The paradox of choice for borrowers

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​To help accountants guide clients through the expanding finance universe, Capitalise.com co-founder Ollie Maitland presents a simple menu setting out some of the options now available.

In his seminal work ‘The Paradox of Choice’ American psychologist Barry Schwartz explained how in our mass consumer society, the sheer number of options available made people anxious and paralysed by choice in their pension funds.

The same effect occurs in business, where all the decision-makers are humans too.

Since the 2008 financial crash the cost of creating new financial products has decreased and 360 new lenders have piled into the small business funding market. Business owners who need funding to support cashflow or invest in talent or equipment have never had so many options available. Except that the paradox of choice prevents them from identifying the most suitable types of funding and the best terms.

When faced with cash flow issues, most business owners leave just seven days to find finance and spend just one hour researching providers. And 80% of them will only approach one lender. Perhaps that is why, despite pulling back from small business lending, the Big Four banks still control 85% of the market.

With a no-deal Brexit on the horizon, it is more important than ever for small businesses to understand the financial solutions available.

HMRC aside, they don’t carry the regulatory baggage and bureaucracy of the corporate world and can react more to challenging circumstances. Accountants who want to build good relationships with these businesses should be more proactive about pointing out the different funding options.

The value of advisers

Sourcing capital to support business growth can be time consuming and expensive. With so many different finance options available, it can be tricky to understand which solution is most suitable and when these services should be brought on board. Now that bank managers have become an endangered species, that source of advice has dried up.

Research from BVA shows that 70% of small businesses use loans, overdrafts or credit cards to finance their business with only 12% using other types of finance. This is likely down to a simple lack of education about the variety of products out there.

Accountants can offer more support to their business owner clients by working with them to match their needs to the array of products now on offer in the expanding business funding market.

Purpose before product

The simplest starting point for business finance is to look at what the funding will be used for. Determing the purpose of the funds will signal the most suitable type of product and narrow the field for who the best provider will be: 

Purpose > Product > Provider

Some of the most popular and effective lending products secured through Capitalise.com are those least understood by SME owners. The cheat sheet below may help advisers looking to understand more about the various financing solutions available:

  • Asset finance helps businesses access the tools, equipment and machinery they need. Business owners who use asset finance frequently can avoid hefty upfront costs by either spreading the payments out over a convenient number of months or years, or simply by leasing the required assets for as long as needed.
  • Invoice finance allows businesses to source funds from work that has already been completed using invoices as security. Business owners can avoid the restrictive inconvenience of waiting for raised invoices to be paid by advancing a percentage of them immediately. Businesses also have the option of outsourcing their sales ledger management process.
  • Obtaining enough capital to support the purchase and production of new stock can often be a stumbling block that holds small businesses back from quicker expansion. To avoid this, trade finance can help fund the supply chain from start to finish by purchasing stock from suppliers on the business’s behalf with loans secured against new purchase orders.
  • Fluctuating turnover can really limit businesses looking to source and repay finance. If a business takes regular payments through a card reader or EPOS terminal then it may well be eligible for a merchant cash advance. A lump sum is sent directly to the business’s bank account with a small percentage of the total amount borrowed repaid each time it takes a credit or debit card payment. This enables businesses to run as usual even when they’re experiencing a dip in turnover.
  • Property finance is appropriate for property investors or business owners looking to purchase their own premises. To ensure that opportunities are not lost due to a lack of capital, accountants can advise on whether a bridging loan is needed, or a development and commercial finance loan.

With all these different options available, accountants can make themselves invaluable by identifying the initial problem within the businesses and helping to identify the most appropriate financial solution.

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