Access to Finance for SMEs

A business loan involves borrowing capital from a lending institution and repaying it, with interest, over a predetermined period. Business loans are very common and one of the first options for businesses looking to raise finance to start or grow their business. The lender provides money that you, as the borrower, pay back, with interest, over an agreed period. The loan amount that you can secure is dependent on both your request and your company’s financial position. Business loans can be for any amount, from £1,000 up to multi-million-pound loans. The amount you can borrow will depend on several factors, including your application and the lender’s assessment of your repayment capacity. When it comes to accessing finance for a small business, a loan is often one of the most common methods for business owners. 

Challenges Faced by SMEs in Accessing Loans 

• Strict Criteria & Paperwork: Strict eligibility criteria, heavy paperwork, and poor lender communication result in low approval rates, deterring many SMEs from applying. 

• High Costs & Collateral Needs: Rising interest rates and security demands have made loans less attractive for SMEs. 

• Risk Aversion & Uncertainty: Economic uncertainty has made both lenders and SMEs more cautious. Many SMEs prefer slower growth over taking on debt. 

• Resource Constraints: SMEs often lack in-house financial expertise to navigate options, making application support crucial 

Terminologies 

Loan Term: The period over which you agree to repay the loan. 

APR: An annual percentage rate is known as an APR. It provides you with a yearly interest rate as well as any compound interest and anticipated costs (such as upfront fees). Lenders usually advertise an interest rate that is lower than the APR and is called the Representative APR. 

Personal Guarantee: It is a legally binding agreement between a finance lender and a business owner or director, that enables a business to take out a loan, and it states that the business owner or director will be personally liable for repaying the loan if the business defaults on loan repayments or becomes insolvent. 

Loan Principal: It is the original amount of money borrowed via a loan.  

Collateral: It refers to the asset used as security to secure a loan. 

There are many types of business loans available in the UK. They range from short-term to longer-term loans and can be either secured or unsecured. 

Secured Business Loans 

With these loans, you’ll need to use an asset from your balance sheet as security. The lender may also consider third-party security, such as a guarantee, instead of or alongside other security. Usually, property is used as security, although other assets like stocks and shares can be used as well. It is preferred for asset-heavy businesses that have the collateral to pledge. 

Unsecured Business Loans 

This allows you to borrow without using any business assets as security. Often, you’ll need to provide a personal guarantee that says you’ll pay back the loan personally if the business can’t. Unsecured loans typically have higher interest rates than secured loans. It works for fast-growing or asset-light forms that need capital quickly. 

There are lots of business loan providers in the UK. They include: 

• High-street banks 

• Challenger banks 

• Community Development Finance Institutions (CDFIs)  

High Street Banks 

They are the large, traditional retail banks that have a widespread physical presence on the main streets of towns and cities. In the UK, the term refers to the major banks that offer a full range of financial services to the general public and businesses 

Lloyds, Barclays, and HSBC are some of the high-street banks providing small businesses with business loans. 

The interest rate can change from month to month as it usually tracks the Bank of England Bank Rate. If the Bank of England Bank Rate goes up or down, so will the amount of interest you pay and your loan repayments. 

In summary, each bank provides loans with varying APR rates, repayment terms, and loan amounts, catering to different needs and financial situations. 

Challenger banks 

Challenger banks are the small, recently created retail banks that compete directly with the longer-established banks in the UK, usually by specialising in areas underserved by the high street banks. They offer a digital-first approach, often with lower fees, innovative features and a focus on customer experience, challenging the established high street banking landscape. 

Some examples of challenger banks providing loans to businesses are Starling Bank, Metro Bank, and Tide.