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W Accountancy Fact Sheets - Sources of Small Business Finance

1. Introduction

There are four sources of funds for business – equity, grants, loans and retained earnings. Most businesses rely largely on loan finance, obtaining loans and overdrafts from the major banks. As commercial lenders, banks are concerned with getting a good return on their investments and do not lose their investors’ money on businesses that go bankrupt. Banks are increasingly responsive to the needs of small businesses, but there are many occasions where the risk of lending is considered too high due to lack of experience, capital and security.

Small businesses often need other sources of financial help if they are to grow and develop. Financial assistance and advice to small businesses is available all over the country, especially in areas of high unemployment and economic deprivation. Funds may come from the Government (at EU, national, regional and local level) and from a number of organisations, such as Local Enterprise Agencies. Many major private companies collaborate with such organisations to provide finance in the form of grants and loans. Banks are more likely to help small businesses that are receiving support and advice from these agencies.

2. Small Business Support Networks

It can be complicated to identify the right package of support for the business. Several regional networks – Business Links (England), Small Business Gateways (Scotland), business Connects (Wales) and the Local Enterprise Development Unit (LEDU) Regional Offices in Northern Ireland – can help. All of these networks provide ‘one-stop shops’, bringing together information on the most important local and national business support services for small and medium- sized businesses.

Financial assistance is often provided for specific purposes, eg marketing or rent relief; specific types of business, eg manufacturing, technology; particular types of people, eg unemployed Or young people; or for specific areas, eg rural areas or areas of industrial decline. Anyone starting or developing a business and looking for financial assistance must produce a comprehensive business plan, clearly setting out the financial situation. Business advisers can assist with this and can also refer clients to other agencies for more in-depth advice and training. An experienced business adviser will know the best way to compile a package of support to suit the needs of small businesses and will guide clients through the application process. It is also worth looking for relevant programmes that may be relatively under-subscribed.

3. Types of Financial Support for Small Businesses

(i) Loan Funds

Loan funds are often managed by enterprises or development agencies. Terms and conditions often depend on the region or area of the applicant. Interest is often fixed for the period of the loan or charged below bank rates. Less security is usually required than a bank would seek and repayment periods can be flexible. Loans are often only available to businesses that are viable but cannot raise all the finance required from banks. Most funds require borrowers to be monitored for the period of the loan and some integrate loan finance with advisory schemes. Business advisers are usually familiar with application procedures and should advise clients on the most suitable loan funds to apply for. It may also be possible to secure loans from friends or relatives.

(ii) Grants and Awards

Grants and awards do not need to be repaid. Grants are usually ‘one off’ payments providing a percentage of the costs towards specific purposes, eg marketing, refurbishing premises and capital equipment. They are rarely available to retail businesses. The Government, the European Union and many local authorities provide grants to encourage small firms. Awards usually recognise achievement and bring publicity or prizes. They can be either local or national. Shell LiveWIRE Business Start Up Awards are run as an annual competition for young entrepreneurs. The Small Business Service runs SMART, which provides grants to SMEs to make better use of technology and develop new products and processes.

(iii) Venture Capital

Venture capital is a means of financing a growing business where a portion of the share capital or equity is sold in return for a minor investment in the business. Whilst some measure of control over the business is lost to the new shareholder, the amount of finance gained can be very large. Most venture capital companies only assist established businesses or those looking to raise sums of over £250.000. Some schemes combine loan and equity finance. The British Venture Capital Association publishes a list of venture capital firms and their contact details.

The Enterprise Investment Scheme encourages equity investments in trading businesses by providing tax relief on investments of up to £150,000. Investors can become paid directors, the aim being to encourage Business Angels – wealthy people with extensive business experience – to provide finance and management expertise. Most regions of the UK now have Business Angel matching services, which encourage local investment and mentoring on a smaller scale. The National Business Angels Network matches private investors with small businesses requiring equity finance of between £20,000 and £400,000 on a national scale. The National Business Angels network is sponsored by several organisations including the Department of Trade and Industry (DTI).

HSBC UK Regional Enterprise Funds are regional venture capital funds managed by enterprise fund and equity venture organisations throughout England and Wales. They provide equity finance from £10,000 to £250,000. The funds are focused on the ‘equity gap’ ie smaller risk capital deals for which it can be difficult to raise equity finance. The Funds usually invest in businesses that have a good track record behind them and good sales and profit making potential.

4. Sources of Financial Support for Small Businesses

This section is a starting point to sources of business finance and is in no way exhaustive. Business Links, etc should have details on what is available locally.

