Fuelling the dream: Financing for small business success

HR managers talking to their HR consultant
By Louise Mulgrew | 5th November 2015 | 13 min read

It was recently suggested following research by insurance firm RSA that cash flow is the main killer of small businesses with it ending the road for around 80%-90% of those that fail.

This is why it is so important to ensure you get paid on time and have the right access to the right funding.

But what funding options are there for small businesses?*

Government grants

Government grants are a great start to financing your small business and are usually awarded to businesses that are proposing an idea rather than already established. The main benefits of a government grant is that you don't have to pay it back and you don't have to give up any form of equity to those awarding the money.

One thing to keep in mind about the grants however is that there is usually a very high level of competition for them and the application process can take a long time and you may even have to enter a certain competition to be awarded the grant.

Find out more about Government grants from the government's website.


Investments, sometimes known as "equity finance" involves selling a part of your business over to an external entity. This person or organisation will then take a share of the profits or losses that your company gets. The investors may then bring in other knowledge and expertise that you can use to further grow the business. While losing control of a part of your business, you won't have to repay a loan or any interest because that person owns a share of the business.

Another thing to keep in mind is that if you're a sole trader or a partnership, you cannot sell shares in your business to investors - only Limited companies can do this.

Find out more about Investments


While you are most likely already aware of loans, the benefit that they can bring to a business is undoubtedly the large influx of liquidity that can alleviate longer term cash flow worries. Loans are usually used for start-up capital or for large asset purchases such as vans, trucks or machinery. Another benefit is that you won't be subject to an early repayment like an overdraft and you won't be giving away any percentage of your business.

Loans will need to be paid back in instalments and are subject to fixed or variable interest (fixed is where the rate of interest stays the same; variable is where the rate of interest changes dependant on the Bank of England base rate).

Usually, loans are to be used for long term commitments rather than short term commitments.


An overdraft is usually a short term solution for cash flow and liquidity problems or paying smaller invoices. You usually won't get charged for paying an overdraft back quicker than you expected and they are usually quite quick and simple to arrange.

The bank can however ask for the money to be paid back at any time, in full and you will usually be charged if you go over the agreed credit limit.

Invoice Financing

Invoice financing is where you lend money from "Invoice Financiers" against the value of (usually) commercial invoices. The way that this works is via either factoring or invoice discounting.

Factoring is where a company buys your invoice from you for a certain percentage of the total value. They are then responsible for collecting the invoice and paying back the difference to your business. During this, you pay them interest and fees.

For example, if you have issued an invoice of £40,000, you sell this to an invoice financier for 85% of the value; £34,000. The invoice financier collects the £40,000 from the business that owes the money and then pays you back the remaining £6,000. They collect any fees and interest from yourself.

The benefits of this is that another company is responsible for collecting your debts and you can receive a large injection of cash. Invoice financiers will usually credit check your customers too; which means there is lower likelihood of receiving a bad debt.

Invoice Discounting is similar but there is no responsibility to collect or chase the invoice by the company lending you money. They lend you money against the unpaid invoices; usually a percentage; and as you receive payment for the invoices, it goes to the invoice financiers and the amount that you can borrow goes up again. You will need to pay a fee for this. The benefits of this is that your customers don't know that you are using an invoice discounting service and therefore you can form closer relationships and there is no possibility of a "bad debt collection" experience damaging your reputation.


After growing in popularity in recent times, crowdfunding is becoming an excellent way to raise finance for inventions, art projects and community ideas. This is because people who like the idea can pledge as much, or as little as they can afford and usually in return for a gift. One of the main benefits of crowdfunding is that you don't have to pay the money back and it also gains your business great exposure - many successful crowdfunding projects have gained media attention.

A major disadvantage of the recent rise of crowdfunding is that the perception of many crowdfunding pages is that they are an e-commerce site. The problem behind this is that those pledging money in return for an early release version or a discounted version of the product often forget that they are investing in a project. Often, if projects are delayed or fail in some way, those that have pledged with this "store buying" mentality, will be hugely disappointed and complain. Another disadvantage is that if you don't reach your funding goal, all of the money pledged will be returned to investors.

As a provider of small business accounts software it's important to us to have well-informed customers. This information is designed to help you realise what types of finance and funding is available out there for small businesses.

One other indirect way of financing your business is to take advantage of free trials and streamline your existing processes, such as the way you run your payroll and auto enrolment.

Payroll is an integral part of your business, so finding cheaper, quicker ways to run it means that you can spend more time concentrating on other areas of your business.

With the IRIS AE Suite™ you can streamline your payroll process as well as working toward compliance with the workplace pension legislation. The IRIS AE Suite™ automatically puts the right employees into a pension scheme at the right time and sends the payslips and P60s electronically. In addition to this, it will also send out the legally required pension letters to your employees' secure, online portals. All with the click of a button.

Following the announcement of NEST Web Services integration within IRIS Software, for those that use NEST for their pension provider, it is now even quicker to send the pension file further streamlining your payroll process.

Don't believe us? Let us show you in a free, 1-2-1 demonstration or check out more information on sme cloud accounting.

Watch how we can streamline your auto enrolment process

*This is only for information purposes only and does not constitute as financial advice.