Categories
SME Finance | The Best Funding Options Compared
UK statistics show that over 99% of the business landscape is made up of small and medium-sized enterprises (SMEs), with over 5.5 million SME businesses in the country. It is of no surprise, therefore, that the market for finance products tailored for the needs of SMEs is so well developed.
SME finance encompasses a range of comprehensive financial solutions for all aspects of the business lifecycle.
Here at Clifton Private Finance, we have expertise that covers the complete range of SME finance products and have developed this short guide to help you understand the funding options available to you.
To get a bespoke quote for your requirements, you can use our calculator below:
Or to speak to an adviser about what's best for your business, book a call below.
Table of Contents
What is Classed as SME Finance?
Startup Funding - Finance for New and Young Enterprises
Cash Flow Finance - Assistance for Short-Term Financial Difficulties
Expansion Finance - Financial Solutions for Growth
Recent Business Finance Case Studies
Refinancing - Optimising Debt Management
SME Finance with Clifton Private Finance
What is Classed as SME Finance?
SME finance covers all financial products that are designed for small to medium-sized enterprises.
This ranges from lower-value financial options for very small businesses, such as sole traders or limited companies with only a few employees, who may be looking for funding that falls between £5,000 and £25,000; to large-scale funding to propel a company onto the world stage through initial public offerings (IPO) and beyond.
Startup Funding - Finance for New and Young Enterprises
For many SMEs, finance begins at the startup stage.
The UK government defines a startup as a company that has been in operation for fewer than 36 months, though not all financial institutions follow the same clear definition, preferring to use the term to refer to any company in the early stages of its business life and development.
When looking for startup funding, however, it is typically beneficial to consider it as specialist financing that is aimed at companies who began trading in the previous 36 months as this meets most lenders’ criteria.
Startup SME finance is, therefore, that which is focussed on the early setup stages of a business, from conception through to becoming an established firm that has settled into its business practices. It encompasses:
Startup Loans
These are loans provided by banks or specialist lenders with preferential rates designed to help young SMEs establish themselves.
Startup loans can be both secured or unsecured, though as many startups are yet to develop the assets necessary to use as collateral, unsecured loans with director’s guarantees for risk mitigation are the most typical.
Currently, the UK offers a government startup loan guarantee scheme to help startups obtain the funding they require at preferential rates, possible thanks to the government providing the collateral backing finance providers need to offset the considerable risk of lending to new companies.
Startup loans are typically utilised to provide the funding needed for:
- Equipment
- Brand development
- Research
- Marketing
- Sales
- Initial running costs
- Establishing networks and partnerships
Asset Finance
Obtaining costly equipment, machinery, and even furnishings is often a concern for startup SMEs. Asset finance, which incorporates both loan structures and leasing solutions, provides an answer, empowering young businesses to be able to access the latest tools to run their companies.
Asset finance is broadly covered by the following three products:
- Hire purchase - An asset-based loan structure for purchasing equipment and paying for it over time.
- Finance lease - A mid-term leasing arrangement that offers flexibility and the option to own at the end of the contract term.
- Operating lease - Both short-term and mid-term rental agreements that provide hassle-free equipment and vehicle use for defined periods.
Asset finance is a substantial part of SME finance and is valuable for businesses at every stage, but is of particular interest to startup entrepreneurs who can rely on it to give their companies the equipment needed to get off the ground.
Grants
Grants offer startup businesses access to funding capital with no obligation for repayment.
Nonetheless, for businesses in the right fields - such as those focussed on innovation or environmental sustainability - grants present a tangible option for significant funding.
Many grants are government backed, though other institutions also offer grant support for new businesses in their sphere of interest. Some grant opportunities for startup SMEs in the UK include those with Innovate UK, The National Lottery Heritage Fund, and the Prince’s Trust.
Investment Capital
Investment provides a route to capital that requires no repayment obligation, instead working on a principle of selling shares in the business in return for capital.
This type of SME finance is known as dilutive funding, as it dilutes the company ownership and many entrepreneurs keen to keep full control of their burgeoning business stay away from investment capital for this reason.
Investment capital includes that provided by dedicated investment strategy conglomerates, known as venture capitalists and private individuals / small groups with a keen personal interest in investing, known as angel investors.
Related: A guide to equity financing
Crowdfunding
Crowdfunding provides startups with the potential for significant SME finance without requiring a loan.
With multiple crowdfunding platforms available, entrepreneurs can choose between dilutive crowdfunding suitable for rapid growth tech companies and e-commerce ventures, and the product pre-funding style of crowdfunding that’s project-specific and is particularly useful for companies focused on a gap in the market that’s solved with their unique solution.
Cash Flow Finance - Assistance for Short-Term Financial Difficulties
A key need for SME finance is to help maintain company liquidity through difficult times.
Many businesses are seasonal with periods of larger turnover contrasted by times of low income, and it can take years before liquid capital is developed enough for the business to weather the storm alone.
Cash flow finance provides a helping hand during the down months, providing short-term funding that’s repaid during more profitable times. Examples of cash flow SME finance include:
Revolving Credit Facilities
Revolving credit facilities (also called lines of credit) represent an alternative to the standard loan structure that provides a lifeline in times of tight cash flow.
Examples of revolving credit facilities include company credit cards and bank overdrafts, both methods of providing SME finance to businesses which can be ‘dipped into’ and out of as the need arises.
Revolving credit facilities provide a number of advantages:
- Single set up - Once a revolving credit facility is set up, it remains for the company to use as and when it needs to, removing the need for future loan applications should the need arise in the future to access the capital.
- Interest only on usage - Unlike a standard loan, for which the business pays interest whether or not the capital is used, a revolving credit facility only charges interest on the portion of the credit that is utilised, potentially saving the business a significant amount in the long run.
