The complete guide to business finance in the UK

Securing the money your business needs is an exciting, landmark moment in your business’ lifespan. While it’s an amazing journey, it’s not without its stresses and complications.

There’s plenty at stake and always the possibility that, for whatever reason, you can’t secure the deal you want. On the other hand, you could unlock the next stage of growth and a future you didn’t dare to imagine for you and your business.

If you’re getting ready to secure more funding for your business, you need to read this guide. It explains the sources and approaches, challenges and strategies for securing business finance.

 

 

What is business finance?

Business finance is a catch-all term for any money you bring into your business that isn’t revenue. A similar broad-brush name for it is external funding.

It could be in the form of selling shares, arranging a loan or using other financial products. The key is that the money generated isn’t coming from operating revenue or future sales.

Whatever name you give it, there are multiple ways to secure business finance and they all work in different ways.

 

Why is business finance so important to UK businesses?

Even the most successful business, with soaring revenues and profits, can need extra finance whether for working capital, expansion, capital expenditure or business acquisitions.

Cash management matters

If a business is cash rich, using all of its available cash to fund a growth project can be a big risk. What if an emergency happens and, say, you need to pay for expensive repairs and refund some orders that can’t be completed?

Finance can be a way to bring forward an investment or purchase by not having to save for it over months or years.

Adding value

If a business is raising money from investors, the money on offer isn’t the only worthwhile element.

Investors often bring with them valuable experience, skillsets and networks. Raising funds from investors can give a business so much more than cash in the bank – it can provide intangibles that make a huge difference, like knowledge and connections.

 

Bridging gaps and stepping stones

A business might not have enough cash to fund a particular venture but could make it more manageable if it is broken down into monthly repayments. This is where bringing new money in can save the day, as it unlocks latent potential in businesses.

A lot of business owners will be able to identify with the catch-22 of needing more cash to grow but needing to grow to first earn the cash.

Business finance bridges that gap and lets you break free from that stuck feeling and into a new phase of growth.

 

The different types of business finance available in the UK

There are plenty of ways to secure finance for your business and they take several distinct forms. The approach you decide will be determined by what your business is like right now – from its industry and financials to its age and ambitions.

We’ve explained the main types of business finance below, but it’s not an exhaustive list.

 

Equity financing

Securing capital through equity financing means you’re selling a bit of your business (in the form of shares – AKA equity) to investors.

These investors can take many forms, from private individuals to international businesses or even an Initial Public Offering (IPO) on a stock exchange.

You get a cash injection and (hopefully) valuable new partners, but at the cost of a percentage of your ownership and, potentially, decision-making power in the business.

 

Debt financing

Debt financing is another name for borrowing money. This could be through a bank loan, a commercial mortgage or an overdraft.

Generally, you’ll receive a lump sum and pay it back over months and years, with interest added to the balance.

Your equity is unaffected, but your monthly cashflow will be impacted by the repayments.

 

Asset finance

Asset finance is a specific type of debt finance, using an asset (e.g. a piece of machinery or a new set of laptops) as security for the loan.

This is a great way of funding your business if your growth plans centre on improving an operational element, like adding some production capacity or using more efficient equipment.

We’ve published the complete guide to asset finance on our website if you want a deeper dive into the topic.

 

Credit facilities

Another option, albeit possibly for smaller sums than the others listed above, is to use credit facilities like a credit card.

These can be unsecured and allow you to draw down funds and repay as you go, rather than receiving a lump sum with a repayment schedule.

Whilst often more expensive, if used for the right purpose, this kind of borrowing can be an important source of financing both in support of working capital or making small capital purchases.

 

Grants, prizes and awards

If your business has an especially innovative product or approach, it could be eligible for financial support from industry bodies.

This kind of funding is often seasonal and can vary from year to year (as well as between industries). However, it’s some of the best money you can bring into your business as there’s usually no repayment required. Money doesn’t grow on trees, but some organisations are kind enough to give it away.

 

Key sources of business finance for UK businesses

You can raise money by selling a stake in your business, by borrowing from lenders or by securing a loan against new assets. Understandably, there are a lot of different ways you can access this finance.

 

Banks and financial institutions

Established, regulated banks (and other financial institutions) are the bedrock of lending in the UK. As well as having the ability to lend large sums of money, they are closely monitored by regulators and licensors, which gives your agreement security.

There are also industry and sector-specific lenders you can use, who might offer finance for more niche situations due to their understanding and expertise.

Best for: debt financing, asset finance and credit facilities

 

Governments and industry bodies

There’s an overall environment of support for businesses to grow and succeed in the UK. This takes lots of forms, like incubators and mentorship programmes all the way through to cash payments.

Typically, funding from the government (eg. via Innovate UK) comes in the form of grants, tax credits or low-cost loans. For industry (eg. the British Council’s International Collaboration Grants), it’s usually grants.

Best for: grants, prizes and awards

 

Private investors and venture capital

You can bring all kinds of investors into your business, from angel investors supporting pre-product startups to international venture capital firms with portfolios of thousands of businesses.

All of these investors are hoping to earn a return on their investment eventually, whether that’s selling their shares, being paid dividends or other means.

 

Angel investors

Typically fund high-potential startups at the very start of their journey.

 

Private investors

Investors involve themselves with established businesses for any number of reasons – because they see an opportunity to add value, they foresee high growth or they support the cause.

 

Venture capital firms

These firms want a relatively quick return on their investment (i.e. within a few years, not decades). Their investment will aim to accelerate the business, grow its market share and value, before exiting with a healthy return.

