Having a steady cash flow is critical for any business and startups and smaller firms are certainly no exceptions. How can these companies prove that they are creditworthy? What if multiple financial institutions deny them loans? This is where other financial options can come into play, including asset-backed financing. The UK has taken it one step further and hopes to improve cash flow for SMEs.
The UK governmentannounced on Aug. 6 that banks must forward SMEs’ unsuccessful loan applications to other potential finance providers, including asset-based financiers. According to the Asset-Based Finance Association (ABFA)–the body that represents the asset-based finance industry in the UK and the Republic of Ireland–the move could be huge for small business funding in the UK.
By referring SMEs to platforms that will connect them with other finance providers, more businesses could be enabled to find the funding they need, according to the ABFA. The organization said that 40 percent of businesses give up on finding funding after being turned down by their banks.
“Asset-based finance is a key part of the tool-kit available to assist the cashflow of UK and Irish businesses,” ABFA Chief Executive Jeff Longhurst said. “It’s great to see the government acknowledge that the industry is already making an enormous contribution to funding the economic recovery and can make an even greater contribution in the future.”
Longhurst added that the ABFA hopes that the news measures “will begin to close the knowledge gap that is preventing small businesses from accessing the funding ABFA members can provide.”
According to Longhurst, ABFA members have been providing finance to SMEs for more than 50 years and currently fund more than 43,000 businesses with a combined turnover of £68 billion. The industry is still willing and able, however, to support more companies.
The value of business funding provided by ABFA members has risen to £17.5 billion–29 percent–since the peak of the recession in 2009. More traditional types of lending have fallen by 19 percent over the same period, the ABFA reported.
America’s attempt at helping SMBs
The United States is also working to help smaller firms acquire the proper funds. According to the New England regional administrator of the U.S. Small Business Administration (SBA), Seth Goodall, the SBA is changing its guarantee process in an effort to help small companies.
Specifically, the SBA is streamlining its underwriting by making a total credit scoring model it’s been testing and refining for more than a decade available to all of the organization’s lending partners on loans of no more than $350,000.
“The SBA total credit score combines an entrepreneur’s personal and business credit scores and makes it easier and less time-intensive for banks to do business with the SBA,” Goodall wrote in a recentNew Hampshire Business Review post. “This model is cost-reducing and credit-based. It ensures that risk characteristics – not socioeconomic factors – determine who is deemed creditworthy. “Along with this simplification, we’re eliminating requirements for time-consuming analyses of a company’s cash flow on small loans under $350,000, a step that can delay loan decisions.”
Additionally, Goodall explained that at the beginning of the fiscal year in October, the SBA set fees to zero on loans of $150,000 or less, which it sees as another way to reduce the costs for lenders of making small-dollar loans.
“We know that the key to a strong and lasting middle class is opportunity for all,” Goodall wrote. “The president has made clear that we must grow our economy from the middle out. Key to that is access to the American dream of starting and owning your own business. By making SBA loans easier and more affordable, more lenders will join our program, more small businesses will have access to our lending products and more entrepreneurs will succeed.”