- Easy administration - With their flexible nature, revolving credit facilities are easy to administer with automatic payment schedules easily adapted to meet the company’s need.
Invoice Finance
Invoice finance is a form of SME finance that allows businesses to leverage accounts receivable to obtain immediate capital.
There are two main forms of invoice finance: invoice discounting, whereby a secured loan is obtained with the accounts receivable acting as collateral; or invoice factoring where the invoice debt is sold to a third party (the factoring company) who then take over collection.
With the development of invoice finance in the SME finance sector, the system offers both traditional loan and revolving credit facility options, tailored to suit the needs of the individual business.
Merchant Cash Advance
With the majority of modern customer transactions occurring through merchant card services, merchant cash advance has grown in popularity for B2C businesses, both online and traditional.
Merchant cash advance is particularly powerful for companies with strong seasonal variation, such as those e-commerce companies who see significant boosts in sales during holiday periods, or hospitality businesses who experience strong summer months but poorer winter ones.
Short Term Loans
Short term unsecured business loans provide another solution to cash flow finance that follows a more traditional model.
With modern lending technology offering extremely fast application-to-acceptance processes with unsecured business loans, they can now be obtained swiftly enough to make them a viable form of cash flow finance for SMEs.
As traditional unsecured loans lean heavily on the business credit score to determine viability, businesses that are suffering a short-term problem with cash flow may find it difficult to obtain favourable terms.
An alternative exists in debt-service coverage ratio (DSCR) loans, for which risk assessment is focussed on the ratio between current debt liabilities and income rather than traditional credit scoring.
Expansion Finance - Financial Solutions for Growth
The most common use for SME finance is to provide the capital required for business growth. Capital used and invested in the business to fund expansion is essential for companies to survive and thrive - debt finance stands as a cornerstone for this expansion and is a vital component to any SME’s long-term strategy.
Unsecured Loans
Unsecured business loans are a tried-and-tested system for providing businesses with expansion capital. Relatively easy to obtain and with significant sums available from a range of lenders, unsecured loans are a standard go-to for business leaders looking to obtain funding.
Unsecured loans offer:
- Good short-, mid- and long-term rates
- Assessment based primarily on credit scoring - excellent for established SMEs
- Reasonable application times
- Clear, uncomplicated repayment schedule
Secured Loans
If the company has viable physical assets that it can use as collateral, then secured business loans offer an improvement in interest rates and terms to similar unsecured loans, with loan sizes that are based on asset-value more than basic credit scoring.
Secured loans provide quality SME finance for medium-sized enterprises for comprehensive expansion with:
- Preferential rates based on asset stability
- Long-term solutions for ease of payment schedule
- Larger sums of non-dilutive capital
- Unrestricted capital usage for all business needs
Asset Finance
Designed to provide companies access to equipment, machinery, and other assets that would otherwise be financially unviable, the wide range of asset finance solutions is a significant portion of ongoing SME finance that drives expansion in growing companies across the UK.
Asset finance provides:
- Significant purchasing power for top-end machinery and equipment
- Flexible terms customised to suit any business requirement
- Worry-free asset usage with additional maintenance and insurance packages
- Options for leasing and full ownership
Commercial Mortgages
For property acquisition and investment, commercial mortgages are long-term SME finance options that present substantial business security.
When expanding a company to own headquarter offices, warehousing, retail space, or for long-term investment, a commercial mortgage is the most suitable product on the market.
- Provides the funding needed to purchase property
- Long-term solution to larger financial need
- Low interest rates and competitive LTV based on company credit history
Related: How to buy commercial property
Revenue-Based Finance
A SME finance solution that sits between the traditional loan structure and the investment qualities of venture capital, revenue-based finance provides instant capital leveraged against future turnover.
With a percentage-based repayment schedule that minimises debt stress and loan values measured against customer volume, revenue-based finance is particularly valuable for e-commerce and SaaS subscription-style businesses.
- Percentage-based repayment schedule perfect for seasonal and high-growth businesses
- Less importance placed on current business credit rating
- No ties to interest rates
Recent Business Finance Case Studies
Refinancing - Optimising Debt Management
Managing debt finance can be an ongoing balancing act and during the course of a company’s life there may well be periods where debt liabilities can be difficult to meet.
SME refinancing offers businesses two potential benefits: the opportunity to consolidate existing business debts into one overall managed structure; and the ability to take advantage of current interest rates.
Refinance is a key product in the world of SME finance that is utilised by experienced financial officers and entrepreneurs across the UK.
Related: Asset Refinancing - How it Works
Secured Loans
A standard secured business loan is often the simplest route to comprehensive debt consolidation.
Through leveraging an asset as collateral, secured loans offer lower interest rates and additional security to the lender that will help companies who are otherwise struggling with debt management.
Just as secured loans are one of the key products for SME finance in terms of expansion, here again they play a vital role in maintaining business stability.
Asset-Based Finance and Equity Release
One sister option to a secured business loan is that of asset-based finance and equity release.
Depending on the arrangement, the equity in the asset can be repurchased over time until it is fully returned to the business, or it can be later sold on and replaced as necessary.
Equity release in this way can unlock capital that is tied up in assets to help with debt recovery, providing the business with a brighter future and even additional funds for new avenues of expansion.
SME Finance with Clifton Private Finance
Understanding the variety and complexity of the SME finance landscape takes considerable research and experience.
Experienced entrepreneurs and business owners understand the value in partnering with specialist finance advisors and brokers, freeing up their time for more specialist business needs.
Clifton Private Finance have dedicated teams focused on each of the many different types of SME finance to ensure that we’re always fully aware of market changes and the latest opportunities.
To discuss your business funding needs and gain access to the wider marketplace of UK lenders, speak to a Clifton PF specialist today.
