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10 Common Finance Hurdles UK SMEs Face (And How To Overcome Them)

If you run an SME, you probably are familiar with these all too well. But it’s easier to overcome these finance hurdles than you think!

First of all, let us begin by admitting and acknowledging the harsh reality. The UK economy has been through a constant grind of speculation, debate and uncertainty over the past few years, all thanks to Brexit. Without commenting on the issue, we would just like to mention that not all SMEs are happy about the way things have been unfolding. Nearly 40% of UK SMEs think that Brexit – if and when it actually happens – will leave them worse off in terms of financing and sales. That’s a very serious trend.

However, that’s only a part of the finance riddle. There are quite a few non-seasonal hurdles that SMEs have to face while applying for and getting commercial finance. Here are our picks (and some advice from our experts on how you can easily overcome them).

1. The Personal Credit Vs Commercial Finance Conundrum

This is by far the most common confusion we’ve seen SMEs struggle with. Much of this has to do with the fact that most SMEs are built ground-up without any solid plan for expansion. This, however understandable, is not the right approach. When you start a business, it’s advisable to treat it like a business. Sure, you can use your personal credit cards or even mortgage your home – but you need to know where to draw the line.

Personal loans tend to reduce your creditworthiness, making things difficult for when you want to get a business loan. The best way to overcome this conundrum is to separate personal and business finances as strictly as you can. Your personal creditworthiness should be a credit to your business – not a burden.

2. Bad Credit

This is the most obvious hurdle. If you have bad credit, you’re going to struggle to get a good deal (or any deal, for that matter). It’s important to know what impacts your credit in addition to the usual do’s and don’ts.

We’d like to note here that having bad credit doesn’t spell the end of the road by any stretch of imagination. We, at Commercial Finance Network, regularly broker bad credit loans for many otherwise successful SMEs. You can read more about our adverse credit mortgage services here.

3. No Credit History

Not many SMEs take business credit seriously, thanks mainly to the fact that most operate as sole traders. Quite naturally, it’s not very common for SMEs in the UK to have business credit history.

The easiest way to establish business credit history (you’ll need it when you want to apply for high-end commercial finance products) is to register your business and start trading regularly. Most companies, just by trading actively, are able to establish various credit tracks that help towards their credit history. To speed up the process, you can also use easy-to-access finance products like credit lines, business credit cards, overdrafts and so forth. Short-term finance products like bridging loans and invoice finance can also be very helpful in building a good credit score.

4. Multiple Applications

As is the case with personal credit, your chances of getting approved for a commercial finance product may get severely hampered by multiple applications. If you overestimate your creditworthiness and have half a dozen applications turned down, it’s almost always going to leave a dent in your business credit history.

This, however, is easily avoidable. If you want to directly work with lenders, make sure you are familiar with the lender’s expertise, expectations and track record. If not, you can send your applications through a reputed whole of market broker like Commercial Finance Network to improve your chances of getting an affordable and customised finance deal.

5. Going After Incompatible/Unsuitable Products

Another easy to avoid problem.

If you’re in need of commercial finance, make sure you know what exactly it is that you need. Specialty finance products are always more affordable than blanket packages. For example, many SMEs apply for a generic business loan to cover all sorts of expenses, instead of going for specialty, focussed loans. This not only makes things more expensive; it also increases the chance of having their application rejected.

An easy fix is to know what commercial finance products are available out there, and how you can best customise them to your needs.

6. Not Making The Right Points

This shouldn’t be a point of discussion, but we’ve seen too many SMEs fail to paint themselves in good light.

If you want to work with specialty lenders (like the ones we have on our panel), you will need to make sure that you know your business inside out. And by business we don’t just mean your day to day operations. You need to be able to demonstrate how you are planning to fuel the growth and overcome the competition. A detailed business plan that touches on all these point (and more) will always be helpful in getting lenders on board.

7. Weak Cashflow

This doesn’t and shouldn’t apply to every SME out there. However, you need to ensure that the cashflow numbers are always as healthy as possible.

Lenders, by and large, look for affirmative signs that tell them that you’ll settle the dues. And there’s no better sign of surety than strong cashflow numbers month after month.

8. Short On Security

Many commercial finance products require you to attach a security. It could range from personal guarantees and shares to properties and even vehicles.

Some specialty products (a good example is that of invoice financing) may not work at all without an inherent security. So, before you apply, know how these products work and what sort of security might be needed to get your application through.

9. No Trading History

Many SMEs try to apply for commercial finance right after they start trading. This is a rather hasty approach, because at that point, no SME can show any sign of credibility – no credit history, no volume of transactions and no track record.

To avoid this, we advise our customers to establish a long-enough trading history (typically six months or longer).

10. Tie All The Loose Ends

If your business has availed any loans in the past – however small the amounts – make sure you pay them off at your earliest, before you apply for commercial finance. If you aren’t in a position to make these payments right away, make sure these loans are represented correctly on your credit file, so that lenders can understand why you needed them and how you’re going to pay those back.

