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Author: Marc Mullen
November 2012 Issue 58
02 SME Finance 03
02 Introduction
03 Investment readiness
05 The right type of nance
06 Debt nance
08 Equity nance
12 Alternative sources of nance
14 Making the most of your assets
14 Other help for SMEs
Marc Mullen is an ACA, who trained with
PwC. He is a freelance journalist and editor of
ICAEW Corporate Finance Faculty magazine,
Corporate Financier.
For SMEs, obtaining and securing the right source of
nance can present a major challenge. Lack of available
funding for SMEs has been brought into sharper focus
post-credit crunch. Many growth businesses are started
by entrepreneurs, often with little experience of how
to raise nance to fund this growth. This guideline
rst and foremost seeks to help them when it comes
to looking for sources of nance. It sets out the main
nancing options and the key issues to consider
when choosing between those options. Accountants
and other advisers to SMEs may also nd it a useful
reference tool.
The guideline also seeks to raise awareness of UK
government schemes which have been launched to
respond to credit and other nance constraints faced by
small businesses through the economic downturn. The
main schemes are indicated throughout the text in red.
Box 3 GrowthAccelerator
Box 9 Enterprise Finance Guarantee
Box 11 Business Angel Co-Investment Fund
Box 12 Enterprise Investment Scheme
Box 13 Seed Enterprise Investment Scheme
Box 14 Venture Capital Trust Scheme
For a business seeking nance it may not always
be clear what type of nance is most appropriate
whether the business is better suited to incur debt or
to sell an equity stake in the business. Forms of debt
can go beyond the familiar concepts of borrowing,
overdrafts and leasing. An investor may buy a stake in a
business and structure the deal with some of the stake
in debt so that the investor receives a payback over
It is also vital that businesses are aware of support that
exists to get them investment-ready not only by
increasing their awareness of nancing options, but also
by showing them how to develop a nance strategy.
This means turning their business proposition into a
pitch that, in very simple terms, sums up the business
and where the growth will come from, and can then be
used to approach potential investors. With the strategy
clear this pitch can be adapted for different sources of
Copyright ICAEW 2012
Text copyright The Department for Business Innovation and
Skills 2012
All rights reserved. If you want to reproduce or redistribute
any of the material in this publication, you should rst get
ICAEWs permission in writing.
The views expressed in this guideline are those of the
contributors. ICAEW does not necessarily share their views.
ICAEW will not be liable for any reliance you place on
information in this guideline.
ISBN 978-0-85760-634-1
02 SME Finance 03
Many small businesses would benet from further
support to turn their business propositions into
attractive investible opportunities. Securing funding
is often closely related to how well businesses make
themselves investment-ready for potential investors.
Preparing a solid business plan is key to securing
funding. A robust plan will help potential lenders
or investors understand the vision and goals of the
business. The process of preparing a business plan will
bring focus to managements understanding of their
strategy where the risks are and the impact of any
deviation from the plan in particular when it comes to
The information will depend on the target audience,
but in each case it should incorporate:
an executive summary, highlighting the main points
and designed to grab the attention of potential
lenders or investors;
details of key people as well as their responsibilities,
skills and relevant business experience;
market research, with details of competitors and
how the product or service ts into the marketplace;
the marketing plan to increase sales of the product
or service to new or existing customers;
nancial information covering the last three years
of trading (if available) accounts (audited, if
available) and key accounting ratios;
nancial forecasts for the next three to ve
years, ideally presented in the same way as the
historical information, highlighting key underlying
additional forecasts, which clearly show the nancial
impact of key downside scenarios, such as sales
growth targets not being met, also need to be
a cash ow forecast covering the next two to three
years (or in the case of a start-up or turnaround,
until the business moves into prot), indicating the
amount of funding needed;
how creditors, capital expenditure, debtors and
stock will be managed over the forecast period; and
how any potential lenders will get their money back,
or investors will see the value of the business and
therefore their shareholding grow.
Any business plan must clearly show how much of the
existing owners money is committed to the business.
If a lender or investor thinks the existing owner is not
demonstrating a willingness to risk enough of their own
capital, securing a loan or an investment is likely to
be more difcult, if not impossible. The business plan
should also clearly detail any backing already received
from other banks or investors which may demonstrate
the investibility of the business and attract new lenders
or investors.
In general terms, if a business is looking for debt
nance, the plan needs to demonstrate how the
business will be able to meet the interest payments and
repay the capital over the period of the loan.
