Four Key Barriers to Finance for Small Businesses

Written by James Shaw

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Small and medium-sized businesses are increasingly struggling to gain access to business loans. In recent years, more and more businesses have found themselves cut off from traditional forms of lending, negatively impacting not only cash flow, but also their ability to invest and grow.

Indeed, in extreme cases, this lack of access to business financing has even resulted in insolvency, forcing businesses across the country to close down entirely - and unnecessarily.

On both a macro and micro level, the lack of funding options available for SMEs is a considerable issue. In fact, cash flow is cited as the cause of 90% of small business failures, and, given the fact that SMEs make up 99% of all businesses in the UK, such failures are highly detrimental to the overall health of the economy.

What are the barriers to business loans?  

But given the importance of small business to the wider economy, why are so many SMEs running into barriers when pursuing traditional financing options? Here are five common reasons why SMEs find themselves shut off from business funding. 

Arduous application processes  

According to a survey conducted by Ashley Finance, 73% of businesses described the business loan application process as “long and painful”. For many small businesses owners, who have next-to-no experience with finance, the rigid and convoluted nature of the loan application process can be daunting and off-putting.

What’s more, for SMEs in need of urgent funding to manage cash flow, the application and approval process can simply be too drawn-out, preventing businesses from gaining access to capital within the timeframe they need. 

Rigid lending criteria

Traditional banks are notorious for lacking flexibility when it comes lending money to small businesses. Their criteria are often non-negotiable, and frequently fail to take into account the real-world circumstances of small businesses. Often, owners of SMEs are forced to satisfy strict check-lists, or risk being asked to put up personal assets, like houses, as collateral against the loan.

Similarly, lenders will typically place significant emphasis on your credit score. If your business' history isn't squeaky clean, you may find yourself cut off from traditional small business loans. 

Lack of a business plan

Most banks require a detailed business plan before they will even consider offering a loan. Banks will expect to see your spending plans in granular detail, alongside contextual information regarding your business' history and long term objectives.

Satisfying the lender typically requires gathering a lot of supporting documentation (including tax returns, profit and loss statements, and bank statements), while fielding a series of detailed questions throughout the process.

For businesses that require immediate cash - perhaps to manage an unexpected business interruption - it may not be possible to produce a detailed roadmap. Similarly, if you've only recently started your business, you may experience issues satisfying the bank's concerns about your business' viability. 

Slow lending speeds

Slow bank lending has been an issue for SMEs since the result of the Brexit referendum in 2016. The pace of bank lending has been highlighted during the COVID-19 pandemic, with the Bank of England intervening to encourage retail banks to expedite the lending process

Data from Bridging Trends has revealed that the average bridging completion time for UK loans runs as high as 50 days. If your business is experiencing unexpected cash flow problems - or a significant business interruption - 50 days is simply too long. 

Is there an alternative to traditional business loans?

A business cash advance is an alternative financing solution that breaks down the barriers outlined above. 

With services like Epos Now Capital, businesses are not required to present a business plan, and the cash advance can be made available within as little as 48 hours. To be eligible for an ENC cash advance, a business must simply be an Epos Now customer, taking at least a minimum of 10 credit and debit card transactions totalling +£5k a month. 

Your funding is based on the business’ card transactions and potential, and payments are taken as a small percentage of your customer card transactions. This means a single agreed payment cost that never changes, and instant access to cash that can be used for a range of purposes, including expansion, marketing investment, stock purchasing, cash flow management, or simply to overcome unexpected business interruptions.

Click here to learn more about business cash advances, provided by Epos Now Capital in partnership with Liberis.