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Small companies face soaring loan rejection rate

Following news that the average loan rejection rate for SMEs has more than trebled since 2008, what other funding options are available to small limited companies, including freelancers?

Small companies face credit rejection

According to a new study by the Ernst & Young ITEM Club, the loan rejection rate for small firms has risen rapidly since the start of the economic downturn. Two surveys, one from the ONS, the other from Warwick Business School, suggest that 11% of small business loans were rejected between 2005-2008 – a figure which has risen to 38% in mid-2012.

If this rejection rate is correct, Ernst & Young estimate that there is a funding gap of around £19 billion (the amount needed to return the rejection rate to the 11% level). Even the Government’s plans for a ‘British Business Bank’ wouldn’t provide enough extra capital to satisfy demand – its entire capacity would be spent within 12 months.

Bank loans a ‘last resort’ for many

Another survey, published by accountancy firm Kingston Smith last month, found that brand new companies were far less likely to seek bank lending when starting up. In fact, only 30% used a bank loan to get started. The majority of respondents said that they would only approach a bank for lending as a last resort, and would more likely rely on their own savings, family help, or other inventive methods of securing capital.

Alternative methods of seeking company funding

If, as most small company owners do, you would rather go anywhere than a bank to secure funds for your business, what other avenues are open to you?

  • Personal capital – most small companies are self-funded via personal savings, credit cards, or remortgaging a property.
  • Borrowing money from family and friends – make sure you do so on a business-basis, and sign a loan agreement to prevent disputes later down the line.
  • Invoice financing – this frees up the outstanding value of your invoices – for a fee (see our guide here). An invoice finance product aimed purely at freelancers and contractors has also recently been launched.
  • Angel investment – if you have a good business idea, and can find an investor to provide capital and expertise, going down the business angel route could be a prudent move. Larger projects may necessitate Venture Capital funding.
  • Leasing – you may achieve significant cashflow benefits by leasing equipment, and vehicles, rather than buying assets outright.
  • Grants – these are available from a wide variety of sources – from both public and private sector, and subject to qualification.

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