Where do you go when the bank says no?
If your bank turns you down, they should refer you to alternative lenders. But how does it work?
Adam Tavener, chairman of Clifton Asset Management, talks through his instrumental role in changing the face of finance in the UK that used to be dominated by bank lenders. The alternative finance marketplace for small businesses has changed drastically in the past few years – it is certainly no longer the case that the bank is the final word in funding. However, accessing finance is still a bug-bear for many SME owners. Despite the increasing variety of options available, raising awareness is still crucial to the uptake of funding with many business owners still turning to bank lenders.
Going back a few years now, Clifton Asset Management created an alternative funding mechanism called pension-led funding. Rapidly, Clifton became one of the biggest alternative lenders in the UK, sitting alongside Funding Circle and Zopa. Adam Tavener was then among a group of lenders invited to Downing Street by the coalition government for a conference on the ways the administration could assist the non-bank funding sector.
“They wanted to reduce the reliance on banks and they wanted businesses like pension-led funding and various peer-to-peer operators to be able to grow rapidly and fill the gaps the banks weren’t filling at the time,” he explained.
Tavener suggested aggregating all the funders into one place and creating a market comparison site. This is exactly what happened – pretty much every alternative funder was incorporated into Clifton’s Alternative Business Funding portal. In order to increase awareness of the alternative funding sector, Tavener suggested banks should be forced to refer rejected applicants to a designated marketplace, such as ABF.
“Nobody in their right mind goes to insure their car by ringing around 12 different insurance companies. You just go to one clearing house and they tell you who’s the best and why. It’s exactly the same principle on Alternative Business Funding.”
The platform now incorporates 120 different business funding products. However, it is worth noting that Alternative Business Funding is not the only website of its kind, and each website will have a different customer journey.
Don’t take no for an answer
Funding a business is without doubt one of the biggest challenges and SME owner can face, and it can be demoralising be rejected again and again.
According to a 2013 survey by the Department for Business, Energy and Industrial Stategy, half of first-time borrowers are rejected finance for their business. Instead of turning to alternative financing methods, 37 per cent just give up.
Since November, banks are required to refer these rejected SMEs to an alternative provider – but what if a business is rejected by an alternative finance lender as well?
“The way Alternative Business Funding works, the vast majority of funders on it already refer rejections to it – so you might approach Funding Circle for a loan to grow your business, and if it says no it will pass your details into the system and hopefully somebody else will do it,” said Tavener.
“Funders don’t just get enquiries out of it, they put their own rejects back in.”
Where can you go for guidance?
The whole Alternative Business Funding project is aimed at SMEs, because it is largely small and growing businesses that need help with funding. However, no two projects are the same – some businesses are looking for cash to plug a gap, while others are looking to scale up operations.
“We tend to categorise the requests for funding loosely into happy and sad – if you’re in the sad category, both you and your funder have to be sure that the funding is enough to fix the problem. There’s no point putting £20,000 into a £100,000 hole,” said Tavener.
For businesses that aren’t sure how much funding, or what type of funding is needed, the site also offers guidance. While it is possible to complete the whole process over the computer, help is always on hand with the concierge option – where a phone-based team can help with any queries.
The platform is positioned very much as a resource as well as a “match-maker”.
The warning signs to look out for
The ABF platform is regulated by the FCA and it, in turn, carries out significant due diligence on lenders wishing to list on its panel, but Tavener highlighted some warning signs to look out for when taking on an alternative funder from elsewhere.
Generally speaking, financial backers should be up front about the cost of the funding – there’s no point going through a process with a funder only to find an APR of 200 per cent is charged.
Secondly, when dealing with an unregulated entity, there is very little in the way of protection.
However, the main piece of advice Tavener has for SME business owners it to prepare, prepare, prepare.
“Ask yourself a few simple questions, do a personal audit. You’re going to get asked those questions anyway, so you might as well do it in advance.
“It won’t increase the lender’s appetite to lend, but it will make the process so much quicker. It will save you so much tome and heart ache by the time you actually get a funder.”