Commercial finance can appear daunting – but trust us, it’s anything but. With specialist lenders who know what your business needs, we’ve got you covered. To request more information or to request a call back, please call us on 03303 112 646. You can also get in touch with us here.

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Get Your SME Finance-Ready – 5 Actions to Improve Your Business Loan Eligibility

Looking to get an SME loan? Avoid these common mistakes to immensely improve your chances!

Taking the entrepreneurial leap of faith might well turn out to be the most rewarding thing in your life. The sheer joy of seeing a plan, a concept – a dream, indeed – materialise is indescribable. But to get there, you’ll first need to take off the rose-tinted glasses.

The world of business is ruthless beyond measure. No industry, no sector, no niche is devoid of competition. Therefore, your business – like every other business – will need to withstand this competition day and night in order to survive, thrive and, eventually, succeed. And this process invariably involves scaling up your business – a point at which drawing strength from your personal savings or seeking help from friends or family just isn’t enough. This is when you, as an SME, are most likely to seek external funding and financing. This, also, is when you have every chance of seeing multiple business loan applications turned down.

How does a young SME go about securing a business loan that’s both substantial and fair?

That’s a question that needs to be discussed in multiple blogs. For now, we will take a look at the steps that you can take to give your business the best chance of getting business loans. Before that, however, it will be more prudent to understand how the lenders perceive SMEs.

SME Lending Is Changing

  • The lending landscape is fast changing.
  • Open Banking will make getting business loans less difficult for SMEs.
  • Banks’ isn’t the only voice that matters.

SME Lending in the UK – A Stat Check

  • Asset finance, general business loans, equity finance & most other commercial SME loans have grown in size since 2015.
  • As many as 7 in 10 small-business loan applications were approved by lenders in 2017-18.
  • 62% of all SME finance applications in 2017-18 stated business growth as the principal reason for the loan.

British Business Bank SME Finance Report 2017-18

UK Finance Quarterly Reports

Liberis Business Survey 2018

Regardless of the narrative or the wider picture, it’s safe to say that the lenders have always dictated the terms of the commercial finance game. They have had the absolute right – at times, an unfair proposition – to accept, modify or reject business loan applications from SMEs as they see fit. While this isn’t likely to change anytime soon, there are definitely some levellers being introduced by the government to make the playing field more even.

The first amongst this is the rather dramatic arrival of Open Banking (better known as PSD2 across mainland Europe) earlier this year. This purported game changer will not have as much of an impact on everyday banking as most thought. The lending game, however, has been forever changed since its introduction. Thanks to the absolute customer-side control of finance data, your business can now request – nay, compel – big banks in the UK to share your 12-month financials, credit history and other data with private, P2P or overseas lenders. While such data sharing isn’t a new concept, the edge lies in the fact that Open Banking will let the borrower have more control over their data. What this means, essentially, is that getting your SME finance-ready will be much, much easier now than it was five years ago. The lenders will be able to make better, more informed lending decision based on this data – just about as seamlessly as personal loan or credit card applications work.

This development is in perfect alignment with the Small Business Enterprise and Employment Act of 2015 that had made it mandatory for banks and institutionalised lenders to share finance data with alternate credit partners for SME loans.

The fact of the matter is – if you run an SME in the UK, you have a great chance of securing a business loan today than ever before.

What Does It Take for an SME to Get a Business Loan in the UK?

The lending criteria differ from one lender to another. They also depend upon the type of the loan you seek. Some of the most common and fundamental lending criteria for SMEs in the UK are:

  • The borrower should be a registered business entity (Sole Trader, LC, LLP or PLC).
  • The business should have a ‘demonstrable’ trading history of 18-24 months.
  • The director(s), owner(s) or proprietor(s) should be able to furnish personal guarantees if required.
  • The business financials should be able to demonstrate a certain minimum turnover (subject to the amount of the loan).

Understanding Why the Lenders Are Forced to Say ‘No’

Despite the lending atmosphere that’s gaining in positivity as far as SMEs are concerned, quite a few business loans are still routinely declined. In this light, it’s important to understand the common reasons why small-business loan applications fail to get approved. This will help you eliminate a major hurdle in getting finance for your business.

The Business Isn’t on Top of Their Credit Score(s)

Countless SME loan applications fail to pass the very first check that banks perform – the credit check. What’s more astounding is the fact that many SME owners aren’t even aware of the credit trail they leave while their business is trading.

The Business Has Problems

It’s a vicious cycle but that’s how it is.

Most businesses apply for loans when there’s a cash crisis. And lenders don’t like such situations. This Catch-22 is perhaps the biggest hurdles SMEs face in getting approved for a business loan. Along with cashflow problems, other problems such as a questionable business plan, a history of poor business decisions, lack of expertise at the helm and inability to prove the growth potential often lead to loan applications being turned down.

The Time Just Isn’t Right

You cannot apply for a regular SME business loan if your business is just starting up. Most lenders will want to see a trading history of no less than 2 full years. Similarly, if you’re applying for a business loan and your business has been trading for 20 years with little to show for it in terms of growth, the lenders won’t take a liking to your application.

