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Why price is not the only issue when looking for the best business lender
It pays to weigh up your options when looking for the best business lender. So, why did 71% of SMEs approach just one provider the last time they sought finance?
The ongoing inquiry by the Competition and Markets Authority (CMA) into competition in the banking industry has already revealed that small businesses are highly unlikely to shop around for finance. But maybe they would be more proactive, and selective, if they focused their attention on looking for advice and partnership rather than just funding.
The CMA’s research reveals 71% of small and medium-sized enterprises (SMEs) approached just one provider last time they sought finance, and 60% of these businesses spent less than an hour considering their options.
A recent study by insurance company Aviva found that 38% of SMEs looking for advice on their business turn to friends and family – compared to just 13% consulting financial advisers, 9% using legal advisers and 6% turning to insurance providers.
Given the strategic importance of these decisions, how can this reluctance to research the market more comprehensively be explained?
To start with, SMEs told the CMA they struggled to differentiate between lenders. “There seems to be this view that all the big banks are the same,” Professor Russell Griggs, Independent External Reviewer of the Banking Taskforce Appeals Process, told the inquiry.
One explanation for this perception is that, on the headline features at least, traditional lenders do offer broadly similar products: comparable interest rates, borrowing limits and repayment terms, for example.
This may explain why SMEs that do switch finance provider are increasingly turning their backs on the banks altogether. Amongst those that have switched over the past 10 years, almost a third have moved from the high street to an alternative source of finance, according to the Close Brothers Business Barometer.
Small businesses certainly do need competitive terms from their lenders, but they also need a range of additional support – above all, a much closer collaborative relationship with a partner that evolves as the business develops rather than a one-off interaction over a loan or overdraft application.
Separate research shows that what will really make or break a business is not the interest rate it is paying on its overdraft, but the quality of the advice it receives. For example, the Federation of Small Business points out that 70% of firms which receive some form of mentoring show over double the survival rate than businesses that don’t receive such support.
The additional support and services these providers can offer has all sorts of advantages. These may include ongoing help tailored to the business’s stage of development, greater flexibility with funding designed around the business as it grows, a closer working relationship where the lender has more visibility of the business and can therefore be more proactive about both opportunities and threats, and better all-round services. Often, alternative finance will be more competitively priced too.
“Without taking the time to properly assess their situation and understand the full range of financial options available,” warns David Thomson, CEO of Close Brothers Invoice Finance, “small business owners and managers could miss out on opportunities for growth as the funding they have in place may not be fit for purpose.”
Pause for thought
- Could switching your finance provider achieve a better all-round deal for your business?
- Talk to the high street banks but consider alternative lenders as well
- Choose a lender on features such as its quality of advice and ongoing business support – not just on price
More and more finance directors and owner-managers are turing to flexible forms of lending such as invoice finance. But how do you work out what is the best invoice finance deal for your business? Here, we take a look at the factors to consider.
