Funding Option for Ambitious Small Businesses

Article written for HSBC Knowledge Centre by John Kerr Chartered Accountants

When trying to grow a small business, having the necessary finance in place is essential. Picking the right type of finance is another key decision and finding the most suitable finance depends on how much you need, what you will spend it on, which repayment terms you can afford, and in some cases, whether you are prepared to give up full ownership or control of your business. Making poor finance decisions can prove costly and damaging, perhaps placing a heavy burden on your cash flow.

Independent financial advice

Seeking independent, tailored financial advice is essential. Some options are more complex, which is where an experienced advisor can help.

You also need to work out exactly how much you need and exactly how it will be spent and building in contingencies is advisable. Preparing a robust business plan is essential, particularly when approaching banks and other sources. Whatever option you choose, you should understand the cash flow implications.  So, what are the key funding options for ambitious small businesses, and what are their pros and cons?

Family and friends

If you can arrange a low or no-interest loan from a friend or family member, obviously it can be cheaper. Drawing up an agreement that details terms – including how and when money will be repaid – can prevent problems. Should the business fail, personal relationships can sour if money isn’t repaid. And, unless you have rich friends and family, you may only be able to borrow a limited amount.


They exist, but they can be hard to find, let alone access. They are usually linked to a specific project or purpose and can come from the UK government [], the European Union [], local councils or charities. There’s usually fierce competition and match funding may be required. Projects already started aren’t usually eligible and the application process can be time-consuming. If you’re just starting a business, the Start Up Loans Company [] is a government-funded initiative that provides repayable loans to start ups.

Bank finance

If an overdraft isn’t a viable solution, a bank loan with either a fixed or variable interest rate could be. Security and personal guarantees are usually required.  Loans are generally suitable to buy assets or for additional capital.

Unlike overdrafts, loans are not usually repayable on demand and repayment periods are typically spread over two years or more. The period can be tied to the asset’s expected lifetime. There can be early repayment charges and you should always remember that if the loan is secured on assets, they could be lost if repayments are not made. The cost of variable rate loan repayments can also change, making it harder to plan finances.

If a viable business has been turned down for a loan or other form of debt finance because of inadequate security or track record, the Enterprise Finance Guarantee [] (EFG) scheme might provide a solution.

Crowd funding

Crowdfunding websites enable businesses to raise money from numerous investors in exchange for rewards or products. Typically, individual sums are pooled until the funding target is reached. Finance can be raised relatively quickly, often without upfront fees. But your pioneering ideas are at risk if they’re not adequately protected and money raised will normally be returned if you don’t achieve your full funding target.

Peer-to-peer lending

A relatively new form of finance, this matches borrowers with people with money they wish to lend for a competitive rate of interest. It can provide a quick solution, but lenders expect returns of 6 per cent or more. I’ve heard of some businesses borrowing 60 per cent of the money they needed to buy bigger premises this way.

Venture capital/private equity

This can be a very complicated and intense process. It also involves giving up some ownership and control of your business, but a smaller share could be worth significantly more if you achieve your growth objectives. You’ll need to consult before making important management decisions and have an exit strategy in place. Venture capitalists offer advice and can have the contacts to help you scale, but they usually want to recover their investment within three to five years. Visit the British Private Equity & Venture Capital Association website [] for more information.

Business angels

They can provide a friendly helping hand and investment, but they usually want a 20-25% return. If you’re lucky, you’ll find an investor with sector experience of growing businesses. Visit the UK Business Angels Association website [] for more information.

Asset finance

Leasing, renting or using hire purchase to acquire assets such as machinery means you won’t have to find a significant lump sum upfront to buy them outright. Interest and repayments are usually fixed, but security isn’t required. These financing arrangements are widely available but there can be tax implications, so seek tailored advice. Disadvantages include difficulty with early termination of some contracts, the need to often pay a deposit or make some payments in advance. It can also prove to be more expensive than buying the asset outright.