Finding finance

Sometimes it's possible to obtain finance from within your business, without using external sources.

Retained profits

This is where the business reinvests profits it has already made rather than, say, taking that money out in dividends. This may be used to:

• Fund expansion. A business owner may calculate that the lowest cost way to potentially increase future profits is to reinvest to support expansion. However waiting for profits to build up may mean a business loses an opportunity they could have exploited sooner, if they’d looked at quicker sources of finance.

• Provide a safety net. This can reduce the chances that a business would need to borrow money in the event of a crisis or downturn in trade, especially when it may be harder to borrow in those circumstances.

Selling assets

If the business is holding assets such as equipment, machinery and property it no longer needs, then this can be a useful source of funds and reduce ongoing maintenance costs. However if the assets are important to the running of the business then the impact of doing this will need to be compared with the cost and availability of external sources of finance.

Commercial providers offer different types of debt and equity finance.

Debt finance

Debt finance is a type of loan that businesses will need to repay, usually with interest. Examples are included below.

The lending market has changed a lot in recent years with challenger banks and providers such as the LendingCrowd now operating alongside traditional high street banks.

If small businesses have their application for finance declined by their primary bank, research shows they often don’t consider if there are alternatives. If that happens, ask about the Bank Referral Scheme provided by the UK government-backed British Business Bank. If one of the nine participating banks has declined your application, they must offer a referral to a platform which may be able to help you source the finance you need in a way that doesn’t impact your credit score.

Overdrafts

An overdraft is a credit facility agreed with your bank. It is usually quick to arrange and allows you to temporarily spend more than you have in your account to provide short-term cash flow. You need to agree your overdraft limit with your bank, and you'll usually be charged interest on any money you use and potentially a fee as well. The interest rates may be higher than other kinds of loan.

Credit cards

These work in a similar way to personal credit cards and can be issued to your employees as well as business owners, and help management of day-to-day expenses. Sometimes they offer rewards linked to how much you spend, and other incentives such as discounts on items like business insurance. Make sure you understand the annual fees and interest payments if not clearing the balance within a certain time, but despite this, they can be a useful way of supporting short-term cash flow. Money Supermarket provides more information on what to consider when taking on business credit cards.

Loans

Business loans are often a specific amount of money borrowed for a set period with an agreed repayment schedule. The repayment amount will depend on the size and duration of the loan. Providers include high street and challenger banks, online providers, and peer-to-peer platforms where loans are provided by individuals, businesses and other organisations. They normally charge interest - which can be a fixed or variable rate - and the terms and costs will vary between providers.

Commercial mortgages are loans specifically designed for businesses buying property such as offices, warehouses, shops or residential portfolios for use by the business or as an investment.

Asset finance

Asset finance is a category of lending can be used to support the purchase of large assets such as machinery or equipment, or to release equity from an asset without having to sell it. It can also be used for intangible assets such as intellectual property.

Leasing and hire purchase are different types of asset finance that businesses use to buy machinery, equipment and vehicles. In leasing, your business rents the item from a provider who retains ownership and at the end of the agreed term, you may be able to extend the term, return, or replace the asset. For hire purchase, technically you own the asset but make fixed payments to the provider to spread the cost.

Invoice finance

Businesses may face cash flow issues with the gap between issuing invoices to customers and those invoices being paid. However, as your invoices are a type of asset, up to about 90% of the value can be used as security for a loan, and funds can be quickly released to your business to boost day-to-day cash flow. Invoice finance is available from companies including large banks and specialist providers.

There are two main types of invoice finance. Invoice discounting is where you continue to manage the invoices yourself, and invoice factoring is where you also outsource the management of your invoices and collecting payment.

Equity finance

Also known as investment finance, this is a way of raising finance from external investors in return for a share of your business. It's best suited to businesses with fast growth potential, strong management, clear strategies and innovative products and/or services. When beginning a funding round, a business identifies the amount of funds they need, how best to raise them and the equity they’re prepared to give away. “Seed funding” is the term used for the initial funding round to cover costs in the early stages towards achieving growth - perhaps covering research, product development, and marketing. There are a few approaches used by start-ups and smaller businesses. Whatever you go for, you will need to have an up-to-date business plan and take action to make your business 'investment ready'.

