Dr. Steve Walker, CEO at Birmingham-based ART Business Loans, discusses why funding applications are increasing, and the key considerations small businesses should make when taking on debt - including the pitfalls to avoid.

For many SMEs, the challenges of the Covid-19 pandemic meant that they were forced to switch into survival mode. In terms of financing, that meant using up cash reserves and / or borrowing funds to simply stay afloat.

Businesses that had to borrow to survive lockdown may now be seeking funds to either accelerate future growth or to refinance their pandemic loans - perhaps having optimistically borrowed over a shorter period. Whether businesses borrowed or spent reserves to help navigate the pandemic, there are challenges to face when securing new borrowing.

Businesses might not be able to produce the level of figures and forecasts being demanded by lenders post pandemic, and smaller loan amounts are not as attractive to major funders.

Post-Covid, SMEs have been turning to alternative lenders who, for the first time, now account for over 50% of the loans made each year to SMEs in the UK. These include those that operate solely online. It’s easy to see the rationale for this - decisions are quick and convenient online, and can provide fast access to finance.

Proceed with caution

However, it’s crucial for every small business owner to adopt a thorough and robust approach to taking on new debt - and have a clear understanding of the pitfalls to avoid.

When using some online lenders, depending on circumstances, interest rates can be very high, reaching well over 30%. Couple this with short payment terms, which in some cases can be as little as two years, and there can be a lot of pressure on cashflow, with businesses struggling to make the repayments.

As a lender, ART is seeing a growing trend - with an upsurge in demand in the last quarter - of organisations coming to us for refinancing in addition to larger loans geared to growth. This may be because businesses can’t meet the requirements of their original loan and are struggling to obtain funds from banks or other finance sources, even if seeking a new loan to support growth. 

Driving growth

Post-pandemic, it’s concerning to see a growing trend of businesses falling prey to three key pitfalls in lending: taking too little advice, borrowing over too short a period, and committing to excessive rates of interest.

While online lenders can undoubtedly offer quick solutions and fast access to finance, lending should always be based on the viability of a business - with a clear understanding that owners can afford to take on and repay the debt.

Not every lending request can end in a ‘yes’. But for those SMEs facing a financial dead-end, a relationship-based approach that is built on transparency and viability can provide an important route to long-term financial security - with no short-cuts. This is where Community Development Finance Institutions (CDFIs), like ART Business Loans, can help.

An appropriate route to finance

CDFIs are prepared to lend in three key scenarios: 1) when other lenders say ‘no’; 2) when other lenders have already lent all they can; or 3) when they can lend as part of a package alongside other banks or finance sources. Crucially, CDFIs can say ‘yes’ because they take a people-centred and relationship-based approach when supporting businesses - with a deep understanding of the organisation, and the financial support it needs to thrive.

ART Business Loans is a leading CDFI, based in Birmingham and covering the West Midlands and adjoining counties. ART is a proud member of the Shropshire Chamber of Commerce, and our mission is to ensure viable businesses and social enterprises across the region can access appropriate loan finance that is tailored to the specific requirements of the business.

For more information, visit www.artbusinessloans.co.uk