Over recent years the commercial finance brokerage market has seen the rise of the ‘on-line’ brokerage models. These are aimed at providing ‘all market coverage’ and focusing on ‘speed of delivery’ to service the ‘need’ they believe SME businesses have. They are, in all honesty, normally backed by very capable ‘techies’ whose expertise is in creating complex algorithms. These allow them to come up with ‘funding options’ in hours if not minutes. The speed at which a solution to a funding problem is found can, on the surface, appear to be very attractive, particularly to a business that is desperate to find a cash flow solution. This is all very well, but what can be highly questionable is the appropriateness of the type and source of funding proposed in such cases.
Funders (lenders) engage with such ‘on- line brokers’ NOT because of the quality of the introductions but for the volume of enquiries they generate due to their high on- line marketing spend. The ‘on-line’ brokerage requires volume and, in their drive to build scale, quality is not their prime focus as, being ‘hares’, they are all about speed. Speaking with many lenders in the commercial finance market, most will confirm that their sales staff would prefer to handle enquiries from a professional firm or experienced commercial finance broker (‘tortoises’) over any ‘on-line brokerage’ enquiries. This is because the ‘Tortoises’ enquiries are invariably better qualified in terms of the prospects requirements and confirmation that it is meeting the criteria, such as security and serviceability, required by the funder. This inevitably leads to a higher successful conversion rate.
It is acknowledged by most funders that they will reject a much higher percentage of enquiries from on-line brokers than they would do from experienced commercial finance brokers or professionals like accountants or corporate finance firms for the very reasons as stated above.
Obtaining the most appropriate funding for any SME business should, in nearly all cases, be more important than the speed of delivery. Taking into account the current unprecedented times we are in, as a result of Covid 19, it is even more pertinent to understand where many funders are in terms of looking at taking on new clients. Most funders are still ‘open for new business’ but will have tightened their underwriting criteria, become more risk adverse and are only interested in what they regard as quality enquiries. This is evidenced by the fact that many funders have ‘furloughed’ sales staff confirming where their priorities lie in the current climate – that is focusing on their existing client book.
As the lockdown restrictions continue to be tightened, more SME businesses will be having to revisit their working capital requirements in what will undoubtedly be more challenging circumstances given what the ‘new normal’ may look like. The Government’s move to support businesses of all sizes by providing the CBILS and Bounce-Back Loans has undoubtedly helped take the pressure off temporarily, it is only a temporary relief! Never has it been more important to ensure that, when it comes to looking for funding, businesses would be well advised to engage with professionals and experienced brokers who focus on obtaining the most appropriate funding as opposed to the quickest funding.
Another ‘on-line’ option that has appeared over recent years is that of the Crowd Funding platforms. There are a significant number of these available today. Not all, however, are totally successful; indeed a number have already failed, causing problems both for their borrowers and the investors whose money they lend. Here again it is worth discussing this optional source of finance with your accountant (if they have sufficient experience of dealing with Crowd Funding Platforms) or a professional Commercial Finance Broker, before making an application.
Whilst on this subject, we have been puzzled by the recent move by the British Chambers of Commerce to partner with on line brokerage platform Swoop Finance. The offer of a ‘find funding’ service is somewhat surprising and will not be seen favourably by many accountant, corporate finance and commercial finance broker members as their Chambers could now be effectively competitors! Surely a better option would have been to pass such enquiries on to local Chamber members!
Sourcing the best funding for a business should not just be about speed [other than in exceptional cases] but a more considered approach to ensure the right type of funding. One very important consideration is whether there is a proper (realistic) business plan with the necessary financial projections confirming the level of finance that is needed to meet future cash flow requirements and/or to cover planned capital expenditure. Whilst some business managers are perfectly capable of writing a realistic business plan many SME executives would undoubtedly benefit from professional advice. Although this will cost in terms of fees, it will normally prove to be a worthwhile investment by saving time and money in the long term. Most Lenders will require a business plan as part of the justification for a loan. No proper plan – no loan!
Another factor to be considered is any requirement for additional security against a loan. Here again this can carry various potential pitfalls. Professional, unbiased advice can greatly improve the prospects of avoiding such pitfalls
Finally we should mention that, over the years, it has become an undeniable fact that in many cases there may be a need for more than one kind of finance to meet the funding needs of a business. For example it may be appropriate to combine a commercial Loan with an element of equity investment. Alternatively a combination of Asset Finance and Invoice Finance may be the best option to avoid unwanted additional security requirements. In most cases the review of such options will not be considered by the on-line brokerages.
Those business owners that take time and professional advice when it comes to raising funding for their business will invariably be the winners in the long run. As with the old story of “The tortoise and the hare”, invariably the tortoise will be the winner when it comes to getting the right type of funding for your business on a long-term basis. So, If you are contemplating applying for finance for your business then before doing so talk to your accountant of a Commercial Finance Broker first!