When looking for equity nance, the plan will need to
show how the equity provider will receive dividends
and how share value will grow.
Investment readiness may be the initial goal of an SME
looking for funding, but before a business plan can be
prepared the business may need to access experienced
advisers knowledge and information in order to make
the right choices.
Business mentors have the practical experience and
contacts to help businesses make those right choices.
A mentor acts as an independent sounding board,
can provide guidance and support from an external
perspective and signpost a business to appropriate
external advice.
Box 1: is a mentoring gateway that links
businesses to mentoring organisations across the UK
and can help nd a mentor that suits the business,
including those offering specialist nancial support.
The British Bankers Association (BBA), the hosts
of the portal, has provided 1000 volunteer bank
mentors recruited from the business community
who can offer expert nancial support and all are
accessible via
04 SME Finance
Coaching will help the business produce a robust
nancial strategy and business plan. Presentation
training will give management the skill to present the
company and their plans in the best possible light,
and deal with the rigorous scrutiny of those plans by
potential lenders or investors. At this stage the adviser
should be able to introduce the company to a network
of investors or lenders. Many independent advisory
rms offer coaching and mentoring services.
Box 2: ICAEW Business Advice Service
ICAEWs Business Advice Service (BAS) is a scheme
offering business support to SMEs in England,
Scotland and Wales.
The scheme offers businesses a free advice session
with an ICAEW-qualied chartered accountant.
Businesses can visit
to nd the nearest ofce participating in the scheme.
BAS offers to help SMEs overcome the challenges of:
how to grow a business;
securing loans, capital and nance;
keeping staff and creating new jobs;
meeting tax and regulatory requirements;
export planning;
planning for long-term sustainable growth;
debt management; and
legal issues.
Box 3: GrowthAccelerator
GrowthAccelerator is a 200m government-backed
programme to provide business coaching to English
SMEs. A private sector consortium of business growth
specialists, led by Grant Thornton and comprising
Winning Pitch, Oxford Innovation and Pera, delivers
the scheme.
Coaching is not prescriptive it is tailored to
meet the specic needs of individual businesses.
Proven business experts work with the businesss
management team to identify the barriers to growth,
devise and agree a strategy to overcome those
barriers and then work with them to execute the
GrowthAccelerator focuses on four main areas:
Commercialising innovation teaching business
leaders how to commercialise their ideas, develop
innovation strategy and generate protable
intellectual property.
Business development helping business owners
to develop and execute a clear growth strategy in
line with their specic needs.
Access to nance this provides an assessment
of business suitability and potential for raising
nance; it helps create a business that is
investible, and introduces a business to potentially
suitable investors.
Leadership and management
GrowthAccelerator provides grants for training
courses that will enable senior managers and chief
executives to create an effective management
structure and run their business better.
In addition to business coaching, GrowthAccelerator
fast tracks clients to trusted providers of business
advice. It introduces businesses to networks of
investors. It also connects them to similar businesses.
English SMEs with no more than 250 employees
and turnover of up to 40m can apply for the
GrowthAccelerator programme. It aims to help
10,000 SMEs per annum once fully up and running. 05
After the preparation of a robust detailed business plan
with realistic nancial forecasts the next step for SMEs
is choosing the right type of nance. This may be a mix
of two or more types of nance. The rst port of call
could be further nance from the existing owners of the
business. This is not always possible.
What must be determined before approaching lenders
or investors is how much funding the business is likely
to require, what the funding is specically needed for
and when it will be required.
For start-up businesses, running expenses must be
factored in, in addition to the initial start-up costs.
Sufcient capital should be available to cover the
projected running expenses for at least six months as
customers may not pay up immediately. A start-up
business is unlikely to generate surplus funds in these
early stages. It is critical that the owners establish how
much money the business will need to survive.
A start-up business may look to use credit unions or
even the owners credit card to fund that early stage
growth. However, as with all means of nancing,
owners must look closely at the cost, particularly if
using their own credit card to fund the start-up.
Taking a business on to the next stage moving to larger
premises, acquiring a competitor or investing in new
machinery to handle bigger orders will almost always
require a further tranche of funding. Most businesses will
use a mixture of nancing sources. Choosing the most
suitable depends on the nature of the business, how
much is actually needed and what exactly it is for.
The overarching decision is between equity (shares)
and debt. It may be that if the business is at an early
stage pre-revenue or pre-prot the only option is
equity. Knowledge-based businesses which are rich
in intangible assets can nd it difcult to access debt
nance. Equity nance may be particularly suitable
for these businesses. See Other Help for SMEs for
information on other sources of funding for knowledge-
based businesses.
