Small and medium sized enterprises (SMEs) are the engine room of the UK economy making a major contribution to employment, turnover and Gross Domestic Product. Yet businesses like these, operating with just a small budget and under financial strain, need to be able to manage corporate finance effectively. This blog provides an overview of corporate finance for SMEs in the UK, detailing funding opportunities that are available to you, as well as financial management tactics and objectives you should be thinking about.
Understanding Corporate Finance for SMEs
Corporate finance refers to all the financial aspects of a business and how they maximize the value of the business. For small businesses, that looks like juggling short-term cash-flow pressures and long-term growth plans. Most of the time, SMEs don’t have a finance team and business owners necessarily have to understand how to handle the money in their business.
Some of the fundamental things SMEs need in corporate finance are the followings:
- Capital Structure: Determine how much of equity and debt will be used to finance the operations.
- Cash Flow Management: Keeping the cash coming in to pay the bills.
- Investment Actions: Assigning funds to growth projects.
- Risk Management: Protect the downside of your financial position against rising interest rates or falling markets.
Funding Options for UK SMEs
Financing is one of the major challenges for the functioning and growth of SMEs. Thankfully, there are a range of funding solutions suitable for smaller businesses on the market in the UK:
Bank Loans and Overdrafts
Banks are still a top financial partner for SMEs. High-street banks including Lloyds, Barclays and HSBC provide loans at comparable rates, with many backed by government schemes such as the Recovery Loan Scheme, aimed to help businesses which have been affected by economic downturn. Overdrafts can give you wiggle room in the short term but may charge higher interest.
Government Grants and Schemes
There are already several UK government initiatives to help SMEs:
Innovate UK: Provides grants for research and development initiatives.
Start Up Loans: Offers low-interest loans and mentoring for startups.
The Enterprise Investment Scheme (EIS): This plan provides tax relief for private investors in SMEs.
Equity Financing
For those SMEs that require more extensive capital injections, equity financing is an option. This entails selling a portion of the start-up to investors– which can be angel investors, venture capitalists or both. Services let small and medium-sized companies raise capital via equity crowdfunding, providing them with access to numerous retail investors.
Alternative Financing
There has also been an increased focus on alternative finance like peer-to-peer lending and invoice financing. Other firms such as Funding Circle and Market Finance allow this small-scale borrowing, so they can access funds more quickly than if they went to a bank or unlock some of the cash tied up in unpaid invoices.
Financial Management Strategies
Effective financial management is crucial for SMEs to thrive in a competitive market. Here are some practical strategies:
Robust Cash Flow Forecasting
For an SME, cash flow is life blood. Do a detailed cash flow forecast. This way you have your eye on potential shortfalls and can plan for growth. Technology in the form of, say Xero or QuickBooks, can make light work of this by giving you real-time visibility over how your business is performing financially.
Cost Control
They are SMEs and have to be very cost-controlled. Productivity can be realised by watching costs, squeezing suppliers and making the most of software to cut the number of things that have to be done. For example, internet-based accounting systems reduce dependence on costly in-house IT.
Diversifying Revenue Streams
Diversification of offering or markets like exporting, with products and services being able to be sold abroad through offerings such as UK Export Finance program could all help protect income.
Building a Strong Credit Profile
High credit will get you better financing terms. Small businesses can improve their creditworthiness by paying suppliers promptly, managing debt sensibly and keeping good financial records.
Possible Consequences
There are many challenges facing businesses of this size as listed below:
Financial Instability: With Brexit and inflation causing global supply chains to fall apart, SMEs are continuing to require quicker payments.
Funding: There’s money out there, but without a lot of ‘trading’ or bad credit scores SMEs will have trouble borrowing.
Compliance: Small business is difficult if not time consuming to negotiate through various tax laws like VAT, PAYE.
To mitigate this risk, SMEs should seek professional advice from either accountants or financial advisers and keep current with regulatory updates through services such as GOV.UK.”
Leveraging Technology for Financial Success
Where corporate finance is concerned, technology is the name of the game. SMEs can benefit from:
- Accounting Software: Programs such as Sage, Xero or QuickBooks make bookkeeping and compliance easier.
- Fintech Solutions: Services such as Revolut Business and Starling Bank’s offer SME-friendly banking solutions with minimal fees and real-time statistics.
- Data Analytics: The more your company can use data to track customer behavior or predict demand, the more sound decisions you’re likely to make around money.
Conclusion
The financing of an SME in the UK is a case where Corporate Finance can become strategic, mainly as regards funding, cash management and risk. Through the use of accessible sources of finance, strong money management and technology adoption – which all contribute to making them more resilient – SMEs will be able to handle the hurdles and remain on a long-term growth trajectory. Whether it’s getting a government grant, researching equity crowdfunding or managing cash flow to perfection, having the right financial strategy in place can be key to making a success of yourself in business over the long haul.
