1. What are non bank lenders?
Business owners often approach banks for loans, but banks are not the only option. Other lenders may be more competitive or more suitable for your business, such as:
- Development Bank of Wales
- commercial loan providers
- peer-to-peer lenders
- social and community lenders, ie Community Development Finance Institutions such as Robert Owen Community Banking Fund in Wales and Purple Shoots
- family and friends
- leasing providers
- factoring and invoice discounting providers (Asset Based Finance Association - ABFA)
If your business has suffered recent losses, has a poor credit rating or has recently been turned down for bank finance, you may find non-bank finance easier to obtain, more flexible and possibly cheaper.
2. The process
Before approaching a non-bank investor, you should make sure your business is ‘investment ready’ by:
- keeping yourself well informed about your business finances
- having an up-to-date business plan
- being clear about the amount of money you require and what it will be used for
- carrying out market research to demonstrate that there's a market for the products or services that you intend to sell
- producing cashflow projections for the next 12 months to show that you will be able to afford repayments, including interest and fees
- carrying out a SWOT analysis (strengths, weaknesses, opportunities and threats relating to your business)
- ensuring your business and personal credit ratings are up-to-date and error-free
3. Loan guarantees
Most non-bank lenders (except, perhaps, your family and friends) will ask you for some form of guarantee before granting a loan. This could include assets such as property owned by the business. You may also be required to ask another person or another business to act as a guarantor and guarantee the loan. The guarantee means that the lender will claim from the guarantor if your business cannot meet the loan repayments.
Some lenders will also require personal guarantees - eg from your board of directors or business backers.
Many loan providers require you to take out loan repayment insurance to cover repayments if your business meets cashflow problems.
4. Pros and cons
- you may get a lower rate of interest and charges than you would with a bank loan
- non-bank lenders may be able to make loans over a longer period than a bank
- less restrictive than a bank when it comes to issues like a poor credit rating or recent losses
- non-bank lenders aren’t as strictly regulated as banks, so you need to be careful when choosing one
5. Common mistakes
You should read all agreements carefully before you borrow from a non-bank lender and find out if any assets will be required as security. Most non-bank lenders are reputable, but they are subject to fewer regulations than banks.
You should avoid unauthorised lenders, also know as loan sharks. An unauthorised lender may give you quick access to credit, possibly without needing a business plan or security, but there may be drawbacks including unfavourable interest rates and loan terms.
You may be dealing with a loan shark if:
- the salesperson is pestering you or is particularly pushy
- the interest rate is significantly higher than that of other lenders
- the company is reluctant to show you the loan terms and conditions
- you are asked to tie yourself into a longer-term contract than you need
6. Funding sources
There are a number of different types of non-bank finance sources, these include:
Commercial loan providers
Commercial loan providers provide financial services like loans and credit facilities, but don't have a banker's licence. This means they cannot take deposits from the public or offer normal banking facilities such as overdrafts. However, they can have less restrictive lending criteria and may be a useful source of funding. You can check the Financial Services Register on the Prudential Regulation Authority website to make sure that the loan provider is registered.
Peer-to-peer lenders (Crowdfunding)
Peer-to-peer lenders let you borrow money directly from savers - cutting banks out of the equation. Terms can be more favourable - eg no early repayment fees - and you may find you are accepted even though banks have turned you down. Also, some services are free and unsuccessful applications for funding will not affect your credit rating.
Some peer-to-peer lenders include:
- Funding Empire
- Funding Circle
- Alternative business funding
Social and community lenders
Social lenders are generally non-profit making organisations that can offer loans and credit:
- Community Development Finance Institutions (CDFIs) lend to businesses, social enterprises, charities and individuals who intend to use the money to help and develop their local community. The Community Development Finance Association has a tool that can help you find CDFI finance.
- Co-operative and Community Finance, the trading name of the Industrial Common Ownership Finance family of businesses, lend to organisations that are owned and democratically controlled by their members, who are usually either employees, customers or members of a community. They lend to those that practice the principles of co-operation, social ownership and sustainable development.
- Credit unions - credit unions offer loans that are accessible and affordable. They are owned and controlled by their members. This means they make decisions that are in members' best interests. Find a credit union in your area.
- The Prince’s Trust give practical and financial support to help your business get off the ground, developing key workplace skills such as confidence and motivation. They work with 13 to 30-year-olds who have struggled at school, have been in care, are long-term unemployed or have been in trouble with the law.
- UK Steel Enterprise is the wholly owned subsidiary of Tata Steel tasked with the responsibility of helping the economic regeneration of communities affected by changes in the steel industry. They support small and medium enterprises with finance and premises. They provide loans up to £750,000. You can find out more on how to apply here.
- The Social Business Growth Fund (SBGF) supports social businesses in Wales financially to enable them to grow and create job opportunities. SBGF is managed by Wales Council for Voluntary Action (WCVA).
British Business Bank
Business Finance Partnership via the British Business bank
The British Business Bank is being set up as a UK Government backed economic development bank, and the brand was officially launched in October 2013 with the marketing strapline ‘Unlocking finance for smaller businesses’.
The Bank’s focus is to address imperfections in the market. The sort of problems it deals with include a lack of diversity and quantity of finance, and low awareness of what is available.
One of the Bank’s solutions for lending to SMEs (with a turnover up to £75m) is the funding of alternative providers of finance through the Business Finance Partnership. This includes 7 non-traditional lenders. Businesses should contact the lenders directly. See the list on Business Finance Partnership British Business Bank.