The short-term finance sector can help with the development of struggling small firms into successful companies
With rising commercial rents and energy bills alongside so much economic uncertainty, times remain tough for small businesses. Granted, conditions have improved since the recession, but many firms are still suffering the same problems.
One of the most serious challenges for any small company is cashflow. These businesses have constant outgoings, stock costs and the new national living wage to contend with, so finding the funding to invest with or even just keep the lights on can be a headache for entrepreneurs.
The situation is even more difficult for new businesses whose product is yet to come to market. These firms have limited sources of capital while they wait to generate income.
This can be particularly true for start-ups in sectors such as technology or property, where substantial investment is required but the products take longer to reach the market.
In Shoreditch, a popular location for start-ups, commercial rents have almost tripled from an average of £17 per square foot in 2010 to £48 in 2015, according to EY. With rising expenses, small firms are increasingly in need of additional capital to continue their operations.
But even when facing these trying conditions, many small companies are keen to expand. Recent research by eBay found two-thirds of small businesses planned to invest over the next year.
However, banks remain hesitant to help fund this progress. High-street lenders are often reluctant to support small firms because of the higher risk profile involved.
A report by the FCA last month found many banks were ‘de-risking’ by dropping small businesses as customers or refusing their applications because of increased regulation. Tech firms, in particular, are struggling because the decision-makers at high-street lenders cannot always grasp innovative business models, so will not provide the finance required.
With the big banks stepping away, the space is open for bridging lenders. A short-term loan can be extremely useful for these small businesses; by fixing short-term cashflow problems, it can make it easier for businesses to bring their product to market.
The short-term nature of the loans ensures companies are not saddled with debt for years to come, which will make it easier to apply for finance in the future, while paying off the loan will boost the firm’s credit rating.
Bridging can also offer a helping hand to struggling businesses. A short-term loan can keep a business afloat until its product comes to market or larger long-term financing can be agreed. Bridging loans can also be used to cover unexpected costs, enabling the business to absorb them over time rather than have to pay upfront straight away.
The main advantage of bridging for all businesses is the speed on offer. While traditional mortgages and bank loans can take months to arrange, a bridging loan can be completed in days.
When used appropriately, the ability to raise finance this quickly can be a major benefit, enabling a business to make the most of any impromptu opportunity. This is especially true if the business is buying stock at auction, when having the finance for the purchase could enable it to bid when the costs are lowest.
By allowing businesses to act at the right time, bridging loans can become a vital tool in ensuring their growth.
Short-term finance is particularly useful for small property development firms because it enables a borrower to raise the finance required to purchase a property at auction and carry out renovations, based on the value of the property once these improvements are complete.
With the construction industry contributing nearly £90bn to the UK economy – equivalent to 6.7 per cent of GDP – helping small developers will make this sector more competitive and boost the economy overall.
When considering a bridging loan, it is important to use a lender that understands what businesses require. The lender must have the capacity and experience to deliver the loan as quickly as possible, while still ensuring the borrower is properly protected.
By helping small businesses, the short-term finance sector can further enhance its own reputation and contribute to the development of struggling small firms into successful companies.
Stephen Wasserman is a director of West One Loans