Small firms should learn that debt is not a dirty word

Why are so many firms shunning debt, and should they?


More SMEs are wary of borrowing, but they’re missing out on a host of innovative finance, which offers easy, flexible ways to access funds - and to repay them.

FEW people would claim to love debt – US presidential nominee Donald Trump, the self-styled king of debt, being a notable exception. But smart business owners recognise a degree of borrowing is often necessary and desirable if their enterprises are to realise their full potential. Plus, today, entrepreneurs have more choice, flexibility, and faster provision of funds than ever before through alternative finance and other forms of fintech.

Nevertheless, it seems more firms are shunning debt.

Almost half of British SMEs describe themselves as ‘permanent non-borrowers’, meaning they haven’t sought outside funding in the last five years, as the latest SME Finance Monitor shows.

Just one in three said the same in 2012.

But, what is behind this growing phobia of owing money? Some business owners never borrow, others only when they actively plan to grow, while a proportion prefers to use personal funds or trade credit when they need liquidity. However, there is some good news - of those entrepreneurs who are confident enough to take on debt, many are increasingly seeking innovative sources of funding, namely alternative finance. The ‘altfi’ industry was valued at £3.2 billion last year by innovation charity Nesta, now representing 12 per cent of all small business lending. But, it could do much more.

British SMEs lose out on £20 billion annually due to lack of awareness of alternative sources of business funding, according to GLI Finance. Conrad Ford, CEO of online SME finance aggregator Funding Options, is frustrated many businesses still don’t realise capital is available beyond the mainstream banks. He adds: “There isn’t a lack of supply of finance for businesses in the UK. In fact, there are plenty of innovative lenders who have the appetite to lend, but they’re currently not reaching SMEs.”

The UK’s big four banks account for nine out of ten SME loans, the Competition and Markets Authority has found. What so many of these enterprises have yet to learn is that the technology boom has created a host of potential funding sources for smaller companies, including peer-to-peer loans and crowdfunding, through to revamped invoice finance, as well as fast-track, unsecured online loans. And those that do tap into these new funding providers find they’re not only offering revolutionary products, but also easier ways of repaying debt.

Many of the new generation of lenders allow small business customers to automate payments via Direct Debit, for example, using the services of fintech pioneers such as GoCardless. This is a huge shift for small businesses that have traditionally relied on cheques, direct bank transfers, and old-fashioned cash to receive and make payments. Banks typically only offered SMEs Direct Debit on condition of a bond, plus they charged thousands of pounds, and employed slow, complex processes.

Leading fintech lender Funding Circle was one of the earliest adopters of GoCardless’s innovative payment collection method. Funding Circle CEO Samir Desai cited a major advantage as the simplicity of one person being able to collect money owed rather than needing an entire department. Others from the new generation of fast-track business lenders, including Capital on Tap, Fleximize and Boost Capital, also employ GoCardless’s repayment services, which offer their customers flexible payment plans on a daily, monthly, or ad hoc basis.

Alex Littner, managing director of short-term lender Boost Capital, anticipates such innovations in repayment practices will both enhance the appeal of altfi, and could impact upon attitudes towards debt more broadly. He says: "Our customers can now make loan repayments using Direct Debit, which is easier, quicker, and more convenient for them and us. People need to borrow for a myriad of reasons even at difficult times in the economic cycle. When bosses realise how fintech is developing to make their experience of debt and repayment as painless as possible, more should see that properly delivered and managed borrowing can be the making of a business’s success."

Clive Lewis, head of enterprise at the Institute of Chartered Accountants in England and Wales (ICAEW), sees other potential benefits for small firms using these new forms of business finance and management. He comments: “What GoCardless is offering should mean SMEs’ accounting is under more control, plus the aged debtor analysis - how much customers owe the business analysed by the length of time outstanding – is easier to keep up-to-date.”

The ability to receive and repay funds quickly was a key reason Joe Moroney turned to Boost Capital to fund his children’s publishing and animation business Fourth Wall. The banks were unable to provide fast capital to buy extra stock to fulfil a large number of orders at the company’s busiest time of the year. Moroney was introduced to Boost Capital by a commercial finance broker, and his firm, which is based in Bromborough, Cheshire, was soon able to meet customer demand. Joe says: “It was a swift process, and there was great customer service along the way. We’re growing at a fast pace, so working with Boost Capital meant we could immediately fund projects that would otherwise not have gone ahead. Repaying the loan quickly and easily via Direct Debit was also a bonus.”

The ICAEW’s Lewis understands some businesses are uncertain about borrowing in the current climate, but points out the enormous potential for those that invest now using the range of borrowing on offer. He adds: “With interest rates at historically low levels and little prospect of an increase, businesses need to seize the opportunities created. The depreciation of the pound is a rare opportunity to expand overseas, for example, so they should consider the risks and rewards of investing to enter new markets, always analysing the cost versus the benefits. A conversation with their accountant can help decide the best course of action.”

Debt may not be something to love, but, handled properly, neither should it be a source of fear. It can certainly bring a business great rewards. And, in the altfi age, borrowing almost certainly looks different to that most SMEs have experienced before – flexible to their needs, easy to access, and simple to repay.

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