Any small business is likely to run into funding issues at some point. It might relate to temporary cash flow difficulties, the investment required to meet growth goals, the expense of product development, or even costs associated with establishing yourself.
Whichever issue you are facing, you need to find a resolution. If left unaddressed, even the smallest financial gap will spiral into a worse problem and prevent you from meeting your ambitions.
Fortunately, there are many sources to raise the funding you need for your SME.
We’ve listed 15 of the best, with options to suit every need.
Secured loans
One of the most common ways to raise finance is through a commercial loan, filling a wide range of requirements. If you’re looking to raise larger sums, a secured loan is your best bet.
A secured loan is when a lender offers you capital secured against your assets – such as property, vehicles or equipment. If you default on payments, the lender will seize your assets to clear the owed balance.
There are benefits to using secured loans. Due to the lower risk factor for the lender, you might be able to raise larger amounts at lower interest rates.
If you don’t have business assets to use, some lenders will look at personal assets as well. Generally, a personal guarantee will be required on secured loans as well. However, there are risks you need to protect yourself against with insurance.
Unsecured loans
An unsecured loan works the same way as a secured loan, except you do not need collateral to utilise. However, it is likely you will raise smaller amounts at a higher interest rate due to the perceived higher risk.
More alternative lenders are providing unsecured options, giving more people access to funding. It’s therefore worth looking around to uncover the most competitive offer for your requirements. These will require also require personal guarantees, but there are some lenders who will offer small unsecured loans to non-UK homeowners and without personal guarantees.
Leasing and hire purchase
When SMEs seek growth, they typically need assets to meet increased demand and scale operations. Purchasing equipment outright requires substantial investment.
Leasing and hire purchase is an alternative solution to access the equipment you need without overwhelming your cash flow. A lender provides you with the asset in exchange for regular repayments (including interest).
In the case of leasing, this will be for a set period after which the asset is the lease is continued, albeit at a smaller payment, or can be purchased for a nominal sum. With hire purchase, you own the asset from day one.
Sale and leaseback
In the same vein as leasing is sale and leaseback. This is an option for businesses that need a cash flow boost and own assets with little or no asset finance in place. You sell your assets to a lender in exchange for an amount, usually the second-hand value of the assets, and they will then lease it back on a repayment schedule, so you retain use.
This is a great way to inject capital back into your business without impeding productivity if you have the equipment to leverage.
Invoice finance
Late payment from customers is an issue many small businesses face. Invoice finance aims to ease the burden by providing funding using your unpaid invoices as collateral.
A lender will give you up to 90% of the total value owed upfront. It’s also fast, with most monies being released within 24 hours. You choose between invoice factoring or discounting, which allows you to decide how much confidentiality and control you want.
It’s a great solution for cash flow issues temporary or otherwise – and if you commonly deal with late payment, it is also be a strategic tool in the ongoing running of your business.
Trade finance
Trade finance is a valuable resource if you work with exports or imports. It refers to the umbrella of solutions used to fund the trade of goods – and around 80% of world trade relies on it.
If you export, it allows you to finance orders made in the UK and sent overseas while you await payment from your customers. If you import, use it to cover the cost of supplies from abroad to fulfil domestic orders.
As well as improving cash flow by enabling you to maximise productivity without requiring payment upfront, trade finance is an excellent solution if you are looking to expand into global sales or build your supply chains internationally. It also mitigates any financial risks associated with trading.
Stock finance
Stock finance is a form of lending that leverages stock in your warehouse, office or factory. It starts with a lender undertaking a third-party stock valuation. Once you agree on the loan, you will provide the lender will regular updates of your stock to amend the funding based on any movement.
Due to its nature, you need to be a product-based business to be eligible. It also take some time to complete the process, so it should not be used for short-term issues. It is particularly suitable for seasonal retailers who have unused stock for some time.
It may be provided as a revolving credit facility which allows you a bit more flexibility in terms of lending amounts.
Commercial mortgage
In many cases, a business requires premises to operate from. This includes offices, factories, restaurants, stores and so on. The cost of buying property outright is expensive, so many rely on a mortgage instead.
A commercial mortgage is a long-term loan where you are required to contribute a deposit of at least 25% to secure the property, and is over a term typically between 15 and 25 years.
Alongside purchasing a property, a commercial mortgage can also be used to develop and expand existing premises.
