New research reveals there has been a sharp increase in SMEs looking to borrow money to finance growth in the first half of 2019, according to a report by the BVA BDRC SME Finance Monitor.
The report shows that almost half (46%) of SMEs were using external finance in the first six months of 2019, up from 36% in 2018. The largest increase in business finance was for overdrafts, up from 19% in 2018 to 23% in the first half of 2019, followed by credit cards, rising from 14% to 19%.
This has led to the proportion of businesses using finance (46%) now exceeding the proportion that are not (41%), which is the first time this has happened since 2014.
Michael Foote, Managing Director of Quote Goat commented: “Many SMEs need finance at some stage and it can be a time consuming exercise to find the right funding source.
“Many are relying on overdrafts, as they appear to be the easiest option, but they can come with high interest rates, so it’s certainly worth shopping around. It’s important to consider the variety of options available to businesses from traditional loans to alternative finance solutions.
“SMEs should also look out for hidden charges such as early, late payment or even processing fees. If they are not careful, these can substantially add to the cost of loan repayments. If a fee was not explained by the lender, businesses can challenge the charges via the Consumer Rights Act. This legislation protects an individual’s rights and makes it easier to contest hidden fees and charges. If this fails, it’s worth seeking redress with the Financial Ombudsman Service (FOS).
“There are now a variety of lending options that are more tailored to the specific needs of borrowers. Merchant cash advances, for example, are calculated as a percentage of a business’s daily card takings and automatically repaid. Invoice finance is another form of lending that can quickly increase business cash flow using the value of your unpaid invoices as security for the lender.
“With traditional bank loans, borrowers are required to pay back a fixed repayment on a set day each month. In comparison, a merchant cash advance is a relatively new type of unsecured lending and unlike a typical business loan, there is no interest charged and repayments are based on a percentage of the card machine sales each day. This helps to ensure that repayments stay in line with cash flow, during both busy and quiet periods throughout the year. The amount to be paid back is based solely on the card receipts and not on cash takings.
“Merchant cash advances have been praised by the government as an alternative funding option for UK businesses and they have already helped thousands of small business owners secure the funding they need for new expansion, equipment and more.
“If a sole trader or small business has been in business for more than six months, has monthly card sales of £5,000 or more, is a UK resident and over 18, they can qualify for a merchant cash advance. All credit histories are welcome, so even if they have bad credit, they can still be accepted for funding. The application process is quick and requires no paperwork, or credit check.”
Before applying for a business loan, it is important to decide:
- What is the purpose of the loan?
- The amount you would like to borrow.
- The period of time you can comfortably pay it back.
- What annual percentage rate (APR) are you comfortable with?
- That you have taken into account any additional fees.
Taking out a loan is a big commitment. Make sure you are borrowing from a reputable lender. A background check is a good way to start. You can typically find customer reviews online that should help inform your decision. You can also use a comparison site to quickly and easily compare quotes from multiple lenders.
Applying for a loan is daunting enough given the huge number of lenders offering finance at different rates. Then you have to make sure you pick an appropriate payment schedule. Once this is all done you will have to check the terms and conditions to make sure you haven’t overlooked something that might come back to haunt you. It is the duty of a loan provider to make sure the information you receive is clear and accessible. If you don’t understand something, make sure you ask for clarification.
Quote Goat works with a panel of lenders that provide a variety of funding solutions. Businesses can talk through which option is suited to an SME or sole trader’s needs when they apply via the form on our business finance page here