Funding options for small businesses

Businesses with Covid-era borrowing may be reaching the end of their Covid-era loans, and while interest rates are higher than they were five years ago, there are still opportunities to borrow at a reasonable rate.

Even those not yet at the end of their loan term may benefit from refinancing. Extending repayments over a longer period at a lower rate can significantly improve cash flow and provide breathing space for growth.

Traditional lenders versus alternative lenders

Broadly speaking, there are two main categories of lenders available to small businesses.

Traditional high street lenders tend to offer slightly lower interest rates. They are often a strong option for well-established businesses with solid financial records. However, they can be risk averse and selective about the sectors they support. Their due diligence processes are typically thorough and can take longer than many business owners expect.

Second tier or alternative lenders have grown in recent years. Many small and medium sized enterprises now turn to them for funding. These lenders are generally more flexible in their approach and move more quickly in their decision making. They can also offer more tailored lending structures to suit specific business needs.  The trade-off is that rates may be slightly higher.

Sometimes a combination of loans and financing is the best option. We’ve recently worked with a swim school business to secure a loan from a high street bank to pay for a new swimming pool. Long term, this will improve their revenue and profitability. We also helped them to secure further funding for wider business expansion.

We’ve also worked with a company which provides equipment in the defence sector. Their work is notoriously challenging to fund.  Many lenders have covenants on their lending excluding funding of firms operating within the defence sector. We used three alternative funders, lending against assets, including invoices the company had raised. We also sourced cashflow lending, which supported materials and the overall manufacturing process. Through this, we enabled a complete funding package to support the manufacture and delivery of the goods to clients.

Prepare to secure the best rates

While market conditions are improving, preparation remains critical to accessing the best rates. Lenders understandably want to feel confident that they will be repaid. Businesses that present themselves well are more likely to secure favourable terms. We always recommend clients have these things in place before applying for funding:

Strong financial records

Clear and up to date management accounts are essential. This should include accurate profit and loss statements, a well-managed debt book, and reliable cash flow information. Business owners must be able to demonstrate that their organisation is well run, financially disciplined, and in control of its numbers.

A clear business plan

Lenders will want to understand what their money will be used for and how it will support growth or stability. A detailed business plan should outline the purpose of the funding and show how it will generate returns. Simple financial modelling that shows your ability to make repayments will help you to understand what you can afford and the lender to understand that you are clear on your figures.

A good credit score

A solid credit history is vital when applying for finance. Business owners should review their credit profile and improve it wherever possible. We’ve worked with businesses to improve their credit scores. Simple actions can make a big difference. The stronger your credit standing, the more attractive you are to lenders.  In some cases, lenders may require personal guarantees. When your financial records, planning, and credit profile are in good order, the likelihood of needing personal guarantees can be reduced.  

Timing it right

The funding landscape for small businesses is more positive than it has been in recent years. With interest rates easing and more lenders active in the market, opportunities are expanding.

Timing plays a key role in securing finance. High street lenders often have lengthy due diligence processes. Beginning conversations early gives you more options and improves your ability to secure the most suitable funding partner.

Success largely depends on good preparation. Solid financial records, a clear use for the funds, strong credit, and early engagement with lenders will give your business the best possible chance of securing finance on favourable terms.

St. James's Place (SJP) work in conjunction with an extensive network of external growth advisers and SME specialists, such as Elephants Child, who have been carefully selected by SJP. The services provided by these specialists are separate and distinct from those carried out by St. James's Place and include advice on how to grow your business and prepare your business for sale and exit.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.