It is likely that at some point you will need to raise funds either to grow your business, bridge a short-term cash flow concern or fund unexpected costs. Finding the right type of funding can be challenging and knowing where to start can seem impossible. Below are just a few options that SMEs can consider.
Traditional vs challenger banks
It is well known that banks have become stricter of late about their lending and getting approved through a traditional bank is becoming difficult. There has been a definite shift with banks preferring to extend loans to larger businesses while increasingly cutting back on SME loans.
However, there are now ‘challenger banks’ disrupting the market and offering alternatives for SMEs seeking funding. Whilst traditional banks may come with systems and processes that feel slow and behind the times, challenger banks tend to be smaller and can therefore be more adaptive, utilising the latest technology to service their customers. This often means that decisions on finance and the release of funds can be much quicker than the high street alternative. These banks can be more time efficient as without physical branches you can access all of their services from anywhere.
Business loans are a good option for both short-term and long-term lending, and can be an effective option for business expansion or rolling out a five year plan. The main advantage of a bank loan is whilst you will pay interest on the loan, you will not sacrifice shares in the company or a percentage of the profits. Finance for the purchase of equipment is always worth considering, as lenders are keen on this type of lending, with plenty of lenders available with often appealing rates.
Utilising your business’ cash flow
If your business is growing rapidly, releasing cash into your business can be an effective way to fund upcoming projects. You could consider invoice financing to free up cash flow. Invoice financing involves borrowing money against the amounts due from your customers. Doing this can allow you to reinvest in the company far sooner than if you’d had to wait for your customers to pay. This type of funding is very popular, as the funding goes up and down in line with your sales activity, therefore lenders prefer this to more typical overdrafts. This area also has lots of “challengers” in the market, offering tech solutions.
However, borrowing money and increasing the company debt can be risky if you haven’t done proper financial forecasting. Plan for what would happen if your growth were to slow to ensure that the loan remains affordable in the long-term.
If your business is involved with anything that could be deemed research and development (R&D) then you will be able to reduce your tax bill and you may be able to receive a refund for any prior tax payments made.
It is important to consider how attractive funding your business may be to investors. The government runs venture capital schemes to help small and medium sized businesses grow by attracting investment. These schemes offer tax reliefs to those who buy new shares, bonds or assets in your business for a specific amount of time. However, while this is an option for businesses in most industries there are exclusions. There are also limits on the amount of money you can raise depending on which scheme you qualify for. This can be a particularly useful scheme for tech companies as higher limits can be implemented for those who carry out R&D or innovation in their business.
Working with your business advisors before seeking funding can help with running clear forecasting and gaining advice on which method of financing can work best for you and your business.