Small Business Finance Guide
Probably the most important measure of a small business’ success is the state of its finances. With a healthy cash flow, a plan to fund investment, and contingency plans to fall back on when times are tough, SMEs can approach new opportunities with confidence.
What, though, is the secret ingredient behind strong finances? Are there more financial actions you could take beyond generating large revenues? And how do you know whether your business needs to secure additional finance to help it thrive, or survive?
These are the kind of topics we’ll address today, as we take you through a quick guide on small business’ finances, which should help small businesses get to grips with the main areas of business finance, while sharing some tips on how to manage finances effectively.
What is SME finance?
Firstly, though, let’s define exactly what we mean by small business finance. The way in which SMEs manage their finances can differ greatly, but some of the common elements you’ll find within a small business’ financial structure include:
- A business bank account which is kept separate to personal finances.
- An accountant, either within the business or outsourced who handles financial administration (such as submitting tax returns).
- Software to support the accountancy process. This is typically either a Microsoft Excel document, or a sophisticated type of accountancy software such as a cash flow management app.
Larger businesses’ finance departments operate on the same fundamentals, but with more elaborate and complex processes. Ultimately, it’s having these fundamentals for managing finances in place that’s essential. It ensures that employees can be paid on time, that costs can be met, and that the business is able to prosper and continue to generate profits.
Often, though, SMEs find themselves in need of additional finance to help either boost cash flow in the short-term, or fund a bigger project. Let’s explore where SMEs can start with sourcing business finance.
Sources of finance for small businesses
Some of the popular types of business finance include:
In an external finance agreement, a business will contact a lender, such as an online lender or bank, to acquire money. How much money is needed and how you intend to use it is something you’ll discuss with the lender when applying for finance.
These discussions will typically involve the lender conducting a risk assessment to determine the interest rates they’ll offer a borrower, which may involve them looking at your credit history and business plans. Lending agreements can be broadly categorised into the following:
- Short term finance: Our product at Rapid Cash is an innovative type of invoice financing, in which our algorithms will offer businesses cash in advance of their invoices being paid by their customers or clients. The lending process is, therefore, largely automated and customers can choose to lend on specific invoices. This type of short-term lending can help businesses free up cash quickly; enabling them to grow steadily by making investments up front, or quickly meet their costs. Other examples of short-term financing agreements include business overdrafts and factoring arrangements.
- Long term finance: If you’re needing access to larger volumes of money, typically upward of tens of thousands of pounds – then you may want to consider a longer-term lending agreement, in which you’ll pay back the money you’ve loaned in instalments over a period of weeks, months, or years. Business loans are a classic example of a longer-term agreement, and these are often used to fund major projects such as expansions, acquisitions of competitor businesses, and the likes.
Another source of finance is internal finance, in which a business funds its growth directly from its profits. A lot of businesses aren’t fortunate enough to be in this position, but internal finance can be an attractive option for businesses that are aiming for a really slow and steady growth process while already generating large revenues.
Naturally, internal financing removes the lender from the financing mix, which could potentially eliminate some admin work, however it’s entirely dependent on the business’ ability to generate profit and so may not be the best option for those with volatile or unpredictable cash flows.
SME asset finance
Another interesting type of finance that small businesses could keep on their radars is asset financing agreements. This type of lending agreement involves an SME using their owned assets as insurance on, for example, a loan.
So, a coffee shop could put up its’ expensive coffee machines as insurance, meaning if they were to default, the lender would own the coffee machines. However, if they were able to maintain stable profits and grow, they could potentially get access to better interest rates from a lender than if they were to take on an unsecured lending agreement, in which they offered no insurance.
How can I go about strengthening my SME’s finances?
With the information we’ve shared today in mind, reassessing your financial goals could be a good starting point for safeguarding and upgrading your business’ finances. Are you looking to make ends meet and sustain your business through a tough period, or accelerate your performance and chase profit?
If you have answers to these questions, here are a few quick topics you could discuss with your colleagues to test your current financial processes.
Explore the range of external finance options available. Open banking has led to a wealth of innovative new finance products emerging, some of which are mentioned here by Rapid Cash. There are also many classic finance options available from major banks that have stood the test of time. 2. Check that you have the right people in place to help your financial processes flourish. Often business owners wear many hats, taking on multiple roles, but it could be worth checking that you aren’t missing out on potential efficiencies that could be made by, for example, bringing an expert financial adviser on board. 3. Give forecasting a go. Try to plan for the upcoming weeks and months, creating simple models to predict how your finances will move. This may make you better able to respond to challenges and seize new opportunities.
To be eligible for Rapid Cash you must be trading for more than 6 months, have an annual turnover of at least £100k and either be a Limited Company or Limited Liability Partnership in England and Wales. Additionally, you need to invoice other businesses and use one of the following digital accounting software: Xero, Quickbooks, Sage 50, Kashflow, FreeAgent and Netsuite.
Security and guarantee required. Product fees may apply.