Sources of Finance for Small and Medium Businesses

Sources of Finance for Small and Medium Businesses

When starting or expanding a business, a crucial question is where to raise the finance.

Here’s a list of sources entrepreneurs most often turn to for funding their endeavor:

Business loans

Loans remain the most popular option for businesses starting out and one of the most popular finance options for businesses looking to expand. Business loans allow you to borrow an agreed sum of money and pay it back over a certain period with interest.

You can borrow a secured business loan, putting up some collateral such as a house, car, or shares against the value of the loan if repayment fails the asset can become forfeit to the loan provider. Or a bank can agree to provide you with an unsecured business loans where you don’t have to put up any collateral but the loan is given on the basis of your current financial situation, including years trading, monthly revenue and credit rating.

A business loan is a source of finance for a medium to long-term. You just have to look for an affordable payment rate and think carefully how to pay back the borrowed money in case things don’t go quite to your plan. The main advantages of a business loan is that as a business owner you don’t have to sell equity in your business and that UK businesses get some tax benefits on paying back business loans.

Asset finance

Asset finance is a form of financing for businesses who need capital to buy high value equipment or machinery. With this type of finance, an asset finance company purchases the equipment or machinery and the business leases the asset for the remainder of its usable life, paying a use fee over time to the finance provider (the provider recoups the upfront cost and interest accrued over this time).

Under a finance lease, the business does not acquire ownership of the asset during the agreement. In this way, it differs from a secured loan where a business uses its own assets as a collateral.

Invoice finance

Invoice finance allows companies to borrow money against the value of invoices due from customers. Depending on a bank’s policy, you can receive up to 85% of the value straight away and the remaining amount (minus the finance charge) when the invoice is paid by the customer.

Invoice finance suits businesses whose customers have long payment terms (30, 60, 90 or more payment day terms agreed with customers) or tend to pay as late as possible since it allows for plugging holes in cash flow. However, this option is only available to companies with a strong track record of generating revenue and getting paid by customers.

Government grants

Small business grants are usually offered by the government, a government body or a charitable outside body. Grants are given to organisations or individuals that meet certain criteria and go through an application and vetting process.

Innovate UK is a government body providing grants to innovative businesses engaged in research and development, but there are many more types of grants available to small businesses as well.

Grants can range in size from £500 to £1,000,000+, with the majority in the UK sitting between £3,000 – £100,000. Although grants are very hard to apply for, they are the best source of finance for businesses as they don’t have to be paid back.

Crowdfunding

Crowdfunding is a relatively new source of investment for businesses that seek to fund the production of new products. In this type of financing, a necessary sum is received through smaller amount of investment from many people who agree to give their share either for equity or for rewards (e.g. perks or public acknowledgement of supporters).

Importantly, success of a crowdfunding campaign depends on the business owner’s ability to market his or her proposition. Major crowdfunding platforms include Kickstarter, Seedrs, and IndieGoGo.

Venture capital

Venture capital (VC) is received mostly by high growth, scalable businesses in exchange for equity. It’s serious finance: VC money can range from £500K to £50 million for a single investment.

As a rule, a venture capitalist is an experienced professional investor. Therefore, your business will be carefully audited before you get the money. And after the investment is received, you will have to develop your business fast and under extreme pressure – so, don’t opt for this type of finance if you are not ready to comply with your new partner’s organisational vision, goals and structure.

Angel investment

Finally, it is possible to raise a small amount of finance to start out from angel investors who may belong to your network.

Investments from angels typically range from £10K to £500K, and it is usually easier to raise money from an angel investor than from a VC or institutional fund.

Angel investors also will help you to get a mentor or an experienced partner from your area of expertise to support you in starting your business.

Image: duncanandison / Adobe Stock

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