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Sources of Business Finance for SMEs

There are many different ways businesses can secure finance outside paying a visit to their bank manager. By doing your research before you need to secure finance, you’ll be better prepared when it comes to making the application.
Sources of Business Finance for SMEs

Updated on 07/08/2020

A recent survey of small business owners in the UK revealed that cash flow is one of their biggest worries. It’s an essential aspect of any business; determining your ability to purchase stock to meet orders and even pay your employees.

It’s not the only worry faced by business owners, though. Businesses may need funds to alleviate an emergency situation, to expand their operations, or to execute a new budget strategy over the coming months. That’s where business finance could help.

We’ve already covered why a business may need finance, so in this follow-up article we’re going to:

Explaining small business financing

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Before we dive into some real-world examples of business finance that you may be eligible for, let’s take a moment to outline some of the key features of the lending landscape.

‘Lenders’ describes an organisation that lends money to a business, whether that’s a direct lender such as a bank, or an online lender. ‘Borrowers’ are, of course, the small businesses that are in need of finance in this instance.

Sometimes ‘introducers’ such as brokers, can help to introduce a business owner to different lending options, and in this case a well-connected broker who understands a business’ needs and has knowledge of all the different business finance options, could potentially help give a steer to SME business owners.

Distinctions between different finance options typically include the lending duration; ‘long-term vs short-term’, the securities involved (are you offering an asset as insurance?), and the nature of the lending agreement – so, whether you are wanting a larger cash injection up front, or would you prefer to receive money in instalments over a longer period of time?

With these considerations in mind, let’s take a look at some of the best-known sources of business finance in today’s world.

Five sources of finance for a business

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A quick disclaimer: your credit score may affect the preferential rates you’re eligible for in a finance agreement, so keeping on top of this could help improve your chances of securing a favourable finance agreement.

1. Business loans

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A business finance loan is a very popular and well-known source of business finance. With varying rates and loan lengths, too, business loans aren’t necessarily just for long-term finance.

Business loans could also be a great source of finance if you’re looking to gain funds quickly. Here at Esme, we offer business loans with competitive rates and aim to have the money in your account within an hour after getting approved.

The key thing to remember with business loans is to do your research, and our blog is a great place to start.

2. Crowdfunding campaigns

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Crowdfunding has emerged in recent years as a way for businesses to raise money for projects they might not otherwise be able to get finance for.

Some platforms are exclusive for certain types of businesses like musicians and designers. Other crowdfunding websites specialise in business finance for unique and innovative products, and some are a catch all. You may be charged a flat fee or percentage once you’ve met your target so be sure to account for that when working out your target.

Kickstarter is probably one of the most well-known crowdfunding platforms but there are plenty of others out there. It provides creative businesses the chance to raise funds for creative projects.

Indiegogo is exclusively for unique and innovative products. It’s a great platform if you’ve thoroughly researched your market and product and believe in your business case.

Just like you’d research the right loan provider, you should research the right crowdfunding site for you. It’s also important to bear in mind that crowdfunding might not be for you if you’re looking for quick business finance as it can be a lengthy process. There is also no guarantee of reaching your target or receiving all the funds.

3. Business credit cards

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Business credit cards can be a convenient and versatile source of short-term business finance. Just like you would use a personal credit card for all sorts of expenses, a business credit card is the same.

Some business credit cards come with added benefits like insurance or discounts but that shouldn’t be what sways you when it comes to choosing. Look at the interest rates and fees that apply and use those as the gauge to choose the right card for you. It’s also worth bearing in mind that if you’re unable to meet the monthly repayments, interest rights can be a lot higher than other sources of business finance.

Applying for a business credit card is a different process to applying for a personal card. Be sure to look up the application process first so you know the information you need to hand to complete the application.

4. Business funds and grants

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Another option that many businesses may overlook are funds, bursaries, or grants that have been specifically set up to help companies thrive. These may come directly from the government or local council or they might be from a non-profit.

Business funds will have criteria that you will have to meet in order to receive funds, which could make the application process important but also lengthy. Again, and we can’t say this enough; do your research to build a solid business case as to why you deserve the funding.

Funds don’t necessarily mean you’ll receive money for free. Rather you may get lower rates or access to things like workspaces and resources.

The government website has a great list of funds all around the country that provide different sources of business finance.

5. Asset finance

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Asset finance is a creative type of lending agreement that gives your business access to different assets. This could mean getting in a new type of equipment that helps you operate (perhaps a coffee machine for a coffee shop), or it could involve selling your assets to a lender then leasing them back in the short-term. This could unlock cash in the short-term that may help other important aspects of your business, such as cash flow to pay your employees’ wages, for example.

Effectively, you could use an asset as insurance when establishing a new loan agreement. This type of lending could be relevant to a business that owns a lot of assets and wants to leverage them to gain access to potentially lower interest rates, or it may also appeal to businesses who are desperately in need of cash in the short-term. You can read more about this in our asset refinance guide.

How to identify which source of finance is right for your business

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You may know that your business is in need of finance, whether that’s for survivability or to help you reach even greater heights. But, with so many options available, it can be hard to know exactly where to start.

You may get a better idea of what suits your business best if you talk to an accountant or financial advisor. By having that conversation with an expert who can get to know your business’ unique circumstances, you may get some really in-depth insights into which business finance option you need.

Alternatively, if you think you may have a rough idea of which direction to move in already, our blog is packed full of useful tips on business loans, tech, finance and management- so it could well be a good place to start your research.

How could Esme help?

These are difficult times for many businesses, so it’s important now more than ever to take good care of yourself and your team. If you’re concerned about your business being impacted financially due to coronavirus, visit our FAQs page for information about how we may be able to support you.