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What finance options are available to UK SMEs?

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Everyone agrees that a thriving SME sector is crucial to UK growth, but gaining access to finance for growth hasn’t been easy for small and medium sized businesses over the past few years.

Government Initiatives

Government initiatives such as the Funding for Lending scheme and Enterprise Finance Guarantee have had limited impact, but there are signs that the strain on lending are easing and lots of new alternatives to traditional finance routes are emerging.

Source & Type of Finance are Important

One overriding consideration for any SME is that the source and type of finance should match the stage of growth your business has reached.


So what are your options?

Finance for start-ups/early stage businesses

As a start-up you should be ready (and passionate enough) to invest your own savings in your business, which will also help to attract investors.

If you don’t want to invest, you might consider taking no salary and living off your savings.  Another option is to approach family or friends as an affordable source of finance.

A bank loan, overdraft or credit card can provide useful support, but beware of high interest rates and be prepared with a robust business plan to support your application.  The Enterprise Finance Guarantee (see below) might also be worth a look.

If your business is focused on research and development, employment and training or environmental schemes, you might also be eligible for a grant from government, your local authority, regional development agency or the EU.


How is the government helping SMEs?

The government, through the Department for Business, Innovation and Skills, offers six main access to finance schemes:

  • Enterprise Finance Guarantee: up to £2bn of lending to SMEs lacking the security or proven track record for a commercial loan
  • Start-up Loans: £120m available to SMEs unable to access traditional forms of finance
  • Business Finance Partnership: alternative sources of funding such as peer-to-peer lending, supply chain finance and mezzanine finance for companies with turnover below £75m
  • UK Innovation Investment Fund: £330m available for technology-based businesses with high potential for growth and economic contribution
  • Enterprise Capital Funds: £200m equity finance available for early stage companies
  • Business Angel Co-investment Fund: for SMEs with high growth potential

The new Business Bank, launched last year and due to open its doors in April 2014, will incorporate these schemes combining greater coherence and ease of access with a greater diversity of finance options beyond traditional channels.


What are the options beyond bank loans, overdrafts and credit?

Here’s a top line summary of some of the options made available through government schemes and others:

  • Asset-based financing provides loans for an asset, such as machinery or a car, allowing costs to be spread against its productive lifetime.
  • Factoring and invoice discounting (now available via online trading platforms) helps the management of cash flow by bridging the gap between sales and payment.  A third party (bank or other financial institution) provides up to 85% of the value of goods or services provided, typically within 24 hours, with the balance (less fees and interest) paid on full settlement by the customer.
  • Supply chain finance is where large companies use the strength of their balance sheet to support suppliers.  As soon as the supplier’s invoice is approved by the buyer, he can sell his invoices to a bank at a discount allowing the buyer to pay later and the supplier to receive payment earlier.
  • Peer-to-peer lending and crowd-funding are fast-growing means of raising finance from individuals and investors for specific projects.  Peer-to-peer lending offers a financial return to investors based on the level of interest the borrower pays, whereas the return on investment in crowd-funding is usually non-monetary, for example a finished product.
  • Business angels are often High Net Worth individuals who invest in early stage or high growth businesses.  They usually have extensive knowledge of the finance seeker’s industry and provide valuable mentoring support as well as finance.
  • Venture capitalists invest in early stage high-risk but high potential businesses and will look to exit after 3-7 years by selling their shares to the business or to another investor.
  • Corporate venturing is a formal direct investment relationship between a larger and smaller company realized via investment for an equity stake, debt finance to fund growth for a return, or non-financial support for a return.
  • The Business Growth Fund is backed by five banks with growth capital to invest in established high growth companies in return for a minority equity stake (10% – 40%) and a seat on the board.
  • Private equity offers medium to long-term finance for an equity stake in unquoted companies with high growth potential.
  • Public equity markets offer smaller growing companies access to investors within regulatory environments.  The company becomes publicly listed and members of the public are able to buy shares.  The main public equity market is the Alternative Investment Market operated by the London Stock Exchange.
  • The Growth Accelerator is a government-backed initiative offering SMEs new, customised ways to source and pitch for investment for their next phase of growth and identify and overcome barriers.

We hope this blog has helped to clarify your options.  Have you found it useful?


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