I recently came across an article headlined: “8 in 10 SMEs still prefer traditional bank loans over alternative finance".
It noted that 83% of financial directors preferred to go to their bank as their first port of call when seeking a loan, rather than finding an alternative, such as P2P lending or equity crowdfunding.
It claimed that a lack of understanding could be the reason for this, but pointed out that almost three-quarters of finance directors (74%) believed their knowledge of alternative finance was either “average or above average”.
So why the lack of appeal? Alternative finance tends to be faster and much more efficient than traditional bank lending, as well as easier to apply for.
Because these platforms don't have to adhere to the same level of underwriting and due diligence as regulated banks – who benefit from being able to collect Financial Services Compensation Scheme-protected deposits – the amount of information needed to apply is minimal in comparison.
Applications can be completed in a matter of minutes, which removes a huge amount of hassle for the business owner and enables him or her to get back to running their business.
The timeframes to get the finance are also much shorter on average – crowdfunding campaigns are typically capped at two months, while P2P lending decisions can be made in as little as 24 hours. And businesses are spoilt for choice: there are numerous platforms to choose from, including those that specialise by sector and region. In the P2P lending space, there's the likes of Funding Circle, RateSetter and Lending Club. With regards to crowdfunding, there's Seedrs, Kickstarter and Crowdcube – to name a few – where businesses can raise millions of pounds in a matter of hours.
However, the key downside is that alternative lending tends to be more expensive than traditional bank loans. Since they're unable to raise retail deposits to help keep their cost of funding down, P2P platforms generally charge higher rates of interest, while crowdfunding forces business owners to dilute and give up equity – a much costlier option.
What's more, if hundreds of people participate in the crowdfund, then suddenly the business has hundreds of shareholders, which can create a huge administrative burden.
An 'alternative' that might appeal, therefore, is taking out a traditional loan from a non-traditional bank. If SMEs are willing to look beyond the big five and consider a 'challenger' or new bank, I think they'd be surprised at just how quick and efficient the process can be.
For example, we complete loans in three weeks on average and offer additional benefits, such as the opportunity to meet the credit committee and provide term and revolving credit facilities. We're also willing to consider multiple asset types – stock, debtors, plant and machinery, intellectual property, art etc – rather than just defaulting to real estate.
SIGN UP TO OUR NEWSLETTER TO RECEIVE MORE NEWS LIKE THIS STORY
Monzo raises £20m in latest crowdfunding round
Monzo has raised £20m in just over two days via its third crowdfunding round...
Could more banks look to use gamification?
Gamification is defined as the application of typical elements of game playing to other areas of activity, typically as an online marketing technique to encourage engagement with a product or service...
Bank Leumi (UK) appoints chief business officer
Bank Leumi (UK) has announced the appointment of Andy Mallin (pictured above) as chief business officer...
Handelsbanken launches UK banking subsidiary
Handelsbanken has launched its new UK subsidiary Handelsbanken PLC as it looks to continue the next stage of its growth in the UK...
Making the most of savings in 2019
Personal finance headlines and best-buy tables are dominated by retail savings products, with very few column inches dedicated to helping businesses determine the best places to stash their cash...
PCF posts 44% pre-tax profit increase
PCF Group PLC has reported a 44% increase in pre-tax profits to £5.2m (2017: £3.6m) in its preliminary results for the year ended 30th September 2018...
Mortgage Sleep Out raises over £100,000
Mortgage Sleep Out has raised more than £100,000 for End Youth Homelessness (EYH)...
Gatehouse Bank launches home purchase plan product
Gatehouse Bank has announced the launch of its first home purchase plan product after securing regulatory approval...
Monese offers free premium current accounts for dual UK/EU citizens
Monese has announced the launch of free premium current accounts for those holding dual EU/UK citizenship...
Masthaven selects Dock9 as digital development partner
Masthaven has chosen Dock9 as its digital development partner...
Aldermore appoints head of mortgage omnichannel
Aldermore has appointed Jon Cooper (pictured above) as its new head of omnichannel within its retail mortgage business...