As the Royal Commission leads to an increase in lending standards and requirements for banks, many businesses will be forced to look outside the Big Four to raise the capital they need.
The good news is that there are a lot of untapped capital options for SMEs to look at. The Royal Commission has meant that bankers are keeping a much closer eye on who qualifies for a business loan.
But this might be a good thing – people tend to regard the banks as the safest option for a business loan, but in my experience that’s not always the case – the banks can actually be riskier than the alternatives.
For example, there’s so much compliance that the banks need to meet, and if you don’t meet those ongoing requirements, you can lose your loan. For small businesses, the requirements for collateral and the standards you need to meet in the first place can be much higher.
They also have the least emotional investment in your business. So let’s look at some of the other options to secure the finance you need.
Organic growth and efficiency
Choosing this option forces you to think differently and run a much leaner organisation. By focusing on efficiency and developing higher-than-average profitability, you can create the cash needs for growth internally. This approach also serves to future proof your business because you won’t owe anyone any money.
Angel investors/private money
Angel investors speak the language of business far better than most banks do, but most small businesses have never even heard of the concept of angel investing. Angel investors can often have a soft spot for entrepreneurs because they know how valuable someone like that would have been when they were starting out.
Angels are generally more involved and more flexible when it comes to the success of the business. There are different angel networks out there that can be an excellent source of capital for your small business.
The three Fs – friends, family and fools
Sourcing money and investments from your existing networks and private investors is always an option, but it carries with it the same risks as lending money in everyday life – you want to make sure it won’t affect your personal relationships.
If it suits your business, you can look at changing your payment structure so customers are paying in advance, allowing you to raise the capital that will allow you to grow and accommodate more customers in the future.
While some second-tier lenders might have a slightly higher interest rate, many offer lower interest rates than the banks themselves. They also have a higher risk profile which means they’ll be more invested in the success of your business, and similar to angel investors, more flexible.
Of course, the banks remain an option if you’re looking to secure finance, but the important thing to remember is they aren’t the be-all and end-all. It’s important to think outside the square and consider all your options when you’re looking to establish or grow your company.
Jamie Cunningham, Business Coach