Business finance options for small businesses

If you’re an established small business looking to grow or hitting a cash flow issue or you’re a new business start-up that is looking for funding options to get your new venture off the ground then there are a number of options open to you when it comes to obtaining business finance, ranging from business loans, borrowing money from friends and family, asset finance and alternative finance options such as crowdfunding.

In this blog we cover the business financing options for small UK businesses that you may be able to access.

Family and friends

With many businesses, especially in the early stages of a business journey, family including spouses, parents and siblings or friends financially support the business. Using this way of funding your business can be a quicker funding process with more flexible terms. If you agree to pay interest on the loan, then it can be a great investment option for your friends and family. However, beware that if anything goes wrong and you can’t repay the money, it could damage relationships, so proceed down this route with caution.

Start up and new business loans

Start up and new business loans are designed for new start-up businesses that have no or limited financial history. Some are government backed and others are offered by more traditional banks. However, funding for start-ups has been more limited in recent years, so some new business owners take out personal loans instead.

If you are yet to open a business bank account, it is worth checking whether you are likely to approved for a business loan before applying as being declined can affect your credit score.

Loans for existing businesses

If you’re business is fully established and has been trading for some length of time, then there are specialist loan companies and traditional bank loans that may be on offer to you. The range of options can be wide and interest rates and terms can vary, so it’s best to do your research. You may need to produce your financial history to date and some projected figures and you’ll also be subject to a credit check to assess your credit score.

Taking a loan means you won’t have to give up any control of your business (which you may have to with other finance options).

Unsecured loans vs secured loans

Put simply, unsecured loans are not secured on your business assets such as your property or equipment. A secured loan however means you will have to put up your asset or assets as ’security’ in case you are unable to repay the loan in full. In the case of non-payment, your assets that you’ve used to secure the funding would be taken to cover the cost of the remaining amount outstanding.

Short-term loans

Some finance companies offer short-term loans. These can be quick to access and if you need to make something happen fast in your business or need immediate help, they may work for you. However, the rate of interest can be extremely high, and costs can quickly mount up. So, if you’re considering a short-term loan, it’s important to make sure the repayments are affordable for the full term of the loan, whether it’s 1 month or twelve months.

Bridging loans

Bridging loans are a type of short term loan but are designed to bridge the gap between making a large purchase and receiving the funds. Often, they are used for things like a property purchase.

Note that there can often be legal fees and arrangement fees to pay and the term of the loan is usually 12 months or less.

Government and other grants

Often there are regional or specialist grants available through local government. These are often regional specific and can be available for new business start-ups or existing businesses for specific purposes such as improving technology in businesses etc. Access can be limited and often you’ll have to produce a good business case or documentation to be awarded the grant.

There may be restrictions based on geography, size of business and sector. The benefit is that a grant doesn’t have to be repaid, whereas a loan does.

Overdrafts

Often your personal bank account or your business bank account will have an option of having an overdraft. This allows you the ability to spend more than the balance of your account. The bank will agree an overdraft limit with an agreed interest rate. Interest is charged based on how much of your overdraft you use. Sometimes there will be an arrangement fee and the overdraft limit will be reviewed regularly. An overdraft can be a good way to secure small amounts of short-term funding or to help with short term cash flow issues.

Credit Cards

A business or personal credit card is available with most bank accounts or from other credit card companies. They can be a quick and easy way to cover large and small business expenses. You or your business will undergo a credit check before a credit card is approved and you’ll be set a monthly spending limit.

The benefit of credit cards can be it can give you some short-term credit and if you pay the balance every month, you won’t pay interest. However, if you don’t repay the balance then the interest rates on credit cards can be much higher than other forms of lending.

Crowdfunding

Crowdfunding has become more popular in recent years, with well known branded crowdfunding platforms such as Crowdfunder, Kickstarter and Crowdcube.