In practice a business generating turnover and making
a prot will use a mix of permanent and temporary
nance. Grants may also be available in certain
situations. Another option may be to make use of some
alternative forms of debt nancing, such as invoice
discounting or export factoring.
Box 4: Friends and family
It might be possible for a business to raise some or
all of the funding required from relatives or friends.
A loan is probably the most appropriate option for
immediate or short-term funds. For longer-term or
permanent funding friends or family could be given
the opportunity to invest in shares in the business.
The advantages of friends and family nancing can
low or zero interest repayments;
loan obtained without the business giving any
a longer loan period before the lender expects
repayment of part or all of the loan, or the investor
a return on their investment;
greater exibility; and
requirement for a less detailed business plan if the
lender or investor already knows the circumstances
of the business.
Despite the seemingly informal nature of the investment
or loan from the friend or family member, they must be
made aware of the risks involved in investing or lending.
They should not invest or lend more money than they
can afford to lose. If conventional lenders are unwilling
to offer nance to the business, then the friend or family
member must seriously consider the reasons for that
and whether it is a viable proposition.
One potential issue is when an inexperienced investor
tries to get involved in the running of the business.
Their involvement may not be welcome and may be
detrimental to the business achieving its plans. It is
imperative that where a passive partner is required,
that is made clear from the outset. To maintain
control of the business a majority of the shares should
be retained by the original business owners. Other
problems can arise if the investor or lender demands
their money back prematurely.
To avoid such problems, both parties should seek
independent advice and formalise any agreement
in writing. The agreement should detail the nature
and timing of the return of any loan, a repayment
schedule or timed plan of dividend payments, and the
respective responsibilities of both parties. There should
also be an agreed procedure for the resolution of any
problems which may arise, to help prevent any future
misunderstandings. It is important to be aware that
the exact nature of any agreements could have tax
implications for either or both parties.
06 SME Finance
It is important to obtain independent advice when
considering nancing options. The type of nance
sought should match the needs of the business.
Advisers can help the business establish whether they
need to raise nance or whether their problems can
be addressed in other ways such as better nancial
management and control.
Overdrafts and bank loans are the most common
sources of additional nance for SMEs. The most
signicant advantage they have over raising equity
is that neither involves relinquishing any share of
ownership or control of the business.
It is almost always the case that an entrepreneur will
benet from the knowledge, insight and network of
advisers who deal with banks on a day-to-day basis.
However, businesses themselves should cultivate
relationships with banks because that relationship may
prove fruitful, particularly when looking for follow-
up funding. Broadly, loans are often better for larger
long-term purchases, such as investment in plant and
machinery. Authorised overdrafts are more suitable for
day-to-day borrowing.
To successfully obtain a loan or overdraft, the business
owner will have to prove to the lender that the business
will generate the income necessary to repay the facility
in accordance with the terms of the loan. Market
conditions affect greatly the ease with which a business
can access a loan or overdraft.
A business will generally need to:
show a comprehensive and credible business plan,
including cash-ow projections demonstrating that
there will be sufcient income to cover outgoings
and meet interest and capital repayments;
provide evidence of a successful track record in
business or of skills and experience relevant to the
business being started;
provide security for any money borrowed against
other personal or business assets; and
demonstrate the owners personal nancial
commitment to the business.
Box 5: Bank loans pros and cons
The main advantages of loans are:
the terms can be tailored to suit the needs of the
repayments are straightforward, simply planned
and the cash ow impact can be budgeted for;
a loan usually costs less in interest payments than
an overdraft when used over the same term; and
there is tax relief on the interest payments, unlike
The disadvantages are:
banks can be reluctant to lend money to new
business owners with no nancial track record;
loans are less exible than overdrafts charges
could be payable on funds that are not used and
there could be penalties for early repayment;
being locked into a rigid repayment schedule could
be a problem if cash ow is seasonal or erratic; and
in almost all instances there will be a need for a
business to put up security against the loan, and/or
the directors to give personal guarantees.
Bank charges vary widely as do the services offered so
it is worth shopping around before opening any account.
