For many SMEs, securing funding isn't necessarily the biggest challenge. Choosing the right type of funding is. The decisions made today can influence flexibility, ownership, cash flow and growth potential for years to come.
Against a backdrop of continuing economic uncertainty, changing borrowing costs and increasingly selective funding markets, understanding the full range of funding options available has become more important than ever.
It’s a topic explored in a recent episode of Fresh Perspectives, the Azets podcast, where host Rob Brown speaks with Mark Barrie, UK Head of Debt Advisory, and Lee Humble, UK Head of Corporate Finance, about funding growth and the steps businesses can take to prepare.
Debt or equity: what’s the difference?
At its simplest, debt funding means borrowing money that will need to be repaid, usually with interest over an agreed period. Depending on the funding arrangement, lenders may also require security, personal guarantees or certain financial commitments from the business.
Equity finance involves an investor providing capital in exchange for a share in the business. While this doesn't operate like a traditional loan that needs to be repaid, it does mean sharing an element of ownership and potentially some control.
For SMEs, equity can also bring benefits beyond the funding itself. The right investor may offer industry experience, contacts and expertise that can support your growth plans.
The choice between equity vs debt financing isn't necessarily either/or. Some businesses may benefit from a combination of debt and equity or other forms of finance. The important thing is understanding the implications of each option and how they fit with where you want the business to go.
Business funding options at a glance
The right route depends on what you're funding and how quickly you need it. Common options include:
- Asset finance: spreads the cost of equipment or vehicles without tying up cash
- Invoice finance: releases cash tied up in unpaid customer invoices
- Working capital finance: supports day-to-day operations and seasonal cash flow gaps
- Business loans and refinancing: term borrowing for investment, or restructuring existing debt on better terms
- Government-backed schemes: such as the Growth Guarantee Scheme, which can widen access to lending for eligible SMEs
- Equity finance: investment in exchange for a share of ownership, sometimes alongside debt
How could funding support your SME?
Funding shouldn't just be about filling a gap in your finances. Used strategically, it can help an SME take advantage of opportunities that might otherwise be difficult to achieve.
You might consider external funding to:
- Invest in new technology, systems or equipment
- Recruit people and strengthen your team
- Expand into new products, services or markets
- Fund an acquisition
- Increase working capital to support growth
- Strengthen your financial headroom
- Accelerate plans that would otherwise take longer to achieve
The most effective funding strategies are often linked to a clearly defined commercial objective. Rather than asking "how much can we raise?", businesses often benefit from first identifying the opportunity, expected return and timescale for investment.
Before looking at individual funding products, start with the purpose. What are you trying to achieve, and what does the business need to make it happen? That can help you consider whether a particular funding solution supports your wider strategy rather than simply solving the immediate requirement.
5 questions to ask before choosing debt or equity
Funding can be complex, but asking yourself a few simple questions can help you start thinking about what your SME really needs:
1. What am I funding?
Be clear about what the capital will be used for and how it supports your business plan.
2. How much do I actually need?
Look beyond today's requirement and consider what the business may need over the coming months and years.
3. Could the business comfortably service debt?
Consider your cash flow, existing commitments and how the business would cope if performance didn't go exactly to plan.
4. How important is retaining ownership and control?
If you're considering equity, think about how you feel about sharing ownership and decision-making with an investor.
5. What else could a funding partner bring?
Price is important, but so are flexibility, expertise, relationships and whether a lender or investor understands your longer-term ambitions.
The most common funding mistake SMEs should avoid
One of the biggest mistakes businesses make is leaving funding conversations too late.
When capital is needed urgently, there may be less time to explore the wider market, compare alternatives or negotiate terms. This can result in a business taking the quickest available solution rather than the one best aligned with its plans.
Businesses that begin funding discussions early often have access to a wider range of potential lenders and investors, more time to compare options and a stronger position when negotiating terms.
Waiting until funding becomes urgent can also place additional pressure on management teams and reduce the flexibility available when making important decisions.
Stronger funding decisions are often made before finance becomes an urgent requirement.
Get funding-ready: practical steps for SMEs
You don't need to be actively raising finance to start preparing. Getting your finances and plans in order now can give you greater visibility over what the business might need in the future.
Start with these five steps:
- Keep management information up to date
Make sure you have a clear view of how the business is performing. - Build and regularly review your cash flow forecast
Understanding what's coming in and going out can help you identify future funding requirements earlier. - Stress-test your plans
Consider what happens if costs increase, growth takes longer than expected or sales fall below forecast. - Know what you need and why
Be able to clearly explain how much you're looking to raise, what it will be used for and how it supports your business strategy. - Start conversations early
If you know an acquisition, expansion or significant investment could be on the horizon, don't wait until you need the money to explore your options.
Listen to the full episode
Listen to the latest episode of Fresh Perspectives to explore debt versus equity, what lenders and investors are looking for, common funding mistakes and how SMEs can prepare for funding conversations.
Listen to Fresh PerspectivesWe’re here to help
Whether you're considering funding an acquisition, investing in technology, expanding your business or simply want to understand the options available to you, talking to an adviser early can help.
Every business has different funding requirements, growth ambitions and risk considerations. That's why funding decisions often benefit from advice that looks beyond a single solution and considers the full range of options available.
Whether you're planning an acquisition, reviewing existing facilities, exploring investment opportunities or simply want to understand how fundable your business is, our Debt Advisory and Corporate Finance specialists can help you assess your options and prepare for future funding conversations.