by RLA Capital Limited

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SME Finance | A guide to securing SME funding

Published on Business stage: Scaling, Starting, Thinking, Unlocking

There are many types of SME finance available and selecting the most suitable lender can be a difficult task for many business owners.
Finding the best SME finance product for your needs and company status is extremely important for several reasons. You will need to consider;
• Affordability
• Suitability
• Terms
For those with limited experience of SME financing options, finding the best lender, the best deal (in terms of rates/fees and repayment amounts) is not easy. Especially with such a wide range of funding types and providers available.
Lenders consider a range of factors when assessing a business’s status. Things they look at when determining credit worthiness are;
• How long a company has been established
• Company financial accountants – income, current assets and liabilities
• Company financial statements – cash flow
• Existing credit agreements (if any)
• Company directors/owners/partners profiles

SME Lending Trends

Since 2013, SME loan approvals have increased each year. Even with these increases, finance from traditional banks have become harder for SMEs to access for several reasons.
In comparison to large corporations, many SMEs do not have long trading histories or detailed financial accounts, with many filling micro-accounts.
This can make it difficult for banks to assess affordability.
Traditional bank loan approvals have declined since 2017 [source]
In response to this, many SMEs are accessing alternative finance, such as P2P (peer to peer) lenders as opposed traditional banks loans.
There has been a marked increase in approvals coming from alternative P2P finance providers which in 2018 exceeded £3 billion [source]

What types of SME funding are available?

• Acquisition and Deposit Funding – Find out more
• Asset Finance – Find out more
• Corporation Tax Loans – Find out more
• Debtors Funding Loans – Find out more
• Income Tax Loans – Find out more
• Invoice Finance – Find out more
• Partner Buy In Buy Out Funding – Find out more
• Refurbishment Loans – Find out more
• VAT Funding Loans – Find out more
• Working Capital and Cash Flow Finance – Find out more

Unsecured Loans VS Secured Loans

There are two main types of loans available to you, secured and unsecured, each type has their own pros and cons.
The main difference is that unsecured loans do not use any tangible assets, either personal or business, as collateral when applying for finance while secured loans do.
When applying for unsecured finance, lenders assess;
• Personal credit rating
• Business bank accounts
• Business financial reports
This is known as an affordability assessment. The amount you can borrow is dependent on the result of this affordability assessment and your credit worthiness.
When using secured finance, loans are secured against company assets, if you are a sole trader these assets will also include personal assets.
The amount you can borrow is based on the value of the assets you are using as security for the loan.

SME Loan Affordability

When deciding if you can afford a loan, lenders will carry out an assessment based on their own affordability criteria. Affordability criteria does vary between lenders, but they all must follow responsible lending guidelines set out by the FCA.
These criteria include;
• Finance Facility Type
• Funding Amount
• Total Facility Cost
• Financial status
• Applicant(s) personal credit history
• Existing loan agreements
• Applicant(s) vulnerability, regarding their mental capacity to understand the obligations and any risks involved in taking out a business loan
Following responsible lending guidelines, a lender would not approve your application if they think there is risk of you being unable to afford the loan repayments.

Sourcing the right SME Funding Solution

With so any lenders to choose from, all with their own lending criteria, many owners find it difficult to source the best funding solution for their needs.
When applying for a loan you may not be accepted by a certain lender, but this does not mean that no one else will accept your loan application.
A common mistake many owners make is sending applications to numerous lenders in a short timescale hoping that one is accepted.
Carrying out multiple applications in a short period of time can have a negative effect on your credit score.
It is better to apply with lenders who are likely to accept your application, this is why using a finance broker is a good idea.
A broker can assist with;
• Realistic lending amounts
• The best time to apply
• Which lenders to approach

RLA Capital assist a wide range of businesses with traditional and bespoke professions finance to suit their requirements and circumstances. Visit their website for more information.

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If you’re not sure what sort of help you need, get in touch and we’ll help you work things out.

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