Business Funding – Borrowing options for small businesses

Many businesses will need to raise funds at some time – either at the start-up stage, or to fund ongoing expansion. With credit currently in short supply, here is an overview of the various options open to small businesses looking to raise funds.

Bank Overdraft

Many businesses will have an overdraft facility with their bank – this adds short term flexibility to provide cashflow when you encounter late payers, or to cope with an unforeseen expense. With instant access, you won’t need to consult your bank manager if you keep within your pre-agreed overdraft limit.

Business Loan

Rather like personal loans, there are a vast number of providers of business loans. Loans can be unsecured or secured, and have variable or fixed rates of interest. Unsecured business lending has also been scaled back due to the current economic climate. Read our guide to small business loans.

Asset Finance

This type of finance allows you to borrow against assets owned by the business. Leasing arrangements are essentially rental agreements with the finance company. The two main types are:

a) Direct Leasing, where the lender buys an asset from a company and the company “rents” it back from the lender.

b) Sale & Leaseback – Where a company sells an asset they already own, but still have access to the asset.

Invoice Finance

Specialist companies allow you to borrow against the value of invoices you have raised (but have yet to be settled). No other assets are required to secure invoice finance funding and you can typically receive up to 90% of the invoice value within 24 hours. You can read more in our dedicated guide to Invoice Finance and Factoring.

Small Firms Loan Guarantee Scheme

Many small businesses don’t have the financial history to borrow significant sums from traditional sources such as business loans. Backed by the Government, the Small Firms Loan Guarantee Scheme (SFLG scheme) allows qualifying businesses to borrow up to £250,000 over 2 to 10 years – with 75% of the loan value guaranteed by the Department for Business, Enterprise and Regulatory Reform (DBERR). You can read our overview of the SFLG Scheme here.

Commercial Mortgages

Commercial mortgages allow you to borrow against any property (or land) owned by the business. A type of commercial loan, the lender will have a legal claim over the property until the mortgage has been repaid in full. The range of commercial mortgage offerings has shrunk even quicker than the consumer mortgage market, but a range of fixed and variable rate mortgages are still available.

Investment Funding

In addition to the funding options discussed above, small businesses may elect to raise investment capital – such as Enterprise Capital Funds, business angels and other commercial investment companies. You can read more about these options in our dedicated guide to investment funding.