Why Bank Funding Is Still an Option for Entrepreneurs
Many entrepreneurs discover early on in their business journey that they do not meet the requirements for a bank loan and instead seek alternative, often equity, funding.
But don’t count banks out. With the rise of challenger banks and with traditional banks utilising new technology to match alternative funders, entrepreneurs also have a growing list of options for debt financing.
Joel Perlman is the co-founder of OakNorth, a challenger bank for entrepreneurs established in 2015. Despite the hype surrounding equity options, he believes that “debt finance can be a much better-suited option than equity” for both young and established companies.
“The biggest advantage is that it prevents dilution and is therefore a much cheaper form of finance than equity. It can be very frustrating having to give up equity in the business in order to secure the finance you need to grow.”
The Challenger
The belief that debt funding is a valuable option for small businesses led to the founding of OakNorth. As a challenger bank, they have eagerly embraced technology that makes borrowing easier for entrepreneurs. They have designed their IT “from scratch” and were the first UK bank to be fully hosted on the cloud.
“We use a fintech platform enables us, and will soon enable other lenders, to originate, underwrite, monitor, and book bespoke SME loans faster, more efficiently and with more rigour.” Artificial intelligence is also used to “make our underwriting more rigorous and our lending structures more flexible.”
The Incumbents
But what about traditional banks? Perlman says they “have had to come to terms with the new reality that many businesses now expect them to leverage technology to offer simpler, faster and more transparent financing. Some banks have either collaborated with or acquired existing technologies and fintechs to do this, while others have launched their own versions in an attempt to compete.”
Like challenger banks and equity funding platforms, traditional banks are making the most of advances in fintech and AI. “With advances in big data, open-source software, cloud computing, and processing speeds, more and more banks are using fintech to improve their product and service offering and enable them to compete.”
Meanwhile, “AI is changing banking in many ways and appearing in many forms — chatbots which help to improve customer experience, predictive analysis to forecast spending patterns and help customers manage their money more effectively, model scenarios to improve capital planning, etc.”
Government Partnerships
Banks are also using government relationships to improve their offerings for entrepreneurs. “In July, the government announced that it had struck a deal with the big five banks to extend millions of pounds of lending to export-focused companies. The deal means banks can provide export-related trade finance to SME customers.
“In addition to this, the British Business Bank, a state-owned economic development bank established by the UK government, has onboarded more banks to its Help to Grow Programme this year. The scheme was launched in May 2016 with Lloyds as the pilot bank, but we joined the scheme as the first challenger bank in January and have since completed a handful of deals under it.”
As an entrepreneur, you might have heard that small businesses often struggle to secure funding from banks — or experienced this firsthand in the past. But with challenger banks like OakNorth on the rise and traditional banks evolving to meet the needs of small businesses, there are plenty of reasons to keep banks on your list of possible funding sources.
Our interview with Perlman shows why it’s critical to consider all your business funding options, even the ones that might seem out of reach. Could equity funding be right for you? Find out at the Investment Conference. The event will be held on 15th November at 12:30 p.m. at NatWest HQ.
Tickets are available until 5:00 p.m. today, so don’t delay — get yours here!