Thursday 6 October 2016 7:30 am

SME finance: Which is best and how can you ensure success?

City A.M.'s interviewer and feature writer. Focus on media, marketing and data.

City A.M.'s interviewer and feature writer. Focus on media, marketing and data.

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British small and medium sized enterprises (SMEs) may be ambitious, but without financing, ambition is nothing more than a pipe dream. Whether it’s new equipment, a cash injection for a project, or simply extra working capital, businesses need money to ensure they can continue to grow.

Clearly, there are different types of finance for different needs – but as a small business, knowing where to look can be difficult. Which option is right for you? And how can you maximise your chances of successfully securing it?

Bank loan

The first thing to consider, no matter the size of the business, is whether you want to take on debt or issue equity. One benefit of debt-based finance for SMEs is that interest charges levied by the lender can be deductible for tax purposes.

Finance to SMEs has traditionally been provided by high street banks, but among other reasons, new capital requirements since the financial crisis have made it less attractive for them to service particularly smaller companies.

The big banks have been on a drive recently to ensure that people “know that banks are open for lending”, says Rebecca McNeil, head of SME lending at Barclays. “It’s critical during this period of Brexit uncertainty that we make sure our presence is really felt.”

Retail banks offer stability from a household name, and their draw is often the wealth of face-to-face support and knowledge they possess – from help with business planning, to international assistance. Bank lending isn’t for everyone, though, especially those without good credit or collateral.

Read more: Why we’re backing Britain’s resilient and optimistic small businesses

Alternative lending

There are countless non-bank lenders stepping in where banks cannot provide, with a variety of products aimed specifically at SMEs. Peter Alderson, managing director of LDF, says that “the options available to SMEs have generally lagged behind the development in the personal market, but this is undoubtedly changing”.

Alongside all the new options SMEs have outside traditional banks, the acceleration of fintech has made those options even more accessible via the internet.

LDF, for example, now enables businesses to access asset finance online via its Lendinghive platform. This type of finance allows businesses to borrow to purchase the equipment they need and spread the cost over its useful life. Other online platforms offer invoice financing facilities and simple loan products, all giving businesses an instant decision and rapid access to the money.


Most SMEs opt for debt-based finance when looking for funding, in order to retain full ownership of their business. But it’s not necessarily a case of having one or the other – both can be used in tandem to help companies achieve long-term growth.

Most small companies have nowhere near the market capitalisation to go public, but again, the internet has provided many alternatives. A quick search will find countless networks of so-called angel investors, venture capitalists and crowdfunding platforms looking for businesses to invest in.

There are advantages to equity over debt – smaller businesses can be vulnerable if they have irregular cash-flow, or if interest rates suddenly increase. “Equity finance can often be a more prudent way to finance growth, either alongside or instead of debt,” says Claire Madden, managing partner at Connection Capital. “Debt needs to be serviced and paid back no matter what, and if it isn’t, it can mean the demise or forced sale of the business.”

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There are options apart from high street banks (Source: Getty)

Matt Truman, chief executive of True Capital, believes that the support offered by venture capital and private equity investors offers “more than just funding”, though. “They can really support the growth of SMEs through strategic advice, experience of prior deals and access to their network.”

It’s worth noting that equity investors tend to look for businesses with high growth potential. Unless a business can offer the prospect of significant turnover growth within five years, it is unlikely to be of interest to them.


Preparing your business to apply for a loan or search for investment isn’t fundamentally different – but where to start? James Codling, managing director of VentureFounders, doesn’t believe “businesses should look at taking ‘traditional’ or ‘alternative’ financing, but should rather look at which options work best for your business and its needs at its current stage”.

One thing lenders and investors alike emphasise is the importance of knowing your market, and being realistic with your expectations – they both deal with pitches all the time, and will see straight through inflated projections.

Your number one priority is always business planning, says McNeil: “do a robust assessment, know what the competition looks like, what the market looks like, what finances you need to get up and running, and have a contingency plan in case it doesn’t go as you wish”. Madden adds that “it should be a dynamic plan – one that can evolve as the business grows and market environments change”.

Simon Hill, chief executive of Wazoku, opted for using an angel investor when setting up his business, and says financial projections are most important. “These numbers are rarely accurate, but demonstrating you understand P&L, have an appreciation of cashflow and can forecast sensible costs to achieve the forecast growth gives confidence.”

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If your business already exists, Truman says “consistency of reporting and accounting, a strong robust budgeting process, where budgets have been adhered to, and a demonstration of financial control” is essential.

Whether you’re aiming for debt or equity, online or off, planning, knowing your market, and demonstrating control of your finances will aid your prospects. Dont rush into a bad deal – do your research. The options available online stretch far, far beyond the bank.