Why high street banks are no longer the go-to option for business finance
If your client needs finance, their business bank needn’t be their first port of call.
There are a whole host of finance options and providers out there today. From specialist lenders to flexible forms of funding, there’s something out there for everyone.
Until recently, non-bank and fintech lenders were often described as “alternative”, and products like merchant cash advances and revolving credit facilities were defined as alternative forms of finance. But not anymore.
The fintech sector emerged as an alternative to the large institutions that had monopolised the market for centuries. Fintech founders were driven by the idea that competition and choice are vital components of a functioning free-market economy.
Fintech pioneered a new era that opened up funding for both the consumer market and businesses, through niche new products and category challengers.
Products like asset finance facilities, which allow businesses to access the equipment they need to run or grow their business - from commercial fridges to electric vehicles. Monthly repayments are typically spread over one to three years.
Invoice finance, meanwhile, helps businesses take control of their cash flow quickly by releasing cash tied up in customer invoices. Businesses can choose to finance multiple invoices or a single invoice.
Merchant cash advances are also flexible and designed for businesses that take customer card payments. The business owner borrows an amount which it pays back through a percentage of its customer card payments.
Traditional term loans require businesses to pay their borrowed funds back, plus interest, in accordance with a fixed repayment schedule. A revolving credit facility, on the other hand, lets business owners withdraw borrowed funds, repay them and then withdraw the funds again when they need to.
Asset finance, invoice finance, merchant cash advances and revolving credit facilities are just four of dozens of finance options out there at the moment.
The peer-to-peer lending marketplace Funding Circle delivered almost a quarter of all CBILS loans in 2020/21. Starling Bank, which was founded in 2014, expects to own 18% of SME business banking accounts within the next five years.
These successes indicate that fintech lenders have entered the mainstream - which is why the “alternative” prefix no longer applies.
It can be difficult for SMEs to obtain funding from their business bank.
The process can be fairly protracted, with your client having to attend an appointment with their bank manager to explain why they need the finance, and put together a comprehensive business case with a detailed business plan and cash flow projections.
Then, they have to wait while the bank considers their application. But in many instances, time is of the essence and business owners can’t afford to wait days or weeks to draw down.
The Covid-19 pandemic accelerated digital innovation and processes. Some of the largest banks in the market leveraged fintechs to deliver business loans quickly while safeguarding against fraudulent applications.
Fintechs use two technologies to ensure that an applicant is who they say they are.
One is called KYC – Know Your Customer, and the other is AML – Anti-money laundering. These are both baked into the fintech solutions’ back-end infrastructure.
KYC and AML ensure that due diligence is performed in a way that can be more secure than if the business owner shared paper documents with their local bank branch.
Funding Options’ Funding Cloud platform uses KYC and AML together with open banking technology to facilitate real-time loan approvals. To put this into context, we recently facilitated a £25,000 loan via iwoca in just 20 seconds.
Instead of having to wait for a bank approval, platforms like ours provide business owners with certainty. They enable them to focus on running their business in lieu of spending hours searching for finance and filling out paperwork.
In the words of Ron Kalifa OBE: “Fintech is not a niche within financial services. Nor is it a sub-sector. It is a permanent, technological revolution that is changing the way we do finance.”
Fintech accounts for 10% of the global market and UK fintech generates £11bn of revenue. Use the Funding Options platform to see what your clients could be eligible for today.
Thomas Boyd is Head of Advisory at Funding Options.