P2P loans
Alternative finance is increasingly popular in the UK. One example of such finance is a peer-to-peer loan, which sees individuals and institutions lend amounts to your business. It’s usually done through a specific P2P platform—the amounts are aggregated by the platform and lent according to the perceived risk profile of your business..
Like a traditional loan, the a P2P platform will consider risk, so a business with security to use and a favourable financial history will raise higher amounts at a better interest rate.
Crowdfunding
Crowdfunding works similarly to P2P lending in that it sees multiple people pool their money to invest your business. However, this is typically done in exchange for shares, incentives or just because the person believes in your cause.
Again, it will be done via an online platform. You’ll need to create a compelling campaign for your business to stand a chance of meeting its financial goal. If you succeed, it can be vital in meeting your ambitions and recruiting loyal ambassadors for your business.
A strong marketing strategy is key to the success of your campaign as is having raised a significant proportion of your target in advance of the crowdfunding campaign.
Angel investment
Another equity solution is angel investment. This is when high net-worth individuals (known as angels) choose to invest in your business in exchange for shares. The aim will be to secure a generous return on investment, so you need to have strong growth potential.
As with any form of investment, it can be hard to gain traction. Investors are selective about who they work with, favouring businesses that demonstrate their value and a good business plan. The process of securing it can therefore be time-consuming.
However, if you’re successful, angels can provide substantial finance to a business, as well as hands-on guidance that helps you to reach your goals.
Venture capital
Venture capital (VC) specialises in early-stage companies with huge potential to grow – even if they also carry risk. This is ideal for businesses that struggle to get funding elsewhere due to the perceived risk level.
Venture capitalists will provide capital in exchange for shares. They will guide your business through expansion, helping you to optimise performance. As a reward for their efforts, they will expect a substantial return on investment when they exit the business – typically five to 10 years later.
The biggest challenge is attracting a VC firm, with a reported acceptance rate of 0.05%. You’ll need to present your business and its worth well to stand a chance.
Private equity
Another potential solution for your business is equity, which focuses on shares and return on investment rather than repayments.
Private equity is a valuable option if your business is underperforming but still has potential. A private equity firm will raise a pool of funding (usually from pension funds or individual investors), which will then be used to invest in a specific investment portfolio, e.g. management buy-outs, management buy-ins or turnaround situations. They will then exit the business at a profit, typically three to seven years after the process begins.
Only certain businesses will be eligible for private equity. You need to have a strong management team, a good value proposition and high growth potential. You also need to be prepared to convince investors of your worth through a sound business strategy and pitches. Private equity will invariably utilise debt finance as part of its strategy to maximise investor returns.
Grants
Grants are highly sought after in businesses. It’s a way of getting funding for your business without the requirement of repayment or shares. In this sense, it can be seen as ‘free money’.
However, grants are limited across the UK, and the criteria are strict. Your business will need to sit in a specific sector or location or address an issue that the government or other leaders want to combat. In most cases, innovation or research will be a key focus and Innovate UK is a great source as they have regular competitions for such funding.
It is still worth reviewing the grants available in case you are eligible. The best place to check is the government’s support finder tool.
Family and friends
If you struggle to find external support for your business or simply don’t want to, there is the option of asking family and friends. The viability of this will depend on your contacts and whether they have the money that they are willing to lend or invest. However, many businesses will go down this route in the early days when establishing their enterprise.
It’s crucial to have defined agreements with anyone you borrow from which details how they should expect to be reimbursed – typically through repayment or equity. You also need to stick to this agreement and communicate clearly to avoid disputes.
In many cases, it’s easier to keep business and personal life separate, especially if you risk relationship damage or your friends do not feel comfortable giving you money. This is where professional solutions, like the ones listed in this blog, have the upper hand.
Conclusion
Operating a small or medium sized business means consistently navigating financial challenges while keeping cash flow moving. If you’re looking to grow, there is the additional pressure of finding funds to reinvest into your business and achieve your goals.
Fortunately, there are solutions on the market to help SMEs overcome almost any barrier. Take the time to understand the options available and how they support you, as this will enable careful financial planning that promotes resilience and performance.
If you’re still not sure what support is best for you, it’s worth speaking to a financial advisor who can guide you through the options and help you to create an appropriate strategy.
The Pegasus funding team address the financial gaps in your business and find a solution tailored to your needs.