Bank bashing has become a national pastime since the financial crash of 2008. The sight of bankers receiving a taxpayer bailout while continuing to pay themselves bonuses, plus the public scapegoating of the likes of Fred Goodwin made these institutions public enemy number one.
Even now, over a decade on, I hear daily complaints about the major High Street banks with the most common complaint being (certainly before the COVID crisis anyway) that they have either declined some business lending or, if they haven’t declined it, that the terms and conditions offered are so onerous that they might as well have declined it. It is unquestionable that the risk appetite of banks has changed dramatically since the crash, with restrictions being harder and more expectations of clients when it comes to providing personal or business security and deposits.
This article hasn’t been written to discuss the merits of dealing with a High Street bank and the pros and cons of this. It is rather about what to do if you have been to your own bank for a lending request and what to do if they have turned you down, leaving you wondering what to do next.
In truth, this would be a useful guide to read even before approaching your own bank for a request as they are not always the best option for you.
Approach another bank
This may seem strange, but just because your own bank has declined your request, doesn’t mean that another bank will. All lenders have different criteria and banks are no different with emphasis on differing sectors and industries depending on their risk appetite at a particular time.
Having a trading history with a bank doesn’t mean they are always the ones most likely to support your business.
Banks lending policy is generally reasonably rigid so you may ‘not fit in the box’ for your own bank but, for a lender desperate to increase their exposure in a certain industry, you may be a very attractive proposition.
A commercial finance broker
Well, I would say this wouldn’t I?
A commercial broker should have access to most of the High Street banks, plus multiple other lenders. They will explore the marketplace for you and ensure you get the most appropriate deal for your circumstances.
A couple of pieces of advice if dealing with a broker. Always make sure they hold the required FCA authorisations (https://www.fca.org.uk/) and are a member of the National Association of Commercial Finance Brokers (https://nacfb.org/)
The secondary marketplace
No longer the alternative option for many business owners. In fact, many well established businesses are funded exclusively by secondary lenders. In the wake of the banks contracting post 2008, the alternative market really stepped up to the plate with a range of innovative products being offered to help fill the gap.
This influence continued to grow with the birth of the fintech lender who are responsible for a considerable percentage of the business lending market in recent years. We have seen this continue with the involvement of fintech lenders in the Government Loan Schemes during the COVID era.
The banks have also been reluctant to deviate outside ‘traditional’ lending products such as straightforward business loans and overdraft facilities. There are services available outside these which have been pioneered by alternative lenders which can offer a more bespoke offering to a business customer.
If it is impossible to secure conventional lending, it may be worth considering an outside investor. There are multiple ways of doing this.
It can be possible to secure business loans (at commercial rates) from third parties or even giving part of the business away to an investor in exchange for a capital injection, known as equity finance. While the idea of selling part of your business can be very frightening, it can be a way to bring expertise and investment in without having to go through the rigmarole of applying for bank finance.
Other external finance methods
Many businesses do not consider looking at their existing trade arrangements when looking at funding. While it is possible that they do require a form of bank funding, it may be equally possible they can tweak the way they currently work.
For instance, can more credit be extended by existing suppliers? If trade limits haven’t been reviewed for a couple of years, then an increase in limit or an extension of terms can relieve the cashflow pressure in a similar way to a lending facility.
Conversely, can amendments be made to the way customers are treated? Are the trade terms given too generous? Can trade credit days given be reduced or incentives offered for early payment, reducing the businesses outstanding invoices and aiding cashflow.
While many business owners prefer to keep their business and personal finance separate, injecting funds personally into a business can sometimes be the most cost-effective way to facilitating a cashflow requirement.
If a limited company needs funding, then a director’s loan can be a suitable way of doing this. It will not cost the business interest, can be repaid on demand if needed, and won’t require involving a third party to approve a request. This only applies if the funds are held in liquid form by the director. If they are having to borrow these funds personally to inject into the company then interest will have to be paid and an application process will be required.
The important thing to remember is that despite the current economic climate, the business owner has never had more options when it comes to borrowing money for their business. Prior to the 2008 recession, the High Street banks controlled virtually all the business lending marketplace with a handful of alternative lenders offering nominal competition.
Now, depending on the product you wish to apply for, you are likely to have multiple options outside the more traditional lenders with a suite of products where before there were one or two.
Being turned down by your bank does not have to be the end of the road for your finance. It may just be the start!
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