By Graham Walker

Graham Walker is a chartered accountant with over 25 years experience.

He has worked for global top tier banking and financial services organisations in the alternative sector. But, more recently Graham has focussed his attention on the UK SME (small and medium enterprises) sector.

When the time comes to get funding for your business, you’ll be faced with two main types of finance: debt and outside investment (equity).With debt financing, you’ll receive funding without giving up ownership, but you’ll need to pay the money back, no matter what happens to your SME.

With equity investors (Private Equity, Venture Capital and High Net Worth Individuals), you won’t need to pay back the money immediately but you will need to give away some ownership of the company. When you take out a loan, you need to know exactly what it’s for and how it will generate income.  At the end of the day you’ve got to pay it back and the monthly repayments can restrict your cash flow in the years to come. To discuss the various options open to you, start by talking to your accountant.

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Look at your business

If you conduct a basic review of your business, you may find that you don’t actually need financing.  Updating your payment terms, negotiating extended settlement periods with suppliers and more aggressive debt collection practices can often result in an immediate improvement in cash flow and avoids the need for low level borrowing.

Debt options

Invoice finance

Invoice financing involves treating your invoices like assets. A lending company advances a percentage of the total amount on the invoice. Once your client pays, you get the rest of the money and pay a fee to the lender.

This is a good option if most of your money is tied up in unpaid invoices and you need immediate payment. It helps cash flow and is a relatively low-risk and stable option.  It’s also a good option for relatively new SMEs with at least some transactional history, since the lender focuses more on the repayment behaviours of your clients and may or may not check your credit.

Startup loans

One of the more popular ways to obtain funding without going to the bank, these allow you access to money while retaining full ownership of your SME. However, it can be harder to qualify for them and you may be asked for personal collateral to lower the risk. It is important to ensure that the loan is allocated and utilised efficiently to generate income as monthly repayments can restrict cash flow in the years to come. Professional advice from your accountant is essential.

Revenue-based finance

Also called cash flow-based lending, this links your monthly loan repayments to the performance of your business.  You pay back a percentage that fluctuates along with your revenue.  There’s no minimal credit, you won’t have to put up any collateral and the application is relatively quick to process.  Importantly, you won’t need to cede any control to someone else.  However, only small and medium businesses from certain industries tend to qualify and the loans range from 4 to 18 months duration.


This involves raising money through a third-party platform like Funding Circle and works best for startups selling more creative products and want to test a market.  It’s a great way to get funding, raise awareness and acquire new customers, without giving away ownership of the company.  In exchange for funding, you can choose to offer early access, free products and future discounts. 

Government backed lending and not-for-profits

It’s worth checking out organisations like the British Business Bank, British Enterprise Fund, Northern Powerhouse and local enterprise partnerships (LEPs) to see what finance might be available.  In addition, local councils often drive initiatives to assist SMEs/startups.

Equity options 

Angel investment

Angel investors provide financing for SMEs in exchange for a share in the business. They expect a 20-25% return on initial investment and are a good option to help fill the gap between investments from friends and family and Venture Capitalists (VCs). 

Angel investments are less risky as you don’t need to pay it back if the business fails – plus many angels are also looking for a personal opportunity to contribute.  However, they’re not suitable if you want to retain 100% ownership and don’t want someone else influencing your company decisions.

Venture capital funding

VCs are designed to provide financial support to help startups grow and often include services such as mentoring, guidance and professional networks. Their objective is to grow the business quickly and get a higher return on their investment. You will need to cede some control of your business and they will become involved in company objectives and the company’s direction.

Private equity

This involves selling “parts” of the business, typically to a private equity fund, but SMEs can also raise private equity through owners and investors. Again, you will need to cede some control to investors, but you may also get mentorship and other additional support. Specialist advice is required to protect your position.


There is no “one solution fits all” when it comes to SME financing. The type of financing that best suits an SME can be influenced by many factors:

  • Age, stage and size of the business
  • The amount required
  • The reason for borrowing
  • The sector in which the business operates

Depending on your company objectives and business model, either debt or equity options might work well for your SME but before making any decision, it is important to perform a thorough assessment of the business as numerous factors will drive the decision on which financing route to take. Professional guidance, usually from your chartered accountant, is a sensible first step.

About the author

Graham Walker is working with organisations including the British Business Banks, various Chambers of Commerce, SME Incubators and helping and advising UK SMEs on issues affecting SME business owners and managers. He is currently Director of Financial Operations at Indigo Accounting (UK) Ltd.

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We’d be delighted to hear from you. The Enterprise Works team can be contacted via:
+44 (0)1904 321420