Finance for small businesses: Loans and Grants

If you are looking for ways to finance your business we hope you'll find this information useful, but please remember this is just a starting point and we have suggestions throughout this guide about ways to find out more.

Where do I start?

No business can start up or expand without the right injection of money. Today there are many options for financing your enterprise, but it's important to make sure the right one is chosen.

For example the kind of finance that will help you pay for advertising or buying office equipment is not likely to be the same as the one you'd use to fund a business expansion.

That's why before you do anything it's usually best to get some impartial expert advice. This doesn't have to cost anything. Depending on where your business is based, the first step could be to get in touch with one of the following regional business networks, who will not only answer all your questions but can also give practical help with any application forms for funding.

Choosing the right financial option

As a start up you have four basic options in getting your business off the ground:

  • Use your own money to finance it
  • Borrow the money
  • Issue shares in your business
  • Apply for a grant

None of these alternatives is automatically preferable - it all depends on your individual circumstances and the nature of the business.

Using your own money

If you have savings or a personal loan then this can be a good way to get a small business going. You can keep close control over the financing and are not indebted to a third party.

Borrowing the money

If you have friends or family members with some spare cash you could ask them to lend you the money, but make sure they know the risks and agree the terms for repayment from the outset - nothing spoils personal relationships quite like money arguments. So it's better for everybody if you make sure any financial arrangement with friends or family are put down in writing.

Probably the better route if you have a viable business plan is to approach a bank for a loan. It's also useful to have a pre-arranged overdraft facility with your bank to cover the inevitable peaks and troughs of cash flow. Other sources for loans are covered below.

Issuing shares

If you have big ambitions for your enterprise you might be able to attract outside investors who will provide some initial financing in return for a share in the business. You could typically raise thousands of pounds this way, but of course other individuals or organisations would then have a stake in your business. It's worth paying for professional advice from qualified accountants or solicitors if you are thinking of taking this route.

Applying for a grant

As a new or developing business there is a good chance you will be eligible for one or more grants. Most grants come with conditions attached and will generally only partly cover the costs or apply only to specific projects. In the Grants section below you'll find more information on this and where to look to see if you are eligible.

Pre-arranged loans

If you need money for fixed assets such as equipment, then a pre-arranged loan is a good route to take. The most obvious place to go for a loan is your bank, but there are other options which your local business network such as Business Link ( www.businesslink.gov.uk) will be able to tell you about.

So what is the advantage of an arranged loan compared with other forms of borrowing?

To begin with it means you know where you stand. Your loan will be arranged for a set amount at an agreed rate of interest, borrowed over a fixed period of time usually with regular equal repayments.

With everything fixed and predictable you'll find it much easy to control your budgeting.

Another big advantage is that pre-arranged loans generally have more favourable interest rates than, say, an overdraft.

And the drawbacks?

If your cash flow is irregular you might find it difficult coming up with the cash needed for the repayments (usually every month). Also if the loan is secured against business assets or your home in a worst case scenario you could end up with the business in receivership, having to sell your home or even being made bankrupt.

In other words, it's important to plan carefully and only borrow as much as you believe you can afford.

Bank overdraft

An overdraft is a good solution if you need extra money for just a short period of time. The big advantage is flexibility. You pre-arrange a maximum amount for the overdraft and can then call on as much or as little of it whenever you want.

But bear in mind they are a bad way to borrow over the long term. That's because interest rates tend to be higher than loans and they are secured against your business assets which can be taken by the bank or other lender if you fail to pay back the overdraft.

Government backed lending schemes

If you're having trouble getting a loan because you don't have enough assets you might find a government scheme will help. One of their many initiatives to help businesses is the Small Firms Loan Guarantee or SFLG.

With an SFLG, the bank or other financial organisation you are borrowing from is given a government guarantee. This means they are more willing to lend to you even if you don't have enough assets to match the loan.

It's a scheme specifically designed to help smaller businesses and is a joint venture between the Department for Business, Innovation and Skills (formerly known as the Department for Business Enterprise and Regulatory Reform) and their approved lenders. Here's how it works:

  • The government guarantee covers 75% of your loan
  • You pay the government department a premium of 2% per annum in return for the guarantee
  • Loans up to £250,000 can be guaranteed with terms of up to 10 years
  • The scheme is available to qualifying UK businesses with an annual turnover not exceeding £5.6 million
  • It is generally available to all kinds of businesses and for most purposes, though of course some restrictions apply.

Joint Ventures

If you are looking to expand your business, want to offer new services or move into a new market, it might make sense to combine forces with another business. This is called a Joint Venture and it provides an opportunity to pool your resources and expertise with obvious commercial advantages.

