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Finance for Small Businesses: SME Loans

SME Loans

SMEs or Small Sized enterprises are the lifelines that bind the UK’s diverse economy. They make up a significant portion – 5.86 Million of the UK’s business population. Several SMEs have faced the wrath of the ongoing Coronavirus Pandemic which caused businesses to collapse. In light of these events, the Government has introduced several initiatives to help sustain these businesses.

In this article, we’ll throw some light upon these initiatives and understand what exactly Small/Medium Enterprise Loans are.

What is an SME loan?

An SME loan is a business loan for small scale enterprises in the UK. This is generally a cash loan to support small businesses, for instance, a business with less than 50 employees and an annual turnover lower than £150,000.

SME loans can be used to solve many purposes, such as:

  •  To pay rent for your work premise
  • To pay wages to your employees
  • For the upkeep of your inventory – availability of stock/goods
  • To fund an expansion that may yield profits in the near future
  • For funding major capital expenditures
  • To cover some pressing operational costs, hindered by a disrupted cash flow

Businesses can either opt for lenders or high-street banks who offered secured as well as unsecured loans. In either case, the success of your application relies on the income generated by your business, and your creditworthiness.

Alternatively, there are several Government grants made available for small enterprises in the UK. Small businesses are highly dependent on funding, therefore these grants work out exceptionally for businesses seeking some financial backing. This brings us to the next section of our discussion – What sources of funding are available for SMEs?

What are the sources of SME financing?

The Covid-19 pandemic has permeated all aspects of our lives, but our businesses and economy have taken the hardest hit. As businesses pilot through this turbulence, there are several funding initiatives to help them survive this hit. We’ve thrown light on a few of these to help your stay updated:

  1. The CBILS (Coronavirus Business Interruption Loans Scheme): As per this scheme, Small and Medium-sized enterprises can now apply for an interest-free loan of up to £5 Million. Under this scheme, businesses with an annual turnover of less than £45 Million can borrow for up to 6 years from a list of approved lenders. Although to get approval for this loan, you will have to prove that your business performed successfully, before the pandemic.
  2. Business Interruption Insurance Claim: The idea of a Business Interruption Insurance scheme was conceived to secure the trading position of businesses when catastrophe strikes. This scheme is different from other insurance policies, in which it secures you against the monetary loss borne by your business due to a disaster.  This policy usually covers the following:
      • Downfalls in your profit
      • Operational costs associated with your work premise
      • Some policies also cover the additional cost incurred by the business about operations and shifting to a new site
      • Loss of revenue incurred owing to closure by civil authorities because of a catastrophe
      • Covers extra costs borne by your company as a result of the disaster. Check your BI policy to assess your eligibility and try to claim your losses
  1. Government Grants: The Small Business Grant is an initiative by the UK Government aimed at helping small businesses that have a property on which they pay rent. The funding for this grant was recently increased from £3,000 to £10,000. This is applicable for a business that qualifies for the Small Business Rate Relief and Rural Rate Relief. A special grant has been rolled out for Retail, Hospitality, and Leisure. This grant aims to provide funds up to £25,000 to small scale businesses in the industry. To qualify, the rateable value of your property should be between £15,000 and £51,000.
  1. Crowd-funding campaigns: These are trying times, but fortunately several communities have joined forces to battle against the pandemic. Crowdfunder has launched one such campaign – ‘Pay it Forward’. This crowd-funding campaign offers 100% commission free fundraising for small businesses in the UK. Customers can support and back indigenous businesses in the UK by paying in advance for their products. This will help them stay afloat so that they can deliver the products later on.
  1. Support from Financial Institutions: Financial institutions such as banks have come forward to support their customers. Contact a bank to which you’ve linked your business account and ask for their assistance on the matter. For instance, Natwest declared repayment holidays for business loans and announced quick access to emergency business loans and deposited balance with zero charges.
  1. Alternative Funding Resources: The UK government is urging banks and lenders alike to free up funds for emergencies and contingencies. So, an alternative to all the funding options above is a business loan from an alternative finance provider. Although each lender will assess your application as per their criteria and decide accordingly.
  1. Angel Investors: An angel investor is an established individual looking to invest their money in a small business. An angel investor judges your business based on the potential it has to offer. Such an investor can be an asset to the business as they bring along strong business acumen, abundant finances, and resourceful contacts.
  1. Trade Credit: If your business deals with other traders such as suppliers, you can borrow credit from them. Although your lender may consider your company as a risky firm and discontinue this funding.

 Why is SME financing important?

SMEs cover a wide variety of businesses in the UK and consequently, the SME sector is vital to the nation’s economy. The SME sector roughly accounts for creating 50% of the employment opportunities while generating 50% of the national income.

Small businesses are usually more malleable and quicker to innovate compared to their counterparts. This implies that SMEs are far more open to change and technological advancements than established firms.

Warning: Late repayment can cause you serious money problems. For more information, go to MONEYADVICESERVICE.ORG.UK

Credit subject to status & affordability assessment by Lenders.

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