Crowdfunding is where many individuals invest small amounts to fund your business idea. People can either lend you the money (peer-to-peer lending) or take a stake (shares/equity) in your business. Some crowdfunding platforms will insist you reach your funding target before you can withdraw the cash, while others will allow you to take a percentage of the target.

Crowdfunding is more suitable for businesses with great growth potential and with time to build the funding needed as it can be a slower process than other forms of funding.

Business angels

Business angel investors tend to be individual entrepreneurs or groups of individuals who are wealthy that provide funding in exchange for a share in your business (think Dragon’s Den!).

Angel investors will expect a return on their money, along with a stake in your business, so it’s not suitable for a business owner that wants to retain 100% control of the business. However, angel investors can often bring great experience and be able to offer you business advice and guidance on growing the business as well as their money.

There are online platforms that help businesses connect with potential angel investors. It can be a long process and your business may come under much scrutiny before someone commits to invest.

Venture capital firms

Venture capital firms or venture capitalists are investors who put in large amounts of money in exchange for equity in the business. Venture capital investment is generally given to businesses with a big idea they want to develop and companies that want to grow rapidly.

Generally, a venture capital firms objective is to help the business to grow rapidly and for them to realise a good return on investment in a short time frame. You are likely to have to give up a large percentage of your business to achieve this type of funding.

Incubators and accelerators

These are programmes designed to accelerate growth and create and support innovative business ideas. They are designed to scale and grow ambitious start-ups and their business ideas.

Accelerators “accelerate” growth of an existing company, while incubators “incubate” disruptive ideas with the hope of building out a business model and company. So, accelerators focus on scaling a business while incubators are often more focused on innovation.

Generally, the programmes provide mentoring, training and expert help and advice as well as a small investment in return for equity in the start-up.

Merchant cash advance

This is a type of finance is designed for businesses taking payments from customers through a card terminal. Merchant cash advance can be a manageable and predictable way to raise and repay business finance. Payments aren’t fixed and will change depending on how much income your business processes.

Research and development tax credits

The Research & Development (R&D) tax credit is designed to encourage innovation and increase spending on R&D activities for companies operating in the UK.

It’s one of the UK government’s top incentives for encouraging investment in research and development and allows up to 33.35% of a company’s R&D spend to be recovered either as a reduction in Corporation Tax or a cash repayment.

It doesn’t have to be product innovation that qualifies, things like software development, or process innovation can qualify too.

R&D Tax Credits provide an essential source of non-repayable funding for many small, medium and large enterprises (SMEs).

SEIS and EIS

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme(SEIS) are two UK government initiatives which encourage innovation by providing private investors a significant tax incentive and are intended to boost the equity investment in unlisted trading companies in the UK.

Whilst there are conditions that must be met by both the investor and company and you’ll need to carry out a ’qualifying trade’ to qualify, both schemes can be a good option for small businesses to raise funding.

Invoice finance, factoring and discounting

Unpaid invoices can be a big problem for many businesses, and chasing unpaid invoices takes time. Invoice finance, factoring and discounting can take away that burden.

Factoring is when a business sells its invoices, or receivables, to a third-party financial company.

Invoice discounting on the other hand is when an invoice financier releases funds from your unpaid invoices to help manage cash flow. The combination of both these aspects of financing is terms as invoice financing.

Asset Finance

If your business needs equipment and machinery to operate and you can’t afford the high cost up front, then asset finance may help. Asset finance can be used to finance things like equipment, vehicles, and materials essential to business growth. It can include hire purchase and equipment leases. Repayments are spread over the lifetime of the asset, making the cost more affordable.

Leasing is a type of asset finance where you rent equipment and upgrade it when you need to.

Summary

All the funding options above come with some risk and with different advantages and disadvantages. Your choice will depend on what you’re funding, what you can afford, your risk as a business, your timescale and if you want to keep 100% control of your business or are willing to give a stake of your business to someone else.

Whether you’re looking to grow your business, start your business or support day to day cash flow our experts at dns accountants can help with business finance advice. Simply then call us today on 03300 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.