 

Mergers and acquisitions

A slightly different option to the others, as M&A involve sacrificing either all or the majority of your ownership stake. Often, the acquiring party absorbs the company they’ve bought, effectively ending your business.

Best for: equity funding

 

Crowdfunding

Crowdfunding is a unique type of private investment that pools the funds of individual investors into a collective.

Depending on the structure of the deal, the crowdfunders might each have individual voting rights or nominate a representative that votes for the entire group.

This is a great way to bring your fans and customers on board with your business but does require careful management.

Popular crowdfunding platforms include Crowdcude, Republic Europe (formerly Seedrs) and Crowdfunder.

Best for: equity funding

 

Peer-to-peer (P2P) lending

Another form of private investment, P2P lending is a hybrid of crowdfunding and private investment.

P2P is a direct agreement between two parties via a marketplace. A business can be listed as available for investment on a P2P lending platform and individuals can broker their own deals to lend funds.

Individuals can use Innovative Finance ISAs (IFISAs) to fund their investments or invest directly through P2P lending platforms like Loanpad.

Best for: debt funding

 

How to choose the right financing option for your business

Choosing which funding approach to take comes down to multiple factors. The reality is, not every option is open to every business.

A brand-new business isn’t going to be of interest to venture capital firms and a firm with a bad business credit score isn’t going to have much luck with borrowing from a bank.

To find the right financing option for your business, you’ll need to weigh up:

• What you need the money for (eg. buying new machinery could make asset finance possible)

• What is genuinely accessible to you (eg. the business credit score example shared above)

• Whether you’re comfortable with the costs involved (eg. monthly repayments on debt finance or loss of equity with equity finance)

 

How to manage business finance effectively

Business finance requires careful management – in terms of how you use the cash and how you manage the costs involved.

There are some good basic principles to follow, as well as a few specifics you might want to consider.

 

Budgeting and forecasting

With a big cash inflow, you’ll need to update your budgets and forecasts accordingly.

You will have secured this finance for a specific goal – now your budget and forecasts need to reflect this. Don’t forget to account for the repayment costs of any debt you’ve taken on.

And, if you’ve brought in new shareholders, you might have to accommodate their views and goals for the business in your budgets.

 

Cashflow management

If you’re using the finance for an immediate payment, then the money will enter and exit your account fairly promptly. If not, you could keep the funds in a savings account – making withdrawals in tranches when you need them and earning interest on the remaining balance.

With any debt, you add a regular outgoing to your cashflow. If you’ve got room to accommodate the repayments in your cashflow as is, that’s great. If not, you’ll need to assess some other line items and potentially cut costs or negotiate contracts to more favourable terms.

 

Financial reporting and analysis

The finance you secure is outside of your normal revenue and needs to be reflected properly in your accounts.

Your balance sheet will look significantly different from the previous year, after all.

If you work with an accountant, they’ll be able to advise you of the best way to account for and report the finance you’ve brought into the business.

 

The common challenges in business finance

Securing funding for your business is no mean feat. The process can take time, cause stress and comes with costs.

Every situation is unique, but there are some challenges that most business owners encounter when trying to bring fresh capital into their businesses.

 

Managing cashflow effectively

Adapting to the increase in working capital is a fun challenge which requires discipline. Spending the money sensibly and following the budget as planned can be harder than you might think.

The other side of the cashflow coin is that, with any debt finance, you have to account for repayments. If you’re planning to use the funds to improve your revenue, your repayment schedule might start sooner than your revenues start rising. You’ll need to have the cash available to afford that.

 

Securing sufficient funding

There aren’t many funders out there writing blank cheques – there’s almost always an element of negotiation involved.

You might have a specific number in mind, but whether you can raise it is another question. You’ll either need to have a plan ready for a smaller inflow or look at multiple sources to reach your magic number.

 

Maintaining financial records

Adding, spending and repaying a large debt on your balance sheet adds some complexity to your reporting admin.

Ideally, you’ll be working with an accountant or have a qualified finance professional in–house. They’ll know how to help you navigate the financial rigmarole that comes with business finance. If not, we highly recommend contacting an accountant for their assistance.

 

Navigating tax obligations

As above, the financial professionals you work with should be able to advise you appropriately about tax issues arising.

Selling shares incurs tax obligations, whereas debt finance doesn’t. You might be able to claim VAT back on advisory fees from professionals in the process of securing finance, but you’ll need to check with a professional as to what can and can't be claimed.

 

Dealing with economic fluctuations

Businesses don’t operate within a vacuum. Difficult economic conditions can cause real challenges for your cashflow and revenues.

You can have a brilliant plan for how you’ll use fresh capital to grow your revenue, but an unforeseen increase in the cost of materials could wipe out that growth.

Sensible forecasting and scenario planning can insulate you from the worst of these impacts, but you can’t predict everything,

 

Adapting to new ownership structure

If you’re adding new shareholders to the business, you’d hope to be bringing in kindred spirits and folks who have a similar view on how to move the business forward. That’s not always possible, though.

Whether your new shareholders feel like old friends or something frostier, you’ll have to adjust to having their voice in the business.

If you were previously a sole director, this can be especially challenging. Give it some time, dedicate attention to building the relationship(s) and even consider working with a mentor or coach to help smooth the process.

 

The start of something significant

Securing new finance tends to mark a lot of milestones for your business – a landmark moment for growth, new faces and a sense of arriving (or departing) somewhere.

There is a lot to consider, from the terms of any agreements to the mental shift that can be sparked by a sudden influx of cash.

We hope this guide has helped you make sense of the complicated threads that stitch together business finance.

And if you think that debt finance or asset finance might be the way to go for your business, we’d be more than happy to talk through your options with Allica Bank.

 

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