(i) Business Start-up

Local enterprise Agencies (LEAs) administer a variety of schemes to help support new businesses. Each organisation uses its own discretion in the way that the scheme is run and conditions vary from place to place. Most schemes include business planning, training and some form of financial support.

(ii) UK Government

The UK Government operates a variety of initiatives through its different organisation (including the DTI), offering help to businesses in areas such as start-up, technology, research and development, export etc. The Government set up the Small Business Service (SBS) in April 2000 which is dedicated to helping small businesses. It runs the Small Firms Loan Guarantee Scheme and the SMART Scheme. The Phoenix Fund encourages entrepreneurship is disadvantaged communities and groups. These are covered in.

(iii) The Small Firms Loan Guarantee Scheme (SFLGS)

The Small Firms Loan Guarantee Scheme is run by the Small Business Service (SBS). Bank loans usually require some security for repayment, which not all small businesses can provide. Through the SFLGS, the SBS acts as a guarantor for a certain percentage of loans made by banks, or other financial institutions, to small businesses. Guarantees cover 70% of loans between £5,000 and £100,000 for new businesses. This rises to 85% of loans up to £250,000 if the business has been trading for up to two years. The borrower pays the SBS a 1.5% insurance premium per year on the outstanding amount of the loan and 0.5% on fixed interest rate loans. Capital repayment can be delayed for up to two years but the term of the loan, must not be more than 10 years.

(iv) Young People

(a) The Prince’s Trust – Business assists young people aged 18 – 30 who are unemployed or in a unfulfilling part-time or temporary job, to start up in business. The Prince’s Scottish Youth Business Trust (PSYBT) assists young people aged 18 – 25. Prince’s Trusts – Business and PSYBT are aimed at disadvantaged young people, who often find it difficult to obtain finance from conventional sources. They operate from regional offices, arranging advice and training as well as grants of up to £1,500 in special circumstances and loans of up to £5,000. Grants of up to £250 are also available for pre-start market testing.

(b) Shell LiveWIRE, sponsored by Shell UK Ltd, aims to assist young people who are interest in starting their own business. The Shell LiveWIRE Business Start Up Awards provide over £200,000 of cash and in-kind support to owner managers aged 16 – 30 in their first year of trading. Entrants must provide a comprehensive business plan to their local co-ordinator.

(v) Former Industrial Areas

UK Shell Enterprise Ltd (UKSE) is a wholly owned subsidiary of Corus Group Plc (formerly British Steel Plc). UKSE aim is to help communities affected by the contraction of the steel industry by supporting the growth of new and existing businesses, thereby improving employment prospects for local people. UKSE can provide equity finance of between £25,000 to £150,000 and loans of between £10,000 and £150,000 to SMEs in 21 designated areas of Scotland, England and Wales.

The Coalfields Enterprise Fund aims to support SMEs with high growth potential in the English Coalfields.

(vi) Rural Areas

The Regional Development Agencies (RDA) provides grants towards regeneration and sustainable economic development in the English Regions. RDAs are also responsible for the regional programmes previously run by English Partnerships and the Countryside Commission.

(vii) Local Sources of Funding

Most areas have funds available for local businesses, often provided through local authorities, Local Enterprise Agencies, Learning and Skills Councils, Business Links, LECs etc. There may also be less well-publicised independent funds and trusts.

(viii) European Funding

Various European funding schemes are available to businesses, mainly supporting research and development, including the European Regional and Development Fund.

5. Useful Tips

(i) Funding for small businesses is frequently raised most effectively as a package of support from several sources. Backing from one source can inspire the confidence of another. The best way to assemble a suitable package of support is through an experienced business adviser acting as an intermediary.

(ii) A comprehensive business plan is essential before seeking any financial help. The business plan should contain financial forecasts detailing exactly how much money is required and what it will be used for. Business advisers and bank managers can advise on business plan preparation.

(iii) Financial assistance, especially for business start-ups, is often associated with business skills course. Undertaking business training not only improves personal skills, but will increase the confidence of potential.

6. Further Information

‘Financing Yours Business’ (URN 98/805)

‘Small Firms Loan Guarantee Scheme’ (URN 94/628)

DTI Publications

Tel (0870) 150 2500

‘Grants and Loans from the European Union’

‘Funding from the EU’

European Commission

(Available from local European Documentation Centres)

To find the local Business Link

Tel (0845) 756 7765

Website : www.businessadviceonline.org/businesslink