- Credit seekers should carry out in-depth research on the viable options prior to access funding
- The increasing competition in the changing landscape of the banking industry through the emergence of fintech firms has made securing business loans a lot simpler
Accessing credit is perhaps one of the most critical factors that a business must consider for financing its ambitions. It enables businesses to achieve their targets and undertake expansion activities while empowering economic prosperity in the long term.
During the unprecedented crisis caused by the novel coronavirus, we came across several businesses making announcements on the London Stock Exchange (LSE) related to fundraising, either through a bank loan facility or a revolving credit facility (RCF). These two methods were frequently exercised by publicly listed companies to secure business loans. This kind of fundraising is usually meant for meeting the short-term requirements of the businesses.
According to a recent report published by Bank of England (BoE), the UK based corporates accessed an additional credit of £7.4 billion from the banking system in May 2020. Bigger businesses repaid loans worth £12.9 billion. The additional borrowings were primarily driven by Small and Medium Enterprises (SMEs), which accounted for nearly £18.2 billion. These additional borrowings include loans disbursed through Bounce Back Loan Schemes and other similar government-supported schemes.
In addition, the private sector businesses in the UK borrowed a total of £11.4 billion from the financial markets and the banking system in May 2020. A much stronger borrowing of £31.8 billion was witnessed in March 2020 as the lockdown was imposed by the British government followed by £14.0 billion borrowing in April 2020.
It is a well-known fact that bigger businesses get cheap and easy access to credit in comparison to smaller businesses. SME’s constitute a major chunk of the UK’s economy and have a significant contribution to the UK’s economy by providing a large number of employment opportunities. Therefore, a larger number of lenders are willing to fund these businesses.
However, the seekers of credit should carry out in-depth research prior to accessing funding as the terms of each lender could be different – providing you with the distinct cost of financing. It is imperative for credit seekers to act astutely in evaluating various financing methods.
Banking is about lending money and earning interest out of it. The Banking industry has become very competitive with disruptive offerings coming up, such as Peer to Peer (P2P) lenders. The conventional bankers have migrated to paperless banking with the evolution of online applications. Most of the banking services, including loan disbursement services, are offered online.
However, before making a final decision of choosing a lender, one must pay attention to detail such as processing charges, payment schedules, applicable interest rates, tenure of the loan and flexibility options such as foreclosure.
Just like mortgages, the applicable interest rates might be of two types: fixed and floating. The interest rate remains unchanged over the tenure of the loan in case of a fixed interest rate. However, the interest rates keep on changing from time to time, according to the underlying benchmark used by the lender as per the prevalent monetary policy in case of a floating interest rate. There is no rule book of making a choice between the applicable interest rates. However, the tenure of the loan would be an important factor to make a choice between the two.
The increasing competition in the changing landscape of the banking industry through the emergence of fintech firms, securing business loans has become easy. Let us look at debt financing from different perspectives.
- Loans v/s Crowdfunding
Traditional bank loans come into our minds whenever we think of debt financing options. This method of financing often requires the loan seeker to maintain a good relationship with the bank. In addition, the loan seeker must be able to convince the bank regarding the appropriate usage of funds. Upon successful validation of a well-researched business plan presented by the credit seeker and good credit history, the bank might offer debt on competitive interest rates. However, this process of raising finance could be time-consuming. Barclays Plc (LON: BARC), Lloyd Banking Group Plc (LON: LLOY), HSBC Holdings Plc (LON: HSBA) and many other options are there to seek access to conventional loan products.
On the flip side, crowdfunding is about raising money without any intervention of the banks. This can be done seeking credit from P2P lenders or through the issuance of shares (equity fundraising). Crowdfunding provides access to a larger pool of resources for raising funds due to which the cost of financing could be lesser in comparison to traditional loans. Zopa Group, which was recently awarded full banking license by the FCA, is a veteran in the P2P lending space.
- Secured Loan v/s Unsecured Loan
While disbursing a secured loan, the lender would ask for a collateral or security, which could be confiscated in case of a default from the credit seeker. The security would be used by the lender to cover the cost of the loan, and usually has a high monetary value. Moreover, the loan amount is often a function of the value of the collateral. For instance, loan against property or Gold. On the contrary, an unsecured loan is offered based on the risk and credit profile of the business. Funding Circle, Barclays, NatWest, and many others offer both kinds of loan products.
- Start-ups v/s Established businesses
For brand new businesses, government-backed finance is available through the Department for Business, Energy, and Industrial Strategy (BEIS) under which business could borrow up debt and repay at a fixed rate of interest. However, some mainstream banks, including NatWest do offer loans for start-ups. A £40 million fund has been recently announced by the government for green start-ups.
Existing businesses must provide credit history, financial position, and future estimated earnings to secure loan from the banks. Barclays, HSBC and many others provide loans to established businesses having a stable outlook.
In addition, depending upon the nature of the business, the credit seeker might get an option of raising funds through venture capital or angel investing. But these options would dilute the ownership of the business.
Maybe the most basic aspect after a business has ensured the necessary financing is being able to repay the debt obligation. It might include estimating the income, using profits to reduce the debt obligation, debt restructuring or syndication, and so forth. In addition, estimating budgetary requirements by arranging your business would keep you familiar with the commitments and the ideal targets, which would empower you to meet those commitments.