Positioning your SME for Growth: Navigating the Funding Landscape

A global pandemic and an energy price shock have made trading conditions difficult for everyone and every business. After rising to 6 million in 2020, these conditions have impacted small and medium sized enterprises (SMEs), reducing the number to 5.6 million1.

SMEs are an engine of growth in our economy. Despite this, many SMEs struggle to access the finance they need to grow. Confidence amongst SMEs in accessing finance has fallen and acceptance rates for business credit has lowered significantly. The Bank of England estimates that there is an SME funding gap of £22 billion2, which is leaving SMEs unable to operate efficiently, achieve their growth potential and therefore prevents them from contributing towards economic growth.

In this blog we explore the funding gap in more detail, how to strategically set yourself up for success, considerations for different funding options, and potential solutions to the current situation.

The SME Funding Gap

According to the National Audit Office research, the SME funding gap refers to “the difference between the funding required by SMEs and the funding available”. While an SME should congratulate itself on driving innovation, job creation and economic growth, this isn’t reflected in the funding landscape available to them. Historically, 40% of SMEs have unmet financial needs3.   The funding gap exists because the SME credit landscape is not optimised for borrowers or the lenders that serve them, and it’s crippling the growth of the UK economy.

UK growth has lagged behind the US and the eurozone since the EU referendum in 2016 (Fig. 1). One impact on growth is the stagnation of business investment. A Bank of England policymaker last year said that Brexit hit UK investment to the tune of £29bn4. While there are other contributory factors to economic growth, the UK needs to be supporting innovation through investment in SMEs to support this overall in the UK. The analysis coming out of the first part of the year suggests the growth drag from rate hikes is starting to peak, and we should see this fade steadily across 20245, however the UK is still expected to lag behind the EU and US in 2024.

Fig. 1

From a business lending perspective, we’ve seen a suppressed demand from SMEs for new and additional finance, which could be due to the overhang of Covid-19 government loan schemes and rising interest rates. 2023 marked the third consecutive year of declining gross lending6, which is consistent with research into SME confidence and financing plans. Research from Q4 2023 and Q1 2024 are some of the most promising signs we’ve seen for a while that SMEs are starting to plan for the future, and have confidence to take on new or additional finance. We need to ensure there is sufficient provision to support these businesses to support economic growth.

Setting Yourself Up For Success

It’s without doubt that external finance is an important enabler of business innovation. There are many different types of funding available to SMEs, and as a founder it’s important to consider your current business’s needs, goals, and growth trajectory including current financial positioning, before driving your considerations for funding forward. This will allow you to explore avenues most relevant to your business. 

SME funding needs will differ depending on the stage of the business and the type of products or services offered. Funding can be via grants, debt financing, loans, or investment, and each comes with its own pros and cons. SMEs should understand the commitment needed to repay or service that funding, and assess the risks involved.

Prior to going out to the market for funding it is essential to have a clear and compelling business plan that outlines both the businesses vision and goals along with considerations for scaling, and the path to profitability and sustainability. Demonstrating a solid understanding of the market, competitors, and customers, shows your credibility to investors.

Understanding Different Funding Options

Access to finance is vitally important for SMEs, and without accessible finance options, businesses may risk their growth plans, which ultimately could be detrimental to economic growth. 

Traditional sources of funding, such as bank loans, are becoming increasingly difficult to secure, especially for newer businesses or those without a solid track record. The Treasury Committee reported the success rate of applications for ‘bank loans fell from 80 per cent in 2018 to around 50 percent in 2023’1.

Equity Financing

Debt Financing

Equity financing involves raising capital by selling shares of your company to investors. While this can provide a substantial amount of money, it also means giving up a portion of ownership and control. Investors will expect a return on their investment and may have a say in business decisions, which can sometimes lead to conflicts of interest.

Debt financing, on the other hand, involves borrowing money that you will need to repay with interest over time. This could be through a loan, line of credit, or another financial product. The key advantage here is that you retain full ownership of your business. Debt financing is non-dilutive, meaning it doesn’t impact your equity. This can be an attractive option for SMEs looking to maintain control.  

What to Consider

As an SME considering either of these financing options, or assessing other types of funding available, it is important to take into account the following:

unchecked Understand risk tolerance: consider your risk tolerance as an entrepreneur and how comfortable you are with taking on debt, diluting ownership, or relying on external investors.

unchecked Understand the total cost of capital for each funding option: including interest rates, equity ownership percentages, and any associated fees or expenses. Compare the cost against the potential returns and benefits offered by each funding source to determine the overall value proposition.

unchecked Consider timing and availability: evaluate the timing and availability of different funding options based on your business’s growth stage, market conditions, and funding landscape.

unchecked Consider funding options alongside potential exit strategies: ensure that the chosen funding option aligns with your long-term business strategy, vision, and goals. Consider whether the investor’s expertise, network, and resources can add significant value beyond just providing capital.

unchecked Seek professional advice and grow your network to support navigating funding challenges: consult with financial advisors, legal experts, and experienced entrepreneurs who can provide valuable insights, guidance, and support throughout the funding process. By building strong relationships with other entrepreneurs, industry experts, and investors, you can tap into valuable insights, resources, and funding opportunities that may not be readily apparent.

The Role of FinTech for Funding Solutions

FinTech has brought phenomenal change, transforming conventional financial services, challenging traditional models and providing opportunities for SMEs when it comes to funding solutions. In addition, SMEs have also recalibrated how they operate their businesses, with new expectations and priorities from financial products and services, and the channels through which they are delivered. 

By providing alternative sources of financing, FinTech companies are increasing borrowers’ funding options and reducing their dependence on traditional banks, providing a more personalised approach to financing solutions. There are multiple benefits for SMEs who need to access these alternative financing options:

unchecked Customised loan products: opportunity to access more tailored lending products, which cater to specific needs and preferences.

unchecked Improved access and speed: streamlined operations can reduce the time it takes to approve and disburse loans. Borrowers can access funds more quickly, while lenders can manage their portfolios more efficiently.

unchecked Increased transparency: offering increased transparency in pricing and terms, leading to better-informed borrowing decisions for SMEs.

FinTechs are not only offering an innovative approach to capital, but a more comprehensive solution which helps drive the significant scope SMEs have for growth. They can better serve SME needs in comparison to traditional models through their data driven approach and use of technology. By leveraging data FinTechs can help SMEs to improve their design and execution of business strategies, along with improving outcomes and market performance. The use of technology facilitates quicker application processes and overall faster access to capital.

Conclusion

The difficult small business environment we’ve seen over the past couple of years is disincentivising risk-taking, innovation and, potentially, growth. The burden of accessing finance for SMEs needs to be eased, and there are potential solutions to easing the access to finance pressures that businesses currently face.

Flexible business financing from FinTechs offers multiple advantages over traditional financing models, making it an attractive option to SMEs. But work also needs to be done to raise awareness of this, educating SME owners on the benefits of accessing flexible financing. Offering business owners an accessible and versatile funding option, puts them at the centre of the funding experience allowing them to continue to be the driving force behind their businesses. 

If you’re interested in a fresh approach to funding your business, get in touch with the team at Juice today and see how we can partner to achieve your goals.

References

  1. SME Finance – Report
  2. Bank of England Research
  3. Small and Medium Enterprises in the Pandemic Paper
  4. BBC News, May 2023
  5. Goldman Sachs
  6. UK Finance – Business Finance Review

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