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A Guide by CMC Business Advisers.

For small businesses in the UK, securing the right type of finance can be one of the biggest challenges they face. Whether it’s raising capital for expansion, covering cash flow gaps, or investing in new equipment, having access to finance is crucial. Yet, many small firms still struggle to secure funding due to various barriers. Indeed, the British Chambers of Commerce surveyed their members earlier this year and 49% of responders stated that it had become more challenging to access finance over the past three years.

In this blog, I will explore the current landscape for small business finance, discuss the options available, and provide some practical tips for improving access. 

The Current Landscape to Finance for Small Businesses 

Despite the UK being a hub for entrepreneurship, small businesses often encounter difficulties when it comes to obtaining financing. Many traditional lenders, such as banks, still perceive small firms as higher risk due to factors like limited trading history, lower revenue, or lack of collateral. This cautious approach has only increased since the 2008 financial crisis, despite various government initiatives aimed at stimulating lending to small businesses. 

However, it’s not all doom and gloom. The UK finance landscape has evolved significantly in recent years, with alternative finance options growing in popularity. From peer-to-peer lending and crowdfunding to invoice financing and government-backed schemes, small firms now have more funding avenues to explore. The challenge lies in navigating these options and finding the right fit. 

Traditional Bank Loans: A Changing Environment 

Bank loans have long been the most common source of business finance, and for some firms, they remain a viable option. However, the reality is that traditional bank loans come with strict lending criteria. For small firms with irregular cash flow, limited trading history, or no assets to use as security, personal guarantees are expected, and approval can be difficult. 

The good news is that there are efforts to make bank loans more accessible to small businesses. The British Business Bank, for instance, works with banks and other lenders to provide guarantees that encourage lending to smaller firms.  

Alternative Finance: The Rise of New Solutions 

With banks sometimes being a challenging route, alternative finance solutions have gained traction. These options are particularly useful for firms that need a more flexible approach to borrowing. Here are some of the key alternatives: 

1. Peer-to-peer lending: Platforms like Funding Circle allow businesses to borrow directly from investors, bypassing traditional financial institutions. This type of finance can often be accessed more quickly than a bank loan and may come with more flexible terms. However, interest rates can be higher, reflecting the higher risk. 

2. Invoice Financing: For businesses with cash flow issues due to unpaid invoices, invoice financing allows firms to borrow against the value of their outstanding invoices. This can be a quick way to access cash but comes at a cost, as fees and interest charges can add up. 

3. Asset-Based Lending: This involves borrowing against the value of company assets, such as machinery, vehicles, or stock. It can be a useful option for businesses with significant physical assets but may not suit firms that rely more on intellectual property or digital products. 

Government Support Schemes 

The UK government has introduced various schemes to help small businesses access finance. These include grants, loans, and tax incentives that can make a significant difference. For example, the Start Up Loans scheme offers personal loans of up to £25,000 for individuals starting a business or have been trading for less than 36 months. Additionally, the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) provide tax relief to investors who purchase shares in small, high-risk companies, making it more attractive for them to provide funding. 

Practical Tips for Improving Access to Finance 

Securing finance doesn’t have to be daunting. Here are some practical steps small businesses can take to improve their chances: 

1. Build a Solid Business Plan: Lenders and investors need to see a clear, credible plan that demonstrates how the business will generate revenue and manage risks. A well-thought-out business plan can make a significant difference in securing finance. 

2. Improve Creditworthiness: Maintaining a good credit score is essential for accessing finance on favourable terms. Ensuring timely payments to suppliers and creditors can help strengthen a business’s credit profile. (Read my guide on how commercial credit scores work here.) 

3. Explore Multiple Options: Don’t put all your eggs in one basket. Consider traditional loans alongside alternative finance solutions and evaluate government-backed schemes that could provide a better fit. 

4. Seek Professional Advice: Sometimes navigating the financial landscape can be complex. Engaging with a business adviser can help firms identify the most suitable options and prepare the necessary documentation. 

Securing Finance for Small Businesses 

While accessing finance remains a challenge for many UK small businesses, the variety of available funding options has expanded. From traditional bank loans to innovative alternative finance solutions and government schemes, there are numerous avenues for businesses to explore. By understanding the landscape and preparing thoroughly, small firms can improve their access to finance and secure the resources needed for growth.

At CMC Business Advisers, we’re here to help guide your business through this process, ensuring you make informed decisions that set the stage for success. If you would like to find out more about how we can support you, contact us via the form below.