Accessing finance for your small business

Whatever the prevailing economic climate, your small business needs finance to grow and prosper.

Fortunately, in this day and age, the sources of such finance are many and varied – you might even be spoiled for choice. So, let’s take a brief look at the range:

Savings, family, and friends

• probably one of the most traditional sources of business finance comes from your own savings or the helping hand you receive from family and friends;
• an injection of funds from your own savings or cash is given or loaned from family and friends may be useful at any stage in the growth of your business but especially when first setting up;

Grants

• a wide range of grants is available from governments, manufacturers, or a combination of the two – typically in support of particular industrial sectors;
• these do however change regularly, with some grants being withdrawn or eligibility criteria changing.

Debt financing

When you are looking beyond your immediate circle of family or friends, the sources of external funding for your small business fall into one of two broad categories – debt financing or equity financing:

Bank loans

• the bank loan, of course, maybe the first thought that goes through the head of any small business owner in need of additional finance;
• loans may be secured (against your personal or business assets) or unsecured;
• secured loans are typically sought for larger borrowing (such as the purchase of business premises), while unsecured loans may be more quickly and conveniently arranged for access to additional working capital or to smooth temporary cash flow issues;
• the traditional role of the high street banks in providing these business loans has, in recent years, been successfully challenged by up and coming alternative or fintech banks operating exclusively online;
• in the extraordinary circumstances of the corona virus pandemic, the government has also introduced a new form of lending for small businesses called Bounce Back Loans;
• the loans allow you to borrow from £2,000 up to 25% of the annual turnover of your business (up to a limit of £50,000). There is no interest to pay during the first year and then interest at a – significantly discounted – rate of just 2.5% a year.

Equity financing

The alternative to borrowing funds – which you typically need to pay back with interest – is to invite investment in your business in return for a share of your company.

Angel investors

• equity funding, too, may come from several different sources – with one of the best known from so-called Angel Investors;
• the UK Business Angels Association, for example, which represents some 160 members, claims to invest a collective £1.5 billion a year in UK businesses;

SEIS and EIS

• the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) were launched with government backing to encourage private investment in small and medium-sized start-up businesses;
• the incentive for investment through SEIS, for example, is that investors may invest up to £100,000 each tax year in return for a 50% tax break and exemption from any capital gains tax otherwise liable from the sale of shares after an initial three-year period;
• investment through the EIS – reserved for medium-sized start-ups – may be up to a maximum of £1 million in any single tax year, in return for a 30% tax break (and exemption from capital gains tax on the sale of shares after three years);

Investment-based crowdfunding

• investment-based crowdfunding enjoyed a period of popularity because of how web-based platforms could directly match investors with enterprises looking for business finance;
• direct match-making such as this is said to be cheaper – since it avoids any commission paid to banks or the like – so that investors could also earn higher rates of return;
• investment-based crowdfunding is currently regulated by the Financial Conduct Authority (FCA).

All in all, therefore, there is no shortage of choice if you are looking for additional finance for your business. The art lies in choosing the sources most suitable for the particular needs and circumstances of your business.