There’s No Collateral Provided

Unsecured business loans attract closer scrutiny from lenders. So, for an SME that doesn’t have a great deal of creditworthiness, it becomes imperative to provide additional security. Business loan applications that aren’t backed by adequate collateral or guarantees usually get declined.

The Plate is Already Too Full

Just like personal loans and mortgages, you cannot expect to get a business loan for your SME if you already have a number of repayments to take care of. A business loan application from an SME dealing with a plate full of loans is almost certain to get rejected, leading to a soft credit enquiry mark that further worsens the situation.

Steps You Need to Take to Improve Your Business Loan Eligibility

There’s no telling what the lender will think of your business loan application. Perception is a strong phenomenon and is still relevant despite much of the work being handled by tried-and-tested credit algorithms. You can, however, take the following steps to make sure that your application stands a very good chance of finding takers.

1. Make Sure the Foundation of Your Business is Strong & Convincing

You want the foundation of your business to be sound, strong and stable. This is vital not just to secure a business loan but also to achieve profitability in the long run.

When you know that your business has a great shot at success, you should be able to convince other people of the same. To convince lenders, you will need a great business plan – especially when your business is relatively new. A good business plan should be accompanied by a cause-and-action plan. This will involve a good explanation of why your business needs a loan, how you plan on using the funds and what your repayment schedule will be like.

A fully customised proposal with all the relevant details shows the lender that you’re serious about the business. This always works in your favour as lenders perceive you as less of a risk and more of an opportunity.

2. Get Your Business Financials in Order Before You Apply

Many businesses get this wrong – but you shouldn’t. Never apply for a business loan if you don’t have an independently audited, tax-certified financials for at least two years in your possession. These financials typically include the tax returns, quarterly balance sheets, cashflow analysis and profit/loss statement.

It’s common for lenders to also request projections over the loan term. So, it’s a good idea to prepare revenue, profit/loss and assets/liabilities projections for up to 5 years before you approach a lender.

3. Know and Understand Your Credit Scores

Regardless of everything else, most lenders will eventually take a look at the credit history of your business before making a decision. Any obvious red flags on this report – from delayed payments and missing records to frequent enquiries and grave defaults – will hurt your application. So, it’s important to know and understand your credit scores before you apply. This includes building a solid credit history for your business as well as personal accounts.

Less than 20% of all SMEs in the UK proactively monitor and assess their credit scores – you don’t want to be a part of that group!

Some useful steps in this regard are:

  • Checking your business credit score once every quarter
  • Filing for corrections when you spot inadvertent mistakes or errors
  • Using a dedicated business account for your business activities
  • Utilising credit facilities such as overdrafts and credit lines judiciously
  • Making timely repayments
  • Not making ‘hard’ enquiries for credit unless you are ready to submit a full application

4. Let the Lenders Know That You Are Invested

A commonly ignored and often decisive mistake is the failure to demonstrate your involvement in your business. Many businesses – especially the ones not registered as Sole Traders – face this problem, just because there’s no ‘face’ attached to the business.

An easy way to avoid this is to make an offer for a collateral. This shows the lenders that you are willing to share the risk with them. Secured loans are always easier to go through.

5. The Time and Timing – Both Should Be on Your Side!

As a rule of thumb, you shouldn’t go searching for a business loan when your business finds itself cornered with nowhere to go. This will only lead to you ruining your credit history with multiple rejections. Having enough time at your disposal is the key. This is where good business intuition and experience will come in handy for you.

As far as getting the timing right goes, you should be well aware of the market situations before applying for a loan. Has the industry your business operates in been faring poorly of late? Have there been any major changes in the lending landscape recently? What has been the trend in the interest rates being offered over the last six months?

Answers to such questions will give you an idea about whether you should apply for a loan right away or it’ll be wiser to wait for a few weeks.

Getting a Business Loan is a Process and Should Be Treated as Such

Many loan applicants think that lenders are prone to making arbitrary decisions. While true in rare scenarios, this usually isn’t the case. The lenders are also in the business – the business of lending money. The more businesses they lend to, the more money they end up making. So, as long as you have taken care of the ‘risk’ factors discussed in this article, you will have little to worry about when you apply for an SME loan.

Applying Left, Right & Centre – A Big No!

The biggest – and unfortunately, the most common – mistake that SMEs make is to apply for credit with no plan of action. Applying at a dozen places will not only lead to simultaneous rejections that will do your credit score no good but also handicap your business from accessing finance when you need it the most. Before applying for any business loan, you should be aware of what your options are – without making hard credit enquiries.

That is exactly what we at Commercial Finance Network, a leading whole of market broker, do for you. Working with some of the best-known and specialist lenders across the UK, we make sure that you get a loan offer that’s fair, fast and flexible.

The days of blindly accepting the first offer that comes your way are long gone. Let our team of experts curate the best business loan quotes for you. Call us on 03303 112 646 or contact us to speak with one of our Business Loan Specialists today!