There are two kinds of Joint Venture:

  1. Incorporated Joint Venture. This involves setting up a separate business to undertake a specific project.
  2. Contractual Joint Venture. In this case, the partners simply agree to co-operate without setting up a separate business.

Before embarking on either kind of Joint Venture, any business needs to be absolutely clear why they are doing it and what the benefits will be from sharing resources. It is also very important to draw up a clear agreement between the various parties so any future disputes can be quickly resolved.

But with the proper precautions in place there can be big benefits to be had from a Joint Venture. Your business will suddenly have access to new networks and new knowledge. You will be sharing the risk with a partner or partners.

Also remember that Joint Ventures don't have to be permanent. You can decide on a limited life-span from the beginning or partners can sell or transfer their shares at a later date.

Grants

There are a number of different grants available to businesses from various sources. It is well worth investigating whether you or your business is eligible.

A grant will rarely cover the whole cost of a specific project or business development. You will normally have to find the remainder of the cost once a grant is awarded and in some cases match the amount of the grant yourself.

Some of the major sources for business grants are the following:

  • The Government
  • Regional Development Agencies
  • Local authorities including local councils and local development agencies
  • Chambers of Commerce
  • County Enterprise Boards

Grants can be awarded for a number of needs. Here are some of the main areas:

  • Training and skills development. More information available from the Learning and Skills Council at www.lsc.gov.uk
  • Employing new staff. Through the Government's New Deal strategy you can receive subsidies for employing people who are currently unemployed. More information can be found at www.dti.gov.uk
  • Developing Best Business Practice. Your business may be able to receive financial support from the Department of Trade and Industry to help introduce best practice improvements. For more information see www.dti.gov.uk
  • Young entrepreneurs. If you are aged between 18 and 30, employed in a part time or low paid job and have a workable business idea you can apply for funds and support from the Prince's Trust to help you start up your enterprise. The scheme is available to people living in England, Wales or Northern Ireland. You can find all the details and a link to an application form here

To find out more about the grants, subsidies and advice available to your business it's well worth visiting the Grants and Support Directory on the Business Link website. Or you could contact your local Business Link directly by checking their details in the Contacts Directory

Are you eligible for a grant?

To be awarded a grant you usually have to meet a number of criteria, so before applying check that you cover the appropriate conditions. Here are some of the most common ones.

Location

Each county in the UK has its own range of grants, and there is likely to be extra funding in areas of high unemployment.

Some local authorities also award grants to help businesses within their boundaries.

Size of business

There are many grants available to small to medium sized enterprises (SMEs) with fewer than 250 employees. In general, grants are often limited to certain sized businesses or those with a specific turnover.

Business sector

Funding to certain business sectors is limited by The European Commission.

Reason for grant

Grants are awarded for specific reasons such as equipment purchase or office improvements. You'll need to demonstrate a high level of commitment and present a commercially viable project to those deciding on your eligibility.

How to apply

Once you've confirmed you meet the criteria for the grant, you'll need to make a formal application. Your local Business Link adviser will be able to help you with this, but in general you will need to supply the following:

  • A detailed description of the project or use to which the grant will be put
  • An outline of the potential benefits of the project
  • A comprehensive work plan with full costings
  • An account of your own relevant experience and that of any other key managers
  • A completed application form

The Business Plan

To successfully raise money you'll need a well thought out business plan to convince people that you have a proposition worth financing. Here are some of the areas most business plans include:

Summary - this is an overview of the proposed business.

Business Description - includes what your services or products are, what your market is and why you have chosen it.

Marketing and sales strategy - why people will want your product or service and how you plan to sell it to them.

Team - Profiles and credentials of the management team, plus brief details of other key personnel.

Your company and operation - overview of your premises, any production facilities, management and IT systems.

Financial Forecasts - confirming what you have outlined above but in figures. An experienced business adviser will be able to help you put together a business plan and suitable finance package.

Hints & Tips

  • It is best to put together the funding for your business from a range of different sources.
  • Business training courses will help you to understand the issues better. It will also give more confidence in your abilities to people who are helping you financially.
  • Further information on financial support providers can be found on the Grants and Support Directory at the Business Link website.

The above information is correct at the time of writing (July 2009) but please check the details are up-to-date with the various organisations listed.

The contents of this guidance are for information only and no guarantee, representation or warranty of any kind is given (whether express or implied) in relation to any of the information, advice or opinions expressed in it. Whilst ICI Paints AkzoNobel have made all reasonable efforts to ensure that statements appearing in this guidance are accurate, ICI Paints AkzoNobel disclaims all liability and responsibility arising from any reliance placed on the information, advice and opinions contained in this guidance. ICI Paints AkzoNobel reserves the right to make any amendments or alterations to this guidance at any time, without notice.

Browse all the topics