The last few years, set against the backdrop of a global pandemic, have been hard for business. Even now, many companies continue to feel the reverberations, facing issues like the ongoing post-pandemic recovery, a UK skills shortage and supply chain disruption.
At the same time, many businesses that need support are unaware of how external finance can help them. A 2020 report from the British Business Bank found that 33% of SMEs did not use finance at all, and a further 33% only used government grants and loans (particularly those offered as COVID support, like the CBILS).
Although many may be reluctant to reach out for external finance, it can be instrumental in the resilience of a business in trying times. By understanding the benefits of funding and the role it can play, you can create a strategy that keeps things moving, avoids disruption and places you in a financially strong position.
This guide explores how business finance can protect and nurture SMEs when they face challenges and why it matters.
- Why businesses need to keep moving
- How does external finance help?
- The best forms of external finance to support businesses
- Understanding the role of external finance in your business
Why businesses need to keep moving
The alternative to not moving as a business is facing the prospects of falling sales and lay-offs – as many have experienced during the pandemic. For any entrepreneur this is catastrophic, potentially resulting in long-term damage to your company, failure to meet financial commitments, debt and insolvency.
In this sense, it is essential to continue to operate to survive. If more new businesses can survive (1 in 5 fail per year in the UK), it makes for a healthier business population, with a diverse range of companies represented and more entrepreneurs given a chance to flourish.
However, ‘moving’ can also refer to the ability of companies to scale their operations. A recurring theme during the coronavirus pandemic was growth taking a backseat. Only one in 10 SMEs experienced growing sales in 2020.
While it is understandable that the focus was on survival during this period, growth is now back on the cards, with more SMEs stating this as an objective for 2022.
The shift towards growth as a priority is good news as it enables businesses to improve resilience and profit, meaning they experience better results and long-term survival. This should also help safeguard them if a new crisis were to occur.
Growth is positive for the economy. As SMEs grow, they create more jobs and opportunities, pay more tax and bring increased competition and choice to the market to benefit consumers.
How does external finance help?
Very few businesses have all the funding they need all the time. It is typical for companies to go through cycles of growth and decline, each of which presents different needs.
If you are undergoing a period of growth, it will require substantial investment. Depending on the goals you are pursuing, you may need to acquire more resources, assets, staff and software, update infrastructure, cover training, or develop products and services. All of these carry a cost that can quickly add up – and may not be covered by your reserves alone.
In this scenario, external finance is instrumental in fuelling growth. By identifying appropriate funding solutions, SMEs can secure the money they need to fulfil their expansion objectives and do it successfully.
Alternatively, external finance can be a lifeline when a business faces a decline or cash flow issue. This has been shown by the vast number of companies using government schemes during UK lockdown restrictions.
By understanding the financial products available to fulfil potential funding gaps in your business, you can improve cash flow, keep up with payments and avoid interruption to your operations. This means you can survive almost any barrier your business comes across.
The best forms of external finance to support businesses
External finance comes in many forms, with solutions tailored to the various funding needs companies may have. The crucial factor is understanding the options available and their impact to learn which your venture might need and when. We’ve listed the main categories of external finance below.
Cash flow solutions
‘Cash flow solutions’ refer to a range of products designed to give businesses a cash injection when required. It covers trade finance (used to facilitate overseas orders or the purchase of imported supplies), invoice finance (unleashing capital tied up in unpaid invoices), stock finance (funding leveraged from stock sat in your warehouse), leasing (allowing you to ‘rent’ equipment for a set period) and leaseback (where you sell your equipment and lease it back for smaller repayments).
The benefit of cash flow solutions is that they work alongside your daily operations, enabling you to maintain productivity while bridging funding gaps. It also allows you to stay on top of financial commitments, preventing potential debt.
Loans
A loan can be used for a variety of reasons, depending on the lender and type. Typically, they will be used to facilitate the scaling or working capital of a business, but in some cases, they may be used for cash emergencies or to facilitate turnaround. It also includes commercial mortgages.
The benefit of commercial loans is that there are many versions in the market, meaning it’s possible to find something for every set of needs and eligibility criteria. The rise of alternative finance has brought even more choice, with improved flexibility that can give more SMEs access.
Any loan you obtain will need to be repaid with interest. Research is essential to find a loan that suits your affordability, so you can keep up with repayments and avoid worsening your financial position if you were to end up in debt. There are also other factors to consider, like loan terms and total value, to find a perfect fit for your requirements.
Equity
The alternative to debt funding (via a loan) is equity. This is where you find investors to finance your business in exchange for shares.
The nature of equity is that anyone looking to support your company will be seeking a return on investment for their efforts. In this sense, it is most suitable for high growth businesses and potentially those requiring turnaround (provided the company can be proven to have value post-turnaround).
Although you can raise substantial funding through equity, it is a long process. It can take time to find an investor who suits your preferences and is willing to work with you and structure a deal. Having a solid business plan will make it easier.
You also need to be prepared to sell shares in your company, which provides holders with specific entitlements – including a long-term influence on your decisions.
R&D tax credits
R&D tax credits are a government-backed scheme created to encourage innovation in business. When conducting research and development, you can access tax relief equivalent to 33p to every £1 spent. The total tax relief can be as high as 24%.
If you are implementing innovation in your business as part of a growth strategy or your daily work, it is worth looking into R&D tax credits.
Grants
Another option for external funding is grants. These are ideal as they do not require repayment or equity. However, grants tend to be extremely limited (especially in the current climate), with strict criteria you need to meet.
Spend time researching grants, either from the government or industry institutions. You may consider reaching out to your local council too.
If you find one that suits your eligibility, apply. You may not always be successful depending on how much funding is available, but it’s still worth a shot – especially if it helps to fund your business.
Grants can sometimes be used alongside other external finance to fund larger-value projects and needs, however check the terms carefully.
Understanding the role of external finance in your business
Implementing external finance into your business can help you achieve many of your goals, whether it be related to growth or overcoming barriers. By consistently utilising the right external support at the right time, you enable financial stability, improve performance and drive resilience.
The first step to effectively introducing external finance into your business is understanding the options available to you and how they fit your needs. Speaking to an independent advisor is a valuable way to uncover this.
When working with an advisor, you should discuss your unique requirements and eligibility factors to pinpoint the best solutions. They will discuss the pros and cons of each avenue in more detail and take you through the application process.
The ultimate result is a financial strategy that calls upon external funding at the appropriate points to bring long-term advantages and keeps your business driving forward in all circumstances.
If you face challenges and need financial support, we can work with you to find an appropriate solution that fits your requirements and improves resilience.
Get in touch today to speak to a member of the team and kickstart your financial journey.