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What Are Some of The Different Types of Business Funding for SMEs?

Updated: Nov 19, 2021

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Small to medium-sized Uk enterprises play an undeniably important role, both societally and economically. To better survive and strive throughout their life, however, said businesses crucially require financial resources to fund their investment and operation cycles, as well as the intrinsic need for innovating solutions.

While there is no dearth of financing sources available, challenges and constraints alike weigh on numerous SMEs, depending on how they go about seeking funding. In the following paragraphs, we will be attempting to present a non-exhaustive selection of the many options SMEs could very well benefit from if approached thoughtfully.

Right before we delve into the meat of the topic, it would not be at all superfluous to take a closer look at some of the core mechanisms that set any enterprise in motion.

different type of business funding

The investment cycle

For starters, the investment cycle of an SME - defined as the set of transactions regarding the buying and constituting of intangible (trademarks, goodwill, etc.), tangible (real estate, etc.), or financial (equity securities, etc.) production goods and fixed assets - not only requires a stable stream of income but, most importantly of all, a rather substantial amount of it.

An SME does not solely depend on its human capital or the overall quality of the services and products it offers. It just as much needs to build a sufficient financial buffer, indispensable for the functioning of the enterprise, as not only investing and operating costs must be covered but steady growth and the focus on product and service development be prioritized.

The operation cycle

The succession of steps ranging from the acquirement of raw production material to the receipt of cash proceeds from sales altogether make what is called the operation cycle. When trying to adjust the tricky balance between ensuring demand while managing resources, enterprises oftentimes fall behind in their attempt to keep their operating working capital afloat.

As far as SMEs are concerned, the need for funding largely varies based on each business' exploitation sector, and concomitantly, so does their operation cycle length. The speed at which products are manufactured and stocks disposed of, the duration of credit agreements, and the management of exploitation elements (wages, social security charges, etc.) can all be counted as determining factors.

6 small business funding sources in the UK

With the above information in mind, another determining factor every enterprise should carefully weigh in when elaborating their financial strategy is choosing the best-suited funding plan possible. And for that, getting acquainted with the various possibilities and offer available is a good start.

small business funding sources in UK

Self-financing, finance leases, supplier credits, the stock market, or bank loans, for example, are all potentially viable solutions to look into that we are going to be investigating further in the following paragraphs.

1. Self-financing

To better enjoy financial and decisional freedom, proper managing would want any entrepreneur to save, partially or in full, the profits generated annually. Truth be told, there is nothing quite as helpful and reassuring as having a monetary surplus at the ready that is either entirely yours or has been generated and durably retained by managing your enterprise.

Moreover, self-financing offers both unparalleled autonomy and better profitability prospects. Not only does it preserve SMEs from crippling debt and save them from being dangerously overburdened with expenses but it can later be reinvested into your own business.

2. Finance lease

equipment leasing and financing form

Corresponding to a lease contract complemented by an optional fixed purchase price, a finance lease consists of the transfer of an enterprise's movable property - computer equipment, service vehicles, etc. - or real estate properties - warehouses, workshops, industrial, commercial, or office buildings - to a finance lease company, meant in turn to rerent the assets of choice.

This transaction allows the ceding party to obtain extra capital they can make use of for future investment projects.

3. Supplier credits

Primary if not perhaps the most popular means of business operation funding for SMEs, supplier credits are a short-term solution that allows smaller entrepreneurs, provided that they undertake to pay within thirty to ninety days upon delivery, to make use of the goods in advance.

4. Stock market

Although both the costs and risks involved are not to be underestimated, listing on the stock market can provide aspiring SMEs that show promising potential and prospects of growth with the acknowledgment they need and help them acquire a reputable image.

Among the most determining factors of success is the type of business an SME is conducting, its size, its history, its development stage, and so on. Therefore, any company that seeks to float on the stock market must come fully prepared, as its volatile nature requires double the time and just as much energy.

5. Bank loans

If need be, or in addition to insufficient capital, SMEs can call on banks for further funding. This type of financing commonly referred to as debt financing brings two parties into play, a borrower at risk of payment default and a lender, in turn, uncertain whether the loan and added interest payments can be honored.

Needless to say, while the former is playing with fire, the latter has the upper hand and will not grant money without a convincing enough guarantee. Banks cushioning the risks is an explanation as to why grants are not as easily obtained by SMEs in the Uk.

small business funding bank loans

6. Small business grants and funding plans

For any enterprise, but SMEs more specifically, to stand a chance in an exponentially competitive market is to focus on innovation. New products and improved services should be at the forefront of any business' commercial strategy.

However, SMEs are more than ever held back by their size, and innovating in the Uk right after Covid is not without its fair share of trouble. Unfortunately for many, failing to generate a quick profit is generally not enough of an encouraging sign for banks to grant loans.

Faced with a dilemma, as they are caught in between the rushing need to innovate and the reluctance of financial institutions to intercede, many SMEs see in bank loans, although they remain the most used means of funding, more of a noose linked to debts and insolvency than a blessing.

We, at Funding Routes, are fully aware of that. And if you would only let our team of advisors assist you in your search for rewarding funding, you would soon see doors open before you! Do not hesitate to get in touch with us for the best alternative offers there are!

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