Guide to funding options for SMEs in the UK

Great business ideas are essential to getting your SME off the ground. However, what can keep your company from doing so is the lack of funding and sustainable business finance. How you determine the correct method of finance is critical to the longevity of your brand. Similarly, you must consider your chances of success in obtaining the funding. This article will outline a range of finance options for SMEs in the UK, and the crucial advantages and disadvantages of doing so.


Managing cash flow and gaining SME finance

Whether you are a startup or SME, you will require finance at some point. However, there are several factors to consider about the range of SME funding options:

  • How much funding is required?
  • Current revenue or forecast for a new business
  • Are you happy to use personal assets as security?
  • Do you have ownership of the business property?
  • Are you willing to sell shares?

 

With that in mind, we’ll discuss the SME finance options below. It’s also important to note that, while traditional banks are still the predominant source of finance, smaller businesses are using a range of alternative methods to gain funding. According to the Small Business Finance Markets 2017/18, peer-to-peer lending increased by a staggering 51%, among others.

SME funding

Government grants

Government business funding is available for SMEs. However, obtaining a government grant is a competitive process. Typically, the government grants focus on particular business themes or purposes:

  • Innovation
  • Technology
  • Energy
  • Training

 

There are also regional grants that support growth and provide small business funding. For instance, your location may improve your eligibility for government business funding. While it can be challenging obtaining the finance, you do not have to pay the money back.

If the above business purposes do not relate to your company, the government also offers support through tax schemes and capital allowances, reducing tax liabilities. You can find more information here.

Venture capital funding

Venture capital is a form of investment at an early-stage for a business, with great growth potential. Unlike private equity – generally investing in a more mature company – venture capital funding involves investing in a new business, with many not yet making a profit. Aside from the SME funding, obtaining venture capital can also provide valuable expertise and guidance within the specific industry. Similarly, you will have additional resources and connections. However, you must consider that you may lose some control in your business, as the investors will likely want to become involved in the company objectives. Likewise, depending on their stake, you could lose management control.

Working capital loan

Working capital is crucial for all businesses – small or large. Without working capital, you cannot purchase stock, pay staff wages or undertake any other essential activities. When it comes to SME finance, working capital loans can meet everyday costs. The specialised loan, unlike larger business loans, is short-term and intended to cover a cash flow issue, or growth. Similar to the above options, there are advantages and disadvantages to a working capital loan. You will have the cash available to deal with any cash flow issues, and can spend it on the assets you would like. You will also keep ownership of the company. However, you will have to repay the loan and, generally, within a much shorter time period to that of a business loan. There is also the chance of a high level of interest, so you must consider all factors.

Invoice finance

If your SME is struggling to obtain a business loan, invoice finance may be a suitable alternative. This procedure can be a relatively quick way of accessing funds, using your invoices as assets. There are two types of invoice financing: invoice factoring and invoice discounting. There are differences between both, regarding sales and who is responsible for collecting payment. With invoice discounting, you retain control. On the other hand, invoice factoring involves a factoring company collecting payments. After you raise a customer’s invoice, the finance company will afford your company between 75-90% of the invoice value. While invoice financing does free up time in chasing late payments, you will lose profits on any invoices managed this way. More information can be found here.

Asset finance

Asset finance is an SME funding option, referring to a type of finance used by companies to buy necessary equipment and stock etc. In the case of startup businesses, cash is often tight and asset finance allows you to gain the tools for growth, without paying large, upfront costs. You can spread the cost of the asset over a longer period, regularly paying a charge. However, you cannot claim capital allowances on leased or hired asset if the lease period is less than five years. You may even end up paying more for the asset over a longer period.

Crowdfunding

Today, there are multiple websites helping to raise SME funding for relatively low cost businesses. Crowdfunding has experienced a boom, due to the likes of Kickstarter, and is an SME finance option. Crowdfunding enables you to set a target fund, over a period of time. However, it could prove difficult to obtain the small business funding without a unique idea, persuasive pitch and long-term plans for growth.

Peer-to-peer lending

As mentioned above, peer-to-peer lending has experienced a growth of 51% in the past year. Similar to crowdfunding, peer-to-peer lending connects your business with corporates and individuals that want to lend. As the bank has been cut out of the equation, borrowers often receive lower interest rates. However, those individuals or companies are investing in your SME, thus may become heavily involved in the future.

Advice for managing cash flow

Once you have obtained business finance, you must correctly manage your cash flow to ensure your company survives in the long-term.

  • Produce a realistic budget – utilising past expenses, company accounts or competitor records – and forecast profits.
  • Stay on top of all repayments and seek advice at the earliest opportunity if you struggle to make those payments.

 

Our business rescue experts will be more than happy to provide advice on SME funding options, and will work to find the best possible solution should you suffer from cash flow issues.

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