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Five common myths surrounding alternative finance solutions and tax funding

Five common myths surrounding alternative finance solutions and tax funding

With Christmas now a distant memory, January is a period when many businesses and self-employed workers face overwhelming pressure to pay their tax bill on time. Even after meticulous financial planning and budgeting, unexpected events can conspire to leave businesses without sufficient working capital to cover their tax liabilities.

In addition to facing greater scrutiny into their financial affairs from HMRC, SMEs must also prepare for the imminent confirmation of the Government's Making Tax Digital (MTD) project. The mandatory MTD scheme will provide a single online location for all individuals and businesses to manage their tax which will eventually lead to the abolishment of the traditional paper tax return by 2020.

From easing cash flow concerns to purchasing new assets, businesses require financial support for a variety of different purposes to fulfill their strategic aspirations. However when it comes to using alternative finance solutions, some SMEs are still hesitant about deviating from traditional banking methods. While those that do are reluctant to admit that they use specialist financing solutions to fund the tax that they owe.

Steve Deutsch, Chief Executive of Wesleyan Bank, below outlines five common misconceptions of alternative finance which often constrain SMEs from being able to access the valuable resources they need to positively influence their future.

Using alternative finance for tax funding is too costly - not necessarily and it's important to research the market and compare what's on offer from more than one provider. More business owners believe it is too expensive or time-consuming to look for a traditional bank loan and prefer flexible alternative finance solutions which make it easier to spread the cost of their tax and VAT liabilities. Digital services, such as Wesleyan Bank's online Taxfunder portal, can actually be the most cost effective way to fund tax. The portal enables SMEs to easily apply for funding and get an instant quote to cover their tax bill. Once approved, the proceeds of the loan can either be paid directly to the firm or to HMRC.

Asset-based lending from alternative sources can also be cheaper than equity financing and offers fewer restrictions to allow SMEs to access the cash they need to make longer term investments.

Successful businesses don't need alternative finance - it is a misconception that only struggling firms turn to alternative finance sources as a last resort. All businesses, even successful ones, encounter cash flow peaks and troughs and paying their tax bills upfront can needlessly tie up banking lines and restrict working capital. Many ambitious and flourishing SMEs are now turning to alternative finance as it offers them a quicker way to pay their tax liabilities over time, freeing up vital funds which can be better used to take advantage of new opportunities.

Traditional banking carries fewer risks - bank overdrafts were historically seen as a safe and flexible way for businesses to weather tough trading conditions and overcome cash flow difficulties. But as a result of the economic downturn some SMEs have seen their overdrafts reduced or even withdrawn as major banks became increasingly restricted in their capacity to lend to smaller businesses. Reassuringly, there is now an extensive range of alternative credit facilities to bank overdrafts available to SMEs which can be tailored to their specific business circumstances.

My business bank knows me better - you may have been with your high street lender for several years but this doesn't mean they will be able to meet your needs in a timely manner. Many SMEs bemoan that their experiences with major banks have become frustrating due to inflexible, protracted and archaic processes to obtain funding. Alternative finance providers typically offer a more personal and bespoke service from a single point of contact who is likely to have a more intimate understanding of your industry sector. Through user-friendly digital services they also offer the added benefit of being able to provide SMEs with access to capital in days, rather than weeks or months.

Alternative finance only covers short-term funding - this is another myth. Alternative finance solutions have evolved rapidly since they first entered the market and there is now a wealth of bespoke products available to SMEs. Specialist business finance providers, such as Wesleyan Bank, can offer loans from three months to 20 years which can cover short-term tax and VAT funding, to long-term solutions to support business acquisitions and building expansion, asset investments such as purchasing new equipment and technology and much more. These flexible solutions can fit perfectly around the day-to-day running of your business and enable SMEs to compete on a level playing field against larger firms.

Despite continued uncertainty over the economy surrounding Brexit, there is tangible evidence to suggest that SMEs are approaching the future with optimism by taking a sensible approach to driving growth. According to the Zurich SME Risk Index, UK SMEs are planning on borrowing an average of £41,770 in 2017, a 22 per cent increase on average figure of £34,375 in 2016. Furthermore, almost two in five SMEs have stated they intend to borrow £100,000 or more.

Is it time your business took an alternative view of alternative finance?

'WESLEYAN’ is a trading name of the Wesleyan Group of companies.

Wesleyan Assurance Society and Wesleyan Bank Ltd are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Wesleyan Financial Services Ltd, Wesleyan Unit Trust Managers Ltd, Practice Plan Ltd and DPAS Ltd are authorised and regulated by the Financial Conduct Authority.  Advice about investments, insurance and mortgages is provided by Wesleyan Financial Services Ltd.

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