How To Fund Your Business in the UK – What Are The Options for an SME?

I love working with small to medium sized companies in Wimbledon Park Capital in UK market, helping them grow and ultimately sell to a trade buyer via a bumper exit in an M&A sale.

But how can you get past the first stage of growth, once you are up and running with your first batch of paying clients – what are the various options, and the pros and cons of each?

In this blog, I will draw on 20 years of Corporate Finance experience in the UK mid-market to set out the key avenues that I am most familiar with.

How much money you can get for your business, how much it will cost and the terms of the investment all depend on the type of finance you choose and the financial health and history of you or your business.

Here are the pros and cons of some of the most common routes to funding your business:

1. Business lending

Pros – You can borrow a cash lump sum, and you keep ownership of your business.

Cons – Your business has to pay interest, and you may need a personal guarantee.

You can take out an unsecured loan for smaller amounts or a secured loan for larger ones, which is secured against an asset such as property. Secured loans for businesses tend to have lower interest rates than unsecured ones.

There are several types of business loans. Some work in the same way as a personal loan while others allow you to sell your unpaid invoices or borrow against them to raise funds.

You may also be able to get a loan through the government-backed Recovery Loan Scheme introduced in April 2021 to help businesses affected by the coronavirus pandemic.

Business loans can be used by both established businesses looking to expand and startups who need funds to get their business up and running.

You could also look for a revolving credit facility, or credit line, which works by letting you withdraw from a sum of money when you need it and only pay interest on what you take. You can repay it and then use it again.

2. Business credit cards

Pros – They can be issued to multiple members of staff, and you keep ownership of your business.

Cons – You have to pay interest and annual fees, this is a relatively expensive way to borrow.

With a business credit card you can make purchases for your business in the same way you would with a personal credit card up to your credit limit. They can be ideal if you need to borrow money to pay for day-to-day transactions and expenses, and they can be issued to several members of staff. Some business cards offer 0% on purchases for several months while others offer incentives like air miles, cashback and rewards. However, business credit cards tend to only be available to businesses that are already trading, so they should not be used to fund the set-up costs of a business.

3. Business overdrafts

Pros – Flexible borrowing and repayments, and you keep ownership of your business.

Cons – You pay interest and fees, and they tend to be for smaller amounts than loans.

A business overdraft works in the same way as a personal overdraft and is a good option for businesses who need flexible borrowing. You are normally charged interest, which is often calculated daily, on the amount you have borrowed and have to pay an arrangement fee as well. Whether you’re approved for an overdraft and the size of the overdraft you’re offered depend on your business’s finances and credit record as well as your own credit history.

4. Crowdfunding

Pros – Your business can keep the money, and you can keep ownership of your business.

Cons – You have to offer incentives – also there’s no guarantee that your project will be funded.

Crowdfunding works by pitching your business idea online and offering perks or rewards to a ‘crowd’ of investors if your investment target is met. This is also called donation or reward crowdfunding. It can be a great way to raise money for a new business venture but you will need a sellable idea and attractive rewards, such as exclusive access to your product or a discount, to secure the money you need. Crowdfunding can be used by both new companies wanting to raise money to support a new business idea and existing businesses. Types of crowdfunding include debt crowdfunding where you borrow money from investors and pay it back with interest, and equity crowdfunding where you sell equity in your business in exchange for investment.

5. Government grants

Pros – You can keep the money and you keep ownership of your business.

Cons – Some are only for small businesses, and the sums may be too small for your needs.

Government grants are designed to support new businesses, or those in certain sectors of the economy or specific areas of the UK. They are good if you need an injection of cash to get started or grow. The big advantage of grants is that you do not have to pay the money back and you keep full ownership of your business. Each grant has different criteria for the businesses that are eligible for it, so check these carefully before you apply. Some may require you to invest the same amount as the grant in your business yourself. The Gov.uk website is a good place to look at the various grants that are on offer.

6. Angel investors

Pros – You don’t have to repay the money, there is no cost to your business (but you may wish to spend some money on getting your investment case properly written up and made to look professional).

Cons – You lose equity in your business, and you may need to give up some control over your business.

An angel investor is a wealthy individual who gives you money to invest in your business in exchange for some equity in your company. Sometimes two or more angel investors will work together. They invest in both new businesses and established ones, usually in their early stages. Angel investors normally act as mentors and offer support with their time, knowledge and contacts but can have a hands-on or hands-off approach to the day-to-day running of your business. How much money you could get for your business will depend on the angel investor, how much equity you are willing to sacrifice and the value of your business.

In Conclusion

If you have any detailed questions, connect with me on Kmend and message me on the platform, I will be happy to give you a free no obligation consultation and see how Wimbledon Park Capital can assist you.