The suitability of an account will depend on the needs of
the business. For example, where a business has many
transactions, they should consider opting for an account
which charges a xed fee rather than an amount per
Statements should be checked regularly not just for
transactions but for bank charges, which can be kept to
a minimum by:
negotiating or switching banks to secure better
interest rates and lower charges;
automating as many transactions as possible,
using standing orders, direct debits and electronic
using on-line banking where available; and
adhering to the terms and conditions of the
account, for instance avoiding unauthorised
overdrafts. 07
It is important to notify the bank if the business is
having nancial difculties. Negotiating new conditions
for an account is always better than breaching a term
such as exceeding a credit limit. This will incur extra
fees and could affect the owners credit rating.
Box 6: Overdrafts pros and cons
The main advantages of overdrafts are:
they are often quicker to arrange than a loan;
overdrafts give exibility interest is only paid on
the amount of money used and they are only used
as nance if required; and
they are regularly reviewed.
The main disadvantages are:
they are repayable on demand and so can be called
in if the bank thinks that the business may be in
interest rates are usually higher than for loans
using them for long-term borrowing will cost more;
cheques bouncing may lead to penalty charges
and/or higher interest rates if the overdraft limit is
penalties may be imposed if the overdraft limit is
exceeded; and
security may still need to be provided.
One major innovation in the supply of debt to SMEs
is peer-to-peer (P2P) funding. It is still at a very early
stage but the UK appears to be at the forefront of this
innovation which uses the power of the internet to
match would-be lenders to would-be borrowers.
There are a number of websites offering this service,
which can be attractive both to businesses looking
for quick access to lending and lenders looking for
potential returns. All parties should carefully consider
the risks of what is currently a largely unregulated
Box 7: Getting the best loan deal
Shopping around for the best loan deal is a must.
Carefully comparing interest rates before deciding
on the best deal can save the business a lot of money
because they can vary enormously.
Interest rates can be xed or variable. With a xed
rate the interest will remain constant throughout
the repayment period. With a variable rate, it may
uctuate according to changes in the Bank of
England base rate or the interbank lending rate,
The annual percentage rate (APR) is the key gure
to look at when comparing different loans and
overdrafts. This is the rate which will be charged
annually once all fees have been taken into
account. It may be possible to negotiate a lower
interest rate or better terms if so it is important
to get this conrmed in writing.
A nance broker or an accountant may be able
to track down a suitable loan and deal with the
application process. Similarly, having an expert
such as a solicitor to review the loan agreement
would be useful. The small print can be checked
for any hidden costs. As well as interest rates
particular attention should be paid to any set-up
fees and loan terms, such as penalty charges for
early loan repayment.
The credentials of potential lenders can be
checked with the Financial Services Authority
(FSA) or, from 2013, its successor organisations.
Box 8: Community Development Finance
Community Development Finance Institutions
(CDFIs) are independent nancial institutions
which provide micro-nance loans to start-up
companies, individuals and established enterprises.
These loans are offered to borrowers from a specic
disadvantaged geographic area or disadvantaged
group, who are unable to access nance from more
traditional sources, such as banks.
Some CDFIs are also EFG accredited (see Box 9).
08 SME Finance
Box 9: Enterprise Finance Guarantee
The Enterprise Finance Guarantee (EFG) scheme is
a loan guarantee scheme which aims to facilitate
additional lending to viable SMEs. These businesses
will lack the security or proven track record for a
commercial loan. Lenders are also likely to request
personal guarantees.
EFG is available to SMEs with annual turnover of up
to 41m, seeking loans between 1,000 and 1m,
and repayable over a period of 3 months up to 10
Accredited lenders make all the lending decisions
related to EFG there are currently 46 accredited
lenders, including all the main UK high street banks,
Community Development Finance Institutions (see
Box 8) and invoice nance providers.
Equity nance enables the raising of share capital from
external investors in return for handing over a share of
the business. The main providers of equity nance for
SMEs are venture capitalists (VCs), business angels and
for start-ups, friends and family.
Unlike lenders, equity investors do not have rights
to interest or to have their capital repaid by a certain
date. Their return is usually paid in dividend payments
and is dependent on the growth in protability of the
business. Because of the risk to their returns equity
investors expect a higher potential return than on more
secure investments.
Equity nance may be particularly suitable where the
nature of a business deters conventional lenders such
as banks (for example, where a business is rich in
intellectual property but has few tangible assets), or
the business will not generate enough cash to pay loan
interest because it is needed to fund core activities or
Business angels are individuals who make equity
investments in high-growth businesses. Some invest on
their own; some invest as part of a syndicate.
Investments by business angels tend to be smaller than
those offered by VCs and tend to target businesses
in the early stage of development or established
businesses looking to expand. Angels will invest in high-
risk opportunities if there is potential for high returns.
