The deadline for starting an application for a government-backed loan has been extended to January 31st 2021, but lender appetite is diminishing. What should you do and who do you turn to when you need working capital and the bank says no?
UK businesses have used government-backed loan schemes to survive these most gruelling of months. And with the latest lockdown adding to to the pain, the second wave will push those in perilous situations over the edge. If you’re one of the hundreds of thousands of business owners temporarily closed again you’re probably exploring your options.
Government-backed schemes have naturally been the first port of call for business owners. More than £50bn has been approved in Coronavirus Business Interruption Loans (CBILS) and Bounce Back Loans (BBLS), with more than 1.3 million struggling businesses utilising them. But banks are restricting access to them due to fears of fraud and future defaults and more likely to back the larger small businesses now. The National Audit Office has said that up to £26bn of £38bn BBLS loans may not be repaid. And then there is a backlog of applications to process, although with the latest extension that will ease.
So it’s not that you shouldn’t apply. In fact the opposite is true. CBILS is unique in that there are no fees or interest to repay in the first 12 months. In September £15bn on CBILS lending was approved across 70,000 businesses. And as the backlog for processing applications clears, the sooner you do so, the more likely you’ll get funds when you need them most. But you may need to look beyond your bank – alternative lenders such as Funding Circle and iwoca are still active. You don’t have to start repaying the loan for the first 12 months. You are 100% liable for the debt, however.
These schemes do have their limitations. With a cap of £50,000, BBLS are often not high enough to see business owners through a longer period of disruption. High street banks also limited CBILS applications to existing customers only. While it is possible to take out CBILS funding from multiple lenders, having existing credit – even when it’s government-backed – can be a negative factor in the bank’s decision. Ultimately it comes down to affordability and the bank’s discretion.
The need for working capital
Despite difficult trading conditions, we are still seeing plenty of businesses looking to grow. Businesses that are pivoting to take advantage of a seasonal trend or retailers expecting a jump in orders. They are working hard to keep income streams looking healthy – it’ll be crucial for the longevity of the business, which will in turn keep people in jobs and even create new ones.
To hire new staff, buy new stock, or invest in another delivery vehicle, businesses need funds. This is easier said than done of course. The bank may have a few products, but they might not be suitable depending on the type of business you are.
For example, a retail store won’t qualify for an invoice finance facility. That’s one product off the list already. You may also be close to reaching the limit of your overdraft facility and your bank doesn’t offer business credit cards. In other words, your options with your own bank are limited.
It’s easy to get disheartened once you get a ‘no’ from your bank. Why try another lender? If the bank that is supposed to have your back says no, surely, you’ll be disappointed again with another?
Alternative finance options
There is a thriving alternative finance market that lots of businesses like yours simply don’t know about. When you’re busy managing your business and spinning plates it’s not always easy to assess all of the funding options available. Keeping a close eye on your cashflow takes precedence. But try working with someone who can flag potential options while you still have time, such as your accountant.
There is a multitude of short-term finance products that will help businesses like yours maintain a healthy cashflow and give you immediate working capital:
The banks have invested a lot in CBILS even with government-guarantees so we expect them to clamp down on new unsecured business loans. Instead, there will be more appetite for traditional asset-based lending, which works in the favour of businesses that have machinery, equipment, vehicles, property or a debtor book. Not only does it give the lender an element of security in a worst-case scenario, it can be just the ticket for businesses to use their assets to restructure.
Merchant Cash Advance
Asset-based lending, and invoice finance facilities in particular, are unsuitable for retailers that are better served with a Merchant Cash Advance. It is not exactly a loan, rather a lump sum advance payment where the ‘lender’ takes a percentage of future PIN transactions until the amount plus interest is paid back. Because it’s pegged to the value of each transaction and there are no fixed monthly repayments, it’s perfect for the retailer who experiences natural peaks and troughs.
Revolving credit facility
This is also known as a line of credit, an established credit amount that business owners can access as and when needed. Unlike a secured or unsecured loan, where interest is paid on the entire sum, business owners only pay interest on the credit used, not the whole line. It’s perfect for cashflow purposes where the amount can be paid off as soon as an invoice is paid. Borrowers can use the line over and over again – until the end of the agreement that is.
“If you fail to plan, you’re planning to fail”, the saying goes. The longer you wait – and the more pertinent your finance need becomes – the higher the price in the form of interest rates and repayment terms. And crucially, a product of ‘last resort’ could provide immediate relief but prove so damaging to cashflow that it could spell the end of your business.
In the face of adversity, business owners must keep their eyes open to any threats and opportunities. Only by acting in a timely manner will they be able to not just survive, but thrive.