Show me the money – finding funding in a low growth economy

Whether it’s an entrepreneur trying to get a new venture off the ground, or an existing business trying to get to the next level, there’s no escaping the fact that money makes the business world go round

Show me the money

Without access to some kind of external funding, small business owners can find that their savings take a significant hit, or that organic revenue growth is slow. When business and personal finances are so closely intertwined, both those scenarios can cause serious cash flow issues.

Access to funding is a perennial issue affecting the UK’s small business economy. But it can be hard to know where to look for it. Business loans, equity finance, venture capital – the list goes on – so it’s important to understand which source is the best fit for each business. As if these decisions aren’t confusing enough, the macroeconomic environment is making access to finance even more difficult to come by. In fact, the British Business Bank found that equity finance for small and medium-sized businesses in the UK fell by 11% last year.

While other stakeholders in the small business ecosystem have a role to play in smoothing the path to finance, business owners must carefully consider which source of funding best suits their needs.

Prevent unnecessary borrowing through prompt payments

As indicated in our latest Xero Small Business Index, record inflation is having a marked impact on the ability of small businesses to sell goods and services. But beyond revenue, inflation also restricts borrowing potential, with rocketing interest rates making loan re-payments far less feasible. What is frustrating, then, is that a poor culture around late payments in forcing small businesses to engage in more expensive borrowing.

This is demonstrated in our Index by a distinct correlation between late payments and the borrowing volume amongst small businesses. After all, small businesses are still paid, on average, more than a week later than the agreed payment terms – and they need to plug the financial gap somehow. Our recent study, combining data from Xero’s Small Business Index and the Bank of International Settlements, showed that for every extra day late a small business is paid by a customer, they borrow 1.1% more every quarter. 

The data also shows that small businesses borrowed most from non-banking institutions to plug the cash flow gap caused by late payments, rather than traditional high street banks or personal assets. Given these institutions tend to charge even higher interest rates, the evidence suggests that the simple issue of payments is causing more unnecessary borrowing and millions in additional interest payments.

Surely, the most natural source of small business finance should be payments made by their customers on time. But late payments – or as we call it, ‘unapproved debt’ – are causing more costly borrowing and confusing the cash flow picture for business owners.

Go for grants

Given borrowing can be expensive, some small businesses proactively seek out grant funding – whether awarded by the Government or a corporate entity. Grants can open the door to new growth opportunities, and there are plenty to apply for across the UK. These usually have a specific focus that determine where the money must be spent, such as job creation, community enablement, innovation or sustainability – projects that traditional lenders don’t typically support. It’s important for small businesses to consider how they can justify what the money has been used for if the outcome is not tangible, for example, if spent on research and development (R&D).

We recently launched a fund for small businesses – the Xero Beautiful Business Fund – to empower and support the aspirations of small businesses around the world. Xero small business customers can apply now, with four UK winners receiving £10,000 funding each to support activity in areas like sustainability, technology, embarking on philanthropic pursuits and upskilling their staff. 

In a low growth economy, grants can provide extremely useful funding and boost resilience. However, they usually supplement other sources. Just remember – competition is high, so it’s important to spend time applying for those that are specifically relevant to your business. 

Finding the right funding

Every small business is unique, so they must carefully consider the type of funding that is most suitable for them. For example, a very new business may struggle to secure finance from risk-averse, high-street lenders because they can’t make an assessment based on past performance or see that they have assets to offer up as security. Equally, sole traders aren’t able to access equity funding – they need to become a company if they want to sell shares in this way.

Business owners need finance for a variety of reasons, so it’s important to first be specific about what those needs are. A specific sustainability project might be suited to a grant, whereas shorter term loans might be required to cover very early start-up costs. Elsewhere, the timeframe of the financial needs can also determine the best place to look, as well as how proven or risky the business model is. The former is more likely to garner the attention of traditional lenders, while the latter may need to target specific grants or R&D tax credits.

Ultimately, aside from grant funding, you can’t access finance without paying interest or giving up a share of profits to an investor. So, it’s crucial to forecast cash flow and be clear about whether this injection of capital is worth the strings attached. If it is likely to provide a strong return on investment, whether that’s in the form of a revenue uplift, hiring new staff or launching a new product line, then there are funding options out there for small businesses to consider.

Alex von Schirmeister
Alex von Schirmeister

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