Angel investors

Angel investors are also known as business angels are usually experienced business people and entrepreneurs who invest in and provide mentoring to start-up and new businesses in exchange for a share of your business. They can offer valuable support when a business requires investment to begin trading but does not have a track record of revenue or profit to easily obtain debt financing. Sometimes they will act as individuals and at other times they combine resources and invest in syndicates.

Crowdfunding platforms

Crowdfunding is where a business launches a campaign on a crowdfunding platform with a target amount to raise by a deadline. It aims to attract a larger number of investors who put in smaller amounts of money. Elements such as minimum target amount, fees, types of businesses and target audience vary between platforms. Some platforms work on an “all or nothing” basis where you must raise the full amount of your target by the deadline to access any of the funding. It can bring benefits such as raising wider awareness of your business among customers as well as investors, but running a campaign takes a lot of time and effort. Businesses must thoroughly research the options to find the best fit. Well known platforms for small businesses include Kickstarter, Indiegogo and Crowdfunder.

Venture capital

Venture capital investors typically invest in scalable businesses with ambitious but realistic business plans, unique and competitive products and/or services, a high return on investment and experienced management teams. For example, with start-up financing they may help you bring your product to market. In contrast with angel investors who invest their own money, venture capitalists are usually employees of risk capital companies investing other people’s money. It is a form of private equity investment where a business obtains long-term investment in exchange for a share in your business.

The advantages of using venture capital include not having repayments or interest. You will also retain control of your business. The disadvantages include needing to give up a share of your business and it may be time-consuming to find a suitable venture capital investor.

The Scottish and UK governments, as well as charities, work with partners to help fill the funding gaps for small businesses in the commercial sector.

Grants

Grants, which are usually provided by public sector bodies and charities, usually don’t have to be repaid but often come with terms and conditions of precisely what they can be used for. Grants are usually non-competitive and may provide targeted support for the likes of research and development. Scottish Enterprise has a list of what is currently available.

For young people between the ages of 18 and 30, The Prince’s Trust in Scotland can signpost you to their grants for start-ups.

Funding calls

Scottish Enterprise promotes public sector funding calls, which are focused on helping businesses that have particular projects or activities that also align with public sector priorities and challenges. These might include job creation in particular areas or innovation in sectors such as space, defence, security, green technology and clean energy. They are competitive processes within funding rounds that open and close at specific times, and the funding is awarded to the highest scoring applications. Funding is awarded to businesses subject to strict terms and conditions, for example, payments only being transferred once relevant costs have been incurred.

Loans

Sometimes the public sector can offer loans to viable businesses, including those that have tried unsuccessfully to obtain all the funding they need from commercial sources. In the Scottish Loan Scheme, usually the businesses have to meet specific criteria around turnover, number of years of trading and be able to evidence economic impact and policies around fair work.

The UK government backed British Business Bank Investment Fund for Scotland works with partners to provide finance options to smaller Scottish businesses that might not otherwise receive investment from commercial sources.

It offers smaller loans to fill the funding gap for growth and development projects and debt finance for larger injections of capital.

Equity finance

Governments often work with partners to fill funding gaps and offer equity finance so business owners can raise capital by selling shares in their business.

The Scottish Government has provided financial support to the Scottish Growth Scheme and partnered with fund managers that invest in Scottish SMEs. Organisations like Scottish Enterprise can also help your business prepare to attract investment. In some cases they will co-invest alongside private investors, such as business angels, venture capital groups and corporate investors to fund a gap within a funding round, through the Scottish Co-Investment Fund or the Scottish Venture Fund.

Through fund manager partners, the British Business Bank provides equity finance for new and innovative companies with potential for high growth.

The Scottish Government has an index page signposting to current sources of finance in the public sector.

The British Business Bank works with over 180 finance partners to provide finance for smaller businesses and has a finance finder tool to help you identify options that might suit your business, based on your sector, location, main reason for seeking finance, amount of finance you need, profitability, and assets available for security.

There is a useful guide to identifying the best finance options for different business objectives such as purchasing a large asset, protecting cashflow, importing and exporting or research and development.