Typically between 10,000 and 2m can be raised from
angels, either alone or in a syndicate.
When angels invest in a business it is not just their
capital they put in most also make their valuable
rst-hand experience available to the business, as well
as their skills and network of contacts. They are likely
to have local knowledge as they usually focus their
investments within a small geographical area. Angels
can often make an investment decision relatively
quickly, without complex assessments.
When VCs invest in shares in a business they are usually
looking for products or services with a unique selling
point, or competitive advantage, with the potential for
high returns. VCs will typically look for proven track
records and so will only rarely invest in pure start-up
businesses. VCs bring their wealth of experience to the
business. They are very unlikely to get involved in the
day-to-day running of the business but will often help
with business strategy. Securing a deal with a VC can be
a long and complex process. A detailed business plan
will need to be prepared. The legal fees incurred in the
deal negotiation will be a cost regardless of whether
investment is ultimately secured.
Private equity (PE) rms look to make equity
investments in established companies with high-growth
potential. Generally, PE rms invest in businesses
which are further developed than those VCs invest in.
The investment is intended as medium to long term.
They typically look to make operational improvements
through active management of their investment over a
period of three to seven years. At the end of this period
they look to sell their shares and exit the investment
completely, having seen the value of their stake grow. A
private equity rm will consider selling the business to
another private equity rm or a trade buyer as well as
the option of publicly listing their shares. 09
Before seeking equity nance there are ve questions to
How much funding is required?
For what is it required?
What skills does the business need?
What level of control needs to be retained?
How long are the funds needed?
The answers to these questions can form the basis
of a comprehensive business plan. This should also
incorporate realistic nancial projections, a detailed
marketing plan and what the investor can expect in
Networking and making use of suitable contacts are
good ways of nding appropriate potential investors.
Corporate nance advisers will have their networks
of contacts in the business angel and venture capital
communities and so engaging an adviser can help
identify an appropriate investor.
Many are private investors, only interested in specic
industry sectors or geographical areas. The following
associations may be helpful for tracking down investors,
networks or networking opportunities:
The UK Business Angels Association.
The British Private Equity and Venture Capital
Association (BVCA).
The European Private Equity and Venture Capital
Association (EVCA).
Chambers of commerce.
Box 10: Equity nance pros and cons
The main advantages of equity nance are:
the funding is committed to the business and its
intended projects with investors only realising
their investment if the business has performed
well through a otation or a sale to other
the right angels or VCs can bring valuable
resource to the business, by way of skills,
experience and contacts, which they can
use to assist in key decision making and the
development of the business strategy;
investors have a direct vested interest in the
success of the business and its strategy, as its
growth and protability will increase the value of
the business and therefore their shareholding; and
investors are often prepared to provide follow-up
funding as the business grows.
The main disadvantages are:
raising equity nance is demanding, costly and
time consuming, and the business may suffer as
time is devoted to the deal;
potential investors will seek background
information, scrutinising past results and forecasts,
as well as the background of the management
the business will be subject to varying degrees of
inuence over its management when faced with
major strategic decisions;
management time will need to be invested in
producing regular information for the investor to
the owners share in the business will be diluted,
although because of the funding this may be a
smaller percentage of a larger business; and
there can be legal and regulatory requirements to
comply with when raising equity nance.
10 SME Finance
Equity funding innovations
Just as with debt innovations, there are innovations in
peer-to-peer equity funding. Crowdfunding creates
a platform which matches companies with would-be
angel investors, sometimes novice angels.
Deal sizes and investment sizes are small. Limited due
diligence is carried out by the platform with it left up to
the investor as to how much due diligence is needed to
satisfy their needs.
In August 2012 the FSA issued a warning that, in its
view, some crowdfunding rms may be handling client
money without FSA permission or authorisation and
therefore may not have adequate protection in place
for investors.
Box 11: Business Angel Co-Investment Fund
The 50m Business Angel Co-Investment Fund makes
initial equity investments of between 100,000 and
1m in early stage SMEs identied as having high
growth potential. Its investments are made alongside
syndicates of business angels, subject to geographical
restrictions. There is an upper limit to the stake it takes
in a business of 49% of any investment round.
The aim of the fund is to boost the quality and quantity
of business angel investing in England, and support
long-term, good quality jobs in high-growth companies
particularly in areas worst affected by public spending
A consortium of private and public bodies with
expertise in business angel investment designed and
established the fund, which is funded with a grant from
the Regional Growth Fund.
