SME Financing Options

When the time comes to get funding for your business, you’ll be faced with two main types of SME finance: debt and outside investment.

With debt financing, you’ll receive funding without ceding ownership, but you’ll need to pay the money back no matter what happens to your SME. With investors, you won’t need to pay back the money immediately but you will need to give away some ownership of the company. In order to pick the best option, you’ll first need to understand the current situation your SME is in, what the various alternatives are and your overall objectives. We put together this article to help you understand the best options available to fund your small and medium business.


Invoice Finance

Invoice financing is a type of debt that involves treating your invoices like assets. A lending company basically advances a percentage of the total amount on the invoice, and once your client pays, you get the rest of the money and pay a fee to the lender.

This type of funding is a good option for SMEs that have most of their money tied up in unpaid invoices and want to get paid immediately. If you are a B2B company that invoices clients and delayed payments are a big cash flow issue, this is a relatively low-risk and stable option for funding. It’s also a good option for new SMEs, since the lending provider won’t check your credit and will focus more on the repayment behaviours of your clients.

SME Financing

R&D Tax Credit Finance

The UK has a successful Research and Development (R&D) tax credit framework, which allows UK companies to deduct R&D expenses from their taxes or receive a cash payout if they are involved in important research projects. Through tax credit finance, your company can get an advance on the money through a loan, and then use it as working capital. The loan is then repaid from the HMRC as an R&D refundable benefit.

This type of SME finance is great for companies that are highly innovative and haven’t started generating revenue yet. It’s a popular funding option in research-heavy industries such as software development, hardware development, and engineering. In order to be eligible, you need to be paying corporation tax and have invested some money already into R&D. Your company must also have a turnover of less than 100 million euros and employ less than 500 staff.

Startup Loans

Startup loans are one of the more popular ways for SMEs to obtain funding without going to the bank. These loans may come through programmes and lenders that specify in loans for startups, or even from the government.

Startup loans allow you to have access to money while retaining full ownership of your SME. It can be harder to qualify for these loans, and some may ask you for personal collateral to lower the risk. As a new company, the loan may not be allocated efficiently and the monthly repayments can restrict your cash flow in the years to come.


Angel Investment

Angel investors are wealthy individuals or groups who provide financing for SMEs in exchange for a share in the business. They go in expecting a 20 to 25% return on initial investment and are a good SMEs finance option to help fill the investment gap between investments from friends and family and VCs (Venture Capitalists). They usually focus on growth and aim for enterprises SMEs.

Angel investments are less risky than debt since you don’t need to pay it back if the business fails – plus many angels are also looking for a personal opportunity to contribute. However, this option is not suitable if you want to retain 100% ownership of your business and don’t want someone else influencing your company decisions.

VC Funding

VC funding is usually the next step up after angel investors. VC are organisations that are designed to provide financial support and help startups grow, and will often include other services such as mentoring, guidance and professional networks. Their objective is to grow the business quickly and get a higher return on their investment. They often will want to become involved in company objectives and have an influence in the direction of the company. Like angel investors, VC funding is less risky than debt; nevertheless, you will need to cede some control of your company.

Revenue-based Financing

Revenue-based Finance

Revenue-based finance is also called cash flow based lending and involves linking your monthly loan repayments to the performance of your business. You take out a loan and then pay back a percentage that fluctuates along with your revenue.

This type of SMEs financing is a more flexible loan model that doesn’t demand minimal credit and won’t require you to set aside any collateral. The application is relatively quick to process and the main benefit is that you won’t need to cede any control over to someone else. The main issue is that only small and medium businesses from certain industries qualify and the loans range from 4 to 18 months duration.

Equity & Rewards-based Crowdfunding

Equity financing involves raising funding by selling small “parts” of the business. Shares are usually attributed to the stock market, but SMEs can also raise private equity through owner and investors. Similar to VC and angel investing, you will need to cede some control over to investors, but you may also get some mentorship and other additional support.

Rewards-based crowdfunding involves raising money through a third-party platform such as Kickstarter or Indiegogo. It’s a great way to obtain funding for a specific product, raise awareness and acquire new customers without giving away ownership of the company. In exchange for funding, you can choose to offer early access, free products and future discounts. This type of finance for SMEs works best for startups that are selling more creative products and want to test a market.

As you can see, there are many different funding options available to startups and SMEs of all industries and sectors. With the debt financing route, you can choose between invoice financing, R&D finance, startup loans and revenue-based finance. If you decide to go with investments, you can decide to go with VCs, angel investors, or offer equity. Depending on your company objectives and business model, either of these options might work well for your SME.

We hope you enjoyed this article on finance for SME financing options for your business. Let us know what you think in the comments and please share if you enjoyed the read!

Alexandra Kepka

Alex is a tech-focused funding expert, helping innovative companies grow through innovative funding through her work at Fundsquire. She also has a background in journalism, having written for outlets like Vice and many others in the past on topics ranging from philosophy to economics.