Credit and Finance, Growth, Hints and tips, Small Business
7 types of funding available to SMEs and trends in lending
Posted on by experian
Estimated read time: 6 mins
Whether you’re a start-up or a mature business, at some point in time you’re likely to require finance. But how do you determine which type of finance is right for your business and crucially, what are your chances of success? You may have been successful in the past, but can you still be sure in today’s more challenging market?
When deciding what type of finance is right for your business, there are a few things you need to consider. According to Gov.uk, the most suitable option for you depends largely on:
• How much funding you need – generally, the smaller the amount, the easier it’ll be
• Your current business revenue or if you’re a new business – higher revenue = greater ability to pay people back
• Your willingness to use personal assets as security – this can make it easier to source funding but needless to say it’s risky
• Ownership of a business property – if you have one, it can be easier to get funding
• Your willingness to sell shares – if you’re willing to sell shares, it could be an attractive prospect for investors
So those are the basic considerations, let’s now explore the different types of funding available.
1. Investment finance: Think Dragons’ Den. You’ll essentially be selling part of your business as shares to would-be investors, who will then take a share of the profits (or losses) that your business makes
Main advantage: Investors could bring in key skills Eg. Duncan Bannatyne can offer you his competitive edge should your business be a spa/ fitness club
Main disadvantage: You could be offering up control of your business to other people, which is not only a laborious process, it could potentially hamper your creative vision
2. Crowdfunding: Typically this method is used to fund project work as opposed to day-to-day business operations. It’s where a number of people chip-in through either investment or donations and then their money is pooled to reach your target. Typically, you’ll need to showcase your idea on the internet
Main advantage: “Alternative” method which can be quick and raises awareness for your business
Main disadvantage: Your idea could be copied if it isn’t protected and if you don’t reach your target, all funds will normally be returned to contributors
3. Loans: This is your typical funding method whereby a bank or even a friend loans you funds as credit, which you will need to pay back, plus interest, based upon the agreed terms
Main advantage: You won’t have to give the lender a percentage of your profits or shares in the company
Main disadvantage: Loans aren’t very flexible
4. Grants: This is essentially free money that is awarded typically for a specific project by the government or a similar provider. Highly competitive, you’ll need to meet a number of different criteria to be eligible
Main advantage: You won’t have to pay anything back
Main disadvantage: You’ll have to find something very specific and tailor your business/ idea to meet the requirements
5. Overdrafts: Overdrafts are small credit facilities allowing temporary over-expenditure and they’re designed to service short-term debts
Main advantage: It’s flexible and easy to arrange
Main disadvantage: There’s a danger of being charged for extension or overspend on the agreed limit
6. Invoice financing: This is where you’re owed money from customers and you either sell your invoice to an invoice financier (at a reduced fee – there has to be profit in there for them) who will manage it for you or they will lend you money against unpaid invoices (again, be mindful of the fees)
Main advantage: It can free up time and stop you having to chase late payments
Main disadvantage: You’ll lose profit on any invoices managed in this way
7. Leasing and asset finance: This is essentially where you rent or lease assets as opposed to buying them outright
Main advantage: You can get equipment you may otherwise be unable to afford
Main disadvantage: It can be more expensive than buying the asset outright, with a contract tying you in
So, those are seven of the different types of funding available out there. Whichever option you pick, ensure you do your research and don’t get overexcited and enter into something that you don’t fully understand. Take time to compare and contrast, speak to other people and try to seek out their experiences but remember, what worked for someone else might not necessarily work for you.
Awareness amongst SMEs regarding the range of alternative finance options has risen recently.
Peer-to-peer lending is up from 24% in 2012 to 40% in 2015.
Crowdfunding is up from 13% in 2012 to 49% in 2015.
The percentage of SMEs contacting only one provider has fallen from 71% in 2012 to 61% in 2015.
Even with this rise in awareness in the alternative options, over half of SMEs immediately turn to the bank to source finance when they identify a need for it.
If you’d like to understand your chances of being accepted for funding, before you apply, check your business credit score at mybusinessprofile.com