Getting finance when the banks say no. 

an article by David Koch.

from Kochie's Business Builders 

It can be a soul-destroying feeling if you have approach a big bank for funding and you get a knock-back – especially if you were counting on this money to fund business growth. When a small business approaches a big bank and is refused funding it’s usually because the financial position of the business doesn’t meet the conservative larger banks’ strict risk management protocols. But the big banks are not the only finance option open to small business. So let’s look at some funding alternatives to bank funding. 

Option 1 – small banks and non-bank lenders 

Banks are not the only institution to lend small businesses money. There is a range of other lenders out there that offer finance to smaller outfits and it’s worth exploring these options if the big four banks won’t lend you money. Try getting in touch with a credit union, or approach one of the non-bank lenders. But take care to scrutinise the terms they offer – it’s not worth taking out a loan if the interest you will pay is more than the return you expect to be able to generate from the funds. 

Option 2 – factoring and discounting 

Once the sole province of businesses in trouble, debtor finance has now become an accepted form of financing for businesses that need quick access to their cash. One type of debtor finance is factoring – where a financial institution will lend you the money owed on your outstanding invoices, minus a portion of the face value of the invoice, and will also collect the debts for you. Another approach is invoice discounting, where a finance firm will extend the value of your outstanding invoices minus a proportion of their face value, while you continue to manage the debts yourself. The amount you pay to the finance firm will depend on the level of risk attached to the portfolio of invoices and will be determined by factors such as the age of the debts and the credit history of the debtors. Once again, be careful not to give away too much margin if you enter a debtor finance arrangement. 

Option 3 – angel investors 

Angel investors are usually wealthy individuals who have experience in a particular sector, as well as funds to contribute to a business initiative. They look to be able to make a managerial or strategic contribution to a business as well as deliver a cash injection – sometimes for a portion of the business’s equity, sometimes in exchange for a certain return from their investment. This can be a good option for small businesses looking for strategic guidance as well as funds. 

Option 4 – government grants 

Don’t forget state and federal governments offer small businesses grants to get up and running and to grow. Go to www.business.gov.au for more information about grants that might apply to your business. 

Finally – don’t be despondent if a big bank knocks you back. It might be the bank wants to see a lengthier trading history, or have you address some risks in your business. If the bank says no to finance it’s always worth having a chat to your bank manager to find out what you can do to improve your chances of securing funding next time you apply for a loanPage under construction...