Nucleus CF

Moving away from the mainstream: why younger businesses are seeking alternative finance




The ability to access working capital for a business is fundamental to its success.

It’s no surprise, therefore, that SMEs across the country rely on funding to continue to operate and fuel their growth ambitions.

However, the reality for younger SMEs is not as promising. Despite the fact that the number of new companies registered last year rose to a record high of more than 663,000, of the SMEs which choose to source funding externally, the success rate for applications for younger businesses is much lower. 

Age matters

The Small Business Finance Markets 2017/18 report found that younger businesses continue to find it more difficult to obtain finance, with small businesses under the age of five years old accounting for 23% of successful loan applications, despite representing 36% of the business population. Meanwhile, confidence that a loan application would be accepted was down to 43% in the three months to November 2017. This may explain why SMEs remain reluctant to take out external finance.

A recent survey by ThinCats found that 65% of SME decision makers under the age of 35 would prefer to opt for alternative sources of funding for their company. When it comes to commercial funding, it appears that age really does matter, as the age of the business also influences the type of external finance sought. Over 70% of businesses aged 35 and over claimed to turn to traditional banks first when in need of funding, compared with just 32% of businesses aged 10 years or less which would also look to their bank for additional cash.  

So, why is alternative lending taking off?

Leveraging assets

Traditionally, commercial borrowing has heavily relied on the amount of collateral a business can put forward in order to obtain the required amount of funding. While business loans are still proving very popular among businesses, new businesses, start-ups and small businesses often fall short of having fixed assets to leverage. As a result, their commercial loan applications often get rejected by high street banks.

However, unlike the majority of the traditional banks, alternative lenders are willing to deal with these types of businesses which are low on fixed assets. Alternative finance providers are able to work with start-ups which are unable to provide the adequate amount of assets to banks and instead allow customers to use a charge against other assets, such as their residential property. Property finance is often the solution small businesses are looking for as it allows them to access the funding they need to be able to achieve their growth ambitions. 

Catering to individual needs 

Following the banking crisis of 2008, tighter lending standards have meant that high street banks are reluctant to lend to businesses that are deemed risky. Unfortunately for start-ups, they fall within this category, given their lack of historical profitability and business accounts. 

While the mainstream banks tend to operate on the four Cs of credit — capital, collateral, capacity and character — alternative finance providers look at the bigger picture. Taking into consideration what each business does, alternative lenders can then recommend a bespoke funding solution that takes into account both the strengths and weaknesses of a company, providing support each step of the way. 

Moreover, whereas banks tend to prefer to grant loans of larger amounts when it comes to business lending, alternative lenders, such as ourselves, will provide loans from as low as £3,000 up to £50m. This means that they can help businesses of a variety of shapes and sizes.

Given that 99% of all UK businesses are SMEs, and their resultant impact on the economy, the alternative finance industry has a paramount role to play in helping businesses to achieve their goals. With their less stringent rules and personalised approach to lending, it’s no wonder more and more businesses are turning to alternative lenders.

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