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Younger Businesses Shun Banks For Alternative Lenders – Here’s Why

Estimated Read Time: 5 Minutes

JESSICA LAMBERT , 26 January, 2023

Being able to access working capital for your business is fundamental to its success and SMEs across the country rely on funding to continue operations and achieve growth plans. But sadly, the picture for younger businesses is a lot less promising, despite the fact that the number of new companies registered last year rose to a record high of 660,000.

Of the SMEs that do opt to source funding externally, the success rate for applications from younger businesses plummets in comparison to companies that have years of accounts and profitability behind them.

The Small Business Finance Markets Report discovered that younger businesses continue to find it harder to obtain finance which could explain why SMEs remain reluctant to take on external finance. Data on loan applications from The British Business Bank in 2017 showed there was record low demand for traditional bank loans, with a decrease in confidence that an application will be accepted at all (down to 43% from 58%).

According to a recent survey on SME borrowing, 65% of business decision makers under 35 would prefer to opt for funding from alternative sources for their company. It appears that when it comes to commercial funding, age really does matter, as the age of a business also influences the type of external finance sought.

A whopping 71% of businesses aged 35 years and over claimed to turn to traditional banks first when in need of cash, which is a huge contrast to the 32% of businesses aged less than ten years who would also look to their bank for funding.

Alternative Lenders Are Willing to Help Businesses That Are Low on Assets

Traditionally, commercial borrowing has always heavily relied on the amount of collateral a business can put forth in order to obtain the funding required. Secured business loans are still a massively popular funding product amongst businesses, with asset-based lending still being at the forefront of funding provided by traditional high-street banks.

However, new businesses, start-ups and many small businesses often fall short of having fixed assets to leverage, meaning their commercial loan applications get rejected. But unlike the majority of traditional banks, alternative lenders are more than willing to work with SMEs that are low on fixed assets.

At Nucleus, we often work with start-ups who are unable to provide the adequate amount of assets to banks and instead allow our customers to use a charge against their residential property. Property Finance is often the solution small businesses are looking for and it allows them to access the funding they need to be able to grow as they intend.

Alternative Lenders Work with Start-Ups

Start-up loans from banks are few and far between and if you have approached your bank in the hope of securing funds to start your own business, you will likely have had your loan application rejected if you are just getting started.

After the 2008 UK banking crisis, high-street banks do not feel confident lending to businesses that are deemed risky – and unfortunately for start-ups, they fall within this category given the lack of historical profitability and business accounts.

When it comes to lending, banks tend to operate based on the four C’s of Credit criteria.

  1. Capital: This is the number one reason why banks say no to small business loans. This encapsulates the business assets that can be used to create services or products in order to make profit, which will then be used to pay back the loan.
  2. Collateral: Simply put, this is the cash and assets a business owner is prepared to pledge in order to secure the loan.
  3. Capacity: Banks want to see that your business has the capacity to generate enough income that you can comfortably pay back the loan amount. The problem with this approach is that start-ups have no way of demonstrating profitability.
  4. Character: In other words, banks are heavily reliant on your credit rating and if you are shown to have defaulted or that you have previously had difficulties with paying back loan amounts, banks will have big reservations about lending to your business.

Alternative lenders tend to look at the bigger picture when it comes to working with start-ups and not just the surface level factors of a business. Nucleus always strive to truly understand each business they lend to and based on that, we then recommend a bespoke funding solution that takes into account both the strengths and weaknesses of a company.

We do not turn down SMEs purely because they are a start-up and we even provide start-up capital when presented with a cash flow forecast and a well-researched business plan.

Alternative Lenders Provide Loans of Varying Amounts

It is well known that banks prefer to grant loans of bigger amounts when it comes to business lending, but for many SMEs, a larger amount is not warranted for what they require. Alternative lenders like Nucleus provide loans as low as £3k yet are equally equipped to lend amounts reaching £50m. Microloans enable small businesses to utilise external capital without needing to sign up for huge amounts with interest rates spanning years ahead.

Alternative Lenders Do Not Tend to Have Qualifications as Stringent as Banks

The rise of alternative lending was born out of the growing issue of thousands of businesses having nowhere to turn in order to access funding when they needed it most. Banks continuously rejected SMEs due to tighter lending standards they put in place following the financial crisis a decade ago.

But given that 99% of all UK businesses are SMEs, failing to provide an answer would have been hugely remiss and so as a result, the alternative finance sector exploded and with that came solutions in abundance for small businesses across the UK.

Alternative lenders are certainly more understanding when compared with traditional organisations and that is undoubtedly exactly why they are now entrenched in the commercial lending market for SMEs.

For more small business advice and tips, read our related posts below. If you are experiencing cash flow challenges or want to realise your business growth plans, get in touch with our team of Funding Specialists today on 020 7839 9451 or email [email protected].





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