A small business is defined within the Companies Act 2006 as a business with up to 50 employees. It will generally use a combination of different types of finance to operate.
A small business may require additional finance for a variety of reasons, including: managing short-term cashflow, re-balancing the mix of short-term and long-term debt, replacing expiring finance facilities or funding the growth of the business.
Small businesses should periodically reassess the suitability of their current financing structure and the availability of alternative or additional funding. Funding should be matched to specific purposes (eg to buy an item of plant) and timing (eg short or long term finance). The availability of certain types of finance may also depend on circumstances (eg ability to provide security).
A business plan will make it easier to raise finance. It should outline how the business will operate in the future and include financial forecasts showing how much funding will be needed for specific items and when the money will be required. It will also show potential lenders or investors how their investment will be repaid.
Small businesses should consider the following finance options:
Business angels often provide between £25,000 and £750,000. This type of investment is common when an early investment capital is required and when a business needs more than money. For example, perhaps you are trying to enter a new market and a business angel with relevant contacts or experience would be very useful. Choosing the right type of angel for your business is therefore very important. The British Business Angels Association is a good place to start.
Businesses ideally suited for cashflow finance/invoice factoring are those that provide tangible goods or services. It is commonly used by businesses that have high levels of working capital tied up within debtors. It is also used by growing businesses who are seeking to manage their working capital. Some examples are manufacturers, wholesalers, engineers, transport companies and labour hire/recruitment service providers.
Finance from friends and family is often used to finance start-ups or relatively new businesses. They are generally a quick and straightforward way to secure the funding needed, with funds usually provided over a fixed period of time. Recent surveys have suggested that one on ten businesses uses close friends and family as bankers.
Grants are usually available for specific projects, for example a new product or process, job creation or training programme. They typically provide between 15% and 60% of the cost of the project. The normal growth of a business would therefore not normally qualify for a grant, though an established business looking at creating more jobs could qualify.
The use of HP/leasing is particularly common in industries where expensive machinery is required, such as construction, manufacturing, plant hire, printing, road freight, transport, engineering and professional services. It is also used to finance other capital requirements (e.g. cars or photocopiers). The asset provider usually dictates this type of linked finance.
Bank loans are frequently used to finance start-up capital and also for larger, long-term purchases. They are generally a quick and straightforward way to secure the funding needed, and are usually provided over a fixed period of time.
Overdrafts are often used by small and medium-sized enterprises (SMEs) to ease pressures on working capital and as a back-up for unexpected expenditures. They are a form of finance for businesses that experience fluctuations in working capital.
Trade credit is probably the easiest and most important sources of short-term finance option available to businesses. The simplest definition is an arrangement to buy goods and/or services on account without making immediate cash or cheque payments. It is short-term finance that is relatively quick to arrange.