How to effectively fund your small business and manage debt

Running your small business can be a juggling act, especially when working out how to fund things like stock, wages, equipment, and anything else you need to run your business effectively. And that's before we even get onto growing your business. But what happens if you don’t have access to the money right away? 

In this guide, we'll explain the options available to you, from a range of loans to grants and some changes you can make to free up funds.

Why is funding your small business important?

Funding means using money to boost sales, buy products or carry out daily business activities. This could be from your own funds or borrowing. Funding can also include support, grants from outside investors, or government loans designed for small businesses.

Businesses of all sizes need funding for various reasons, but there are some common situations when a company might apply for outside funding. 

If you don’t have thousands of pounds of your own money to spend on set-up, you might choose to take out a startup loan. If you need access to more finances to buy bigger premises, hire more staff or expand, external funding can also help.

How do you know how much funding you’ll need?

The amount of funding you need will depend on your business, how much money you have available to spend, and how well your business is going. It helps to create a business plan to see which areas of your business could benefit from extra funding. Find out more about how to easily write a business plan with our guide. 

Having a realistic idea of your start-up costs and how much it is going to cost to keep your business running will really help you work out how much funding you need. A good tip is to take notice of your cash flow, so you don’t run out of money. This will help you to avoid borrowing more than necessary and getting into some sticky situations. 

What are some funding options available?

There are a variety of funding options available. Some are designed to suit small businesses, while others might meet the specific needs of larger ones. It depends on how much you need to borrow and what you'll use the money for. Here are some solutions for you to consider:

Asset finance

Asset finance is a way of leasing machinery and vital equipment or other assets you need to run your business. If you don’t have the cash to buy the assets outright, you can pay for them in instalments over a set amount of time with asset finance. You usually have the option to purchase the assets at the end of your payment plan too.

Working capital

A working capital loan is supposed to improve your cash flow and cover everyday expenses. If you’re having issues paying staff wages or buying essential stock, a working capital loan will pay for those things until the cash comes into your business.

Property funding

Property funding means investing in commercial property. These could include offices, factories, warehouses and shop space. Customers can pay a lump sum to invest, this money is then collected together and used to purchase more business assets.

Invoice financing

Another option is invoice finance. This is when the lender uses an unpaid invoice as security for your borrowing. This can give you access to a percentage of that sum’s value, often within 24 hours. It’s a quick way to free up cash and is popular with a lot of business owners. 

Growth finance

Growth finance gives the lender the right to add on equity interest if the loan you take out is not paid back on time. Growth capital loans are private equity investments. This finance mainly applies to companies looking to pay for a change in the business without changing ownership.

Trade finance

Another solution to explore is trade finance. This is when an exporter asks an importer to pay for goods before they are shipped. The exporter’s bank may offer a loan to the exporter once a contract has been written up.

Pension finance

Pension finance offers social insurance. A pension fund can provide money to insured workers following their retirement. A lot of the time pension finance also provides disability benefits.

How to manage small business debt

There are a few ways you can limit or manage your small business debt. Some of these include:

Cut unnecessary spending

The first way to limit your spending is to cut down on unnecessary spending. Having a budget to stick to will help create monthly and yearly benchmarks for business spending. A budget will also help you save money and highlight areas you can easily cut down on spending.

Increase revenue

Increasing revenue is another way you can manage business debt. It’s not always easy but there are a few things you can try to attract more customers:

• Increase your prices
• find new customers
• sell more products to existing customers
• offer sale promotions
• develop a new product 
• access new markets

Create a ‘rainy day’ fund

Saving is the key to limiting small business debt. If you create a budget, the saving will likely be easier for you. Having a rainy-day fund will ensure you have access to money should something go wrong in day-to-day business, for example, if a computer breaks or a leak springs up on your premises.

You don’t even have to put lots of money away in your savings, start off small but put something in each month and you will see it grow.

Negotiate with suppliers

If you have long-term suppliers, why not negotiate with them for lower prices on stock? The worst thing they can say is no, and you might find that they would be happy to offer you a reduced price for products in return for a longer contract with them.

Consider refinancing

Corporate refinancing means restructuring existing debts through reorganisation and consolidation. Some businesses do this to reduce monthly interest payments, get better loan terms, reduce risk, and access more money.

Will applying for finance affect your credit score?

No. A business loan won't impact your credit if you keep your business and personal finances separate. Business loans don’t usually affect personal credit, this is because incorporated companies have their own identities.

Does the UK government give grants to start a business?

There are some Government grants available for UK businesses. If you're starting a UK business, it helps to check out the government website to see if you are eligible for help or support in your area. Although not a grant, it could be worth seeing if you're eligible for a Startup Loan, which is a government-backed scheme for businesses that have been trading for less than three years.

What if your business is struggling financially?

If your business is struggling financially, don't ignore it. Before you speak to your lenders, it might be worth getting advice from one of the following organisations:

• The UK Government Business Support Helpline offers free phone advice on funding, tax, and business planning. You can call them on 0800 998 1098 or visit https://www.gov.uk/business-support-service
• Your local Growth Hub is another great starting point. These offer free one-to-one advice, help finding grants or loans, and practical support. You can find your local hub at lepnetwork.net
• The British Business Bank has excellent guides on funding options, including government-backed loan schemes, at british-business-bank.co.uk
• If you’re falling behind on tax payments, HMRC’s Business Payment Support Service can help you set up a payment plan. Call them directly on 0300 200 3835
• For debt advice, Business Debtline provides free, confidential support to small business owners at businessdebtline.org
• You can also look at organisations like Enterprise Nation for free webinars and advice, or The Prince’s Trust if you’re aged under 30 and need mentoring or financial support

Many high street banks also offer free small business support services, so it’s worth speaking to your bank early if you’re concerned.

How can Bionic help me make the most out of my business?

Working out how to limit debt as a business owner can be tough, but it doesn’t have to be a worry. 

Although Bionic can’t get rid of your business debt, we can help you save time, hassle, and unnecessary admin when sorting business essentials. We compare business gas and business electricity, as well as business phone and broadband, to help make sure you're on the best deals. 

We can also help with business insurance and business finance. Get in touch to find out more.