What Funding Is Open To A Business When The Bank Says “No”?
What are the alternatives to a bank overdraft?
In the last couple of years, two businesses we work with have been refused an overdraft by their existing bank. This is despite relationships going back many years. They are in different sectors with different reasons for additional funding – expansion plans and cash flow problems. However, they both found the finance needed to support their businesses from alternative funding. We’d like to share their stories with you…
Crowd Funding Solution: A Bar Company
They had five successful bars in the group. The funds were needed to expand their successful concept.
After failing to get bank funding from Santander, they looked at a crowdfund loan from Funding Circle, probably the largest crowdfund lender in the UK. The process was quick and easy to arrange, taking about three weeks from start to finish. It did require them to have two years’ trading history and also required a director’s guarantee.
After registering online and completing some due diligence the six-figure loan was offered on Funding Circle’s web platform. Over 1,000 lenders then made bids for part of the loan (some as low as £20). Within 3 days the loan was fully funded and after that, further bids reduced the average interest rate. After a week the auction finished when the minimum rate was achieved (depending on the borrower’s status Funding Circle grade the loans from A to E and assigns minimum interest rates to each grade). The interest rate was not cheap (typically above 10%), but the new bar was easily able to make the repayments from the profit it made. In the end, it repaid the loan early!
Invoice Discounting Solution: A Construction Business
The business was struggling for cash but had significant debtors and work in progress which is common in that sector. Traditionally, invoice discounting companies do not lend to the construction sector because of the inherent issues with proving the debt, especially mid-contract.
We then looked at two other lenders – Market Invoice and Platform Black, peer-to-peer finance platforms. They lend against specific invoices without the administration and service fees normally charged by banks for similar services. Both were happy to advance around 85% of the invoice value for up to 90 days and required us to set up a dedicated bank account to receive payment from the end client. We chose Market Invoice and over the next 18 months obtained finance against 30+ large invoices which allowed the construction business to keep trading. Eventually, its cash position recovered so it no longer needed this form of finance. Again, the interest costs were higher than a traditional overdraft but affordable. Had this form of finance not been available the business may well have failed with the loss of 16 jobs.
If you’re seeking business funding and have been refused an overdraft from your bank, it’s not the only source of finance available. Contact a FinanceHead for help in finding the right finance for your business. To arrange a call with a potential finance director please contact us at info@financeheads.co.uk.