't be seen as the end of the world though – needing additional funding or falling on hard times doesn't instantly make an SME a bad business. However, one too many rejections may cause business leaders to become disheartened and consider closing their doors, rather than finding the good funding partner they need.
Increase the options available
So what's the worst case scenario for businesses that keep getting rejected? It could put budding entrepreneurs off starting-up their business or make it impossible regardless of their hunger. Similarly, it could be the difference between SMEs struggling to scale-up taking the next step and plateauing. When you consider that Britain's 5.7 million SMEs are the growth engine of the UK economy, not giving them the support needed to thrive can have a huge impact. This is where brokers with strong links to the right funding partner are vitally important.
Although there will always be businesses that don't qualify for finance due to serious red flags, the vast majority of SMEs should be able to access the financial support they need to thrive. One way for business that are uncertain of their funding options to source financial support is to contact brokers who can assess their needs and quickly match them to specific lenders who they know have an appetite to assist.
SMEs that have been turned down for simple bank loans can evaluate what assets the business has available which could be used as security for additional funding (short or longer term). Asset finance offers financial support placed against high-value assets such as factory equipment or plant and equipment. This gives the business security to place the debt against, creating a much more attractive environment for lenders to work in. Similarly, an unpaid sales ledger is a perfect asset to generate additional funding under an invoice finance facility. Trade finance can be used to help bolster a company's cashflow by helping to pay suppliers for goods which are to be sold onwards and bridging finance can be used to generate funds for a business using the equity in any property held.
Benefits can be achieved by using brokers who work alongside flexible alternative lenders that can provide a wide variety of options to fit the needs of any SME. With the right partnerships in place, brokers could be the key to unlocking finance for so-called 'high risk' SMEs so they don't suffer in silence.
Turning high risk into high reward
By viewing so-called high risk businesses as an opportunity, brokers can create long-term relationships with potential clients by constantly adding value through high-level business consultancy. This starts with standard tasks, such as connecting companies struggling with credit scores with credit management experts, or identifying the correct type of funding arrangement required to assist the business and putting them in touch with appropriate lenders who can help. It shouldn't stop there though.
While this work is taking place, brokers can stay front of mind by supporting SMEs that had been unfairly deemed "too high risk" by lenders previously. In fact, it's likely the broker that takes them under their wing, supports them and connects them with the right lender will become the partner that SME turns to whenever it needs help in the future. It will turn what could have been a one-off interaction into a potential long-term relationship that proves fruitful for both the business and the broker.
Time for change
SMEs are increasingly finding the need to seek financial support to hit their full potential thanks to the complexities of today's business market. If they are constantly rejected, it may have a very negative impact on the company both financially and in terms of morale. By prioritising flexible funding partners with a broad portfolio, brokers can increase the likelihood of turning high risk SMEs into long-term clients. Doing so, while positioning themselves as an indispensable business advisor will inevitably help everyone involved and create a more sustainable business environment.