An Introduction to Finance for Small Business
Almost all small businesses require access to finance at some point in their business journey. The options are vast and can seem overwhelming. In this blog we introduce the key types of business funding.
business loans
Most business loans are provided either by a bank or an online lender. There are many types of loans and they can be used to fund a variety of purposes - making them one of the first places that small business owners look.
Secured Business Loans
A secured business loan uses business assets (normally property) as security in the case that the business is unable to make repayments. This protects the lender. As many small businesses don’t own their own property, they are more likely to look for an unsecured loan.
Unsecured Business Loans
An unsecured business loan doesn’t require business assets as security. Instead, a personal guarantee and credit check are normally required.
A better credit score generally enables you to access more favourable loan terms (i.e. lower interest rates and / or a longer repayment period). Banks tend to require higher credit ratings than online lenders, and they typically take longer to make lending decisions. This makes online lenders an attractive option for small business owners - despite typically higher repayments and interest rates, loans can be relatively quicker and easier to access.
business overdraft or credit card
This is an often overlooked source of funding that is quick to arrange and that has a high rate of approval. A business overdraft or credit card gives you access to a limited fund of money that you can use as you need. They are typically suited to cover smaller purchases and payments when cash flow is tight. Interest rates can be high compared to other forms of lending.
merchant finance
This is a short-term source of funding for businesses that accept debit and credit card payments from customers. The merchant (lender) advances a lump sum of money to the business in exchange for a percentage of their future credit and debit card sales. It can give almost instant access to funding, making it a pragmatic option if cash is needed urgently. The downside is that it is expensive (due to high fees and interest rates) and repayments are often high.
asset finance
Asset finance provides a means for a business to purchase business-critical assets (such as machinery or IT equipment), without having to spend the full cash amount up front. Although there are different forms (finance lease, operating lease, hire purchase etc.) they all involve the business being able to use the asset now and pay for it over time.
equity finance
Equity finance involves selling a stake in your business - you sell shares in return for funding. There are different types of investors (angel investors, private equity and venture capital firms) and some types of investment may qualify for tax relief (Seed Enterprise Investment Scheme or Enterprise Investment Scheme - SEIS / EIS) - potentially making them more attractive for an investor.
Equity finance is most typically sought by businesses with high growth plans and is well suited to businesses that want to build or scale at pace. Selling a stake in your business comes at a cost (the roles and benefits of ownership become share) but can be worth it for the opportunities it opens, including the possibility for a completely different scale of business.
grants
Depending on the sector you operate in and the nature of your business, there may be grants available to fund specific aspects of your business. There are online tools where you can check your eligibility, including the Government’s business finance finder.
If you do access grant income, one consideration is whether you need to charge VAT. It’s a complex area and we have guidance here.
R&d tax credits
Research and Development Tax Credits are a mechanism for qualifying businesses to claim a reduction in their Corporation Tax payable to HMRC (or to receive a cash payment from HMRC if there is no Corporation Tax liability).
This is a specialist area of business tax and you can read more about what qualifies as R&D for tax purposes here.
savings
It might sound obvious, but when your business needs extra funds, one place to look is inside the business at what can be saved. Identifying savings isn’t always easy, but it shouldn’t be discounted.
What subscriptions and regular payments are you signed up for and are they all still needed?
When did you last compare prices on utilities or business insurance - are you still getting a good deal?
Are there things that can be put on hold temporarily until there is more money to hand?
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