Investment decisions are made by the funds
independent investment committee, based upon
detailed proposals put forward by business angel
Box 12: Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) is designed
to help smaller higher risk trading companies raise
nance by offering a range of tax reliefs to investors
who subscribe for new shares in those companies.
Investors can invest up to 1m in qualifying
shares and receive 30% of the cost of the
investment as a relief against income tax.
Capital gains tax liability on disposal of an existing
asset can be deferred if reinvested in EIS shares
within a certain period.
Provided income tax relief is given and the shares
are held for a qualifying period, any prot on
the sale of the shares will be exempt from capital
gains tax.
Providing that income tax relief has been given
and has not been withdrawn, losses arising on a
disposal of the shares may be set against income
tax as an alternative to being relieved against
capital gains tax.
Companies can raise a maximum of 5m in any
12-month period from the governments three
venture capital schemes the EIS, SEIS (see Box 13)
and VCTs (see Box 14).
The EIS is administered by HM Revenue & Customs
At the time of the new shares being issued companies
eligible to receive investment through the EIS must:
not be listed on the London Stock Exchange or
any other recognised stock exchange;
have fewer than 250 full-time equivalent
have assets of no more than 15m; and
be carrying on or preparing to carry on a
qualifying trade as dened by HMRC.
There are further requirements which the company
must meet for a continuous period from the issue of
the shares. 11
Box 13: Seed Enterprise Investment Scheme
The Seed Enterprise Investment Scheme (SEIS) is
designed to help smaller, early-stage companies to raise
equity nance. It complements the EIS (see Box 12).
At the time of the new shares being issued companies
eligible to receive investment through the SEIS must:
not be listed on the London Stock Exchange or
any other recognised stock exchange;
have fewer than 25 full-time equivalent
have assets of no more than 200,000;
must not have had any EIS investment or
investment from a VCT (see Box 14); and
must be carrying on a new qualifying trade or
preparing to do so. A new qualifying trade is one
which has not been carried on for more than two
years (whether by the company or by anyone else
before the company acquired it).
Companies can receive a maximum of 150,000
under the SEIS. Companies can raise a maximum of
5m in any 12-month period from the governments
three venture capital schemes the EIS (see Box 12),
SEIS and VCTs (see Box 14).
The SEIS offers a range of tax reliefs to encourage
individual investors to purchase new shares in
qualifying companies. Shares must be held for at least
three years and income tax relief is available at 50%
of the cost of the shares, up to a maximum annual
investment of 100,000. For 201213 only, there
is an exemption from capital gains tax where gains
on the disposal of an asset are reinvested in shares
qualifying for SEIS income tax relief. Any gain on
disposal of SEIS shares will be exempt from capital
gains tax.
Box 14: Venture Capital Trust Scheme
The Venture Capital Trust (VCT) scheme encourages
individuals to invest in small, unlisted higher-risk
trading companies indirectly through the acquisition
of shares in a VCT. VCTs are similar to investment
trusts and must have HMRC approval.
The maximum investment in VCT shares by any
individual in any year is 200,000, which will qualify
for relief against income tax at a rate of 30% of the
amount invested. Shares must be held for at least ve
years from the date of their issue by the VCT. There
is an exemption for capital gains tax on disposal of
shares in a VCT, and dividends on VCT shares are
exempt from income tax.
VCTs invest their funds into eligible small companies.
Eligible companies can receive both debt and equity
investment from a VCT. At the time the VCT invests
an eligible company must:
not be listed on the London Stock Exchange or
any other recognised stock exchange;
have assets of no more than 15m;
have fewer than 250 full-time equivalent
employees; and
be preparing to carry on, or carrying on, a
qualifying trade as dened by HMRC.
There are further requirements which the company
must meet for a continuous period from the issue of
the shares.
Companies can raise a maximum of 5m in any
12-month period from the governments three
venture capital schemes the EIS (see Box 12), SEIS
(see Box 13) and VCTs.
12 SME Finance
The advantages of buying a property for a business
using a commercial mortgage includes protection
against sudden rent increases. Such interest payments
are also tax deductible.
However most providers of commercial mortgages
would expect the buyer to invest a proportion of their
own money in the property. This deposit could swallow
up cash that could be better deployed elsewhere in the
Also if it proves difcult to sell the premises in the
future, this could hinder any relocation plans. Because
it is such a long-term commitment, the implications
along with the terms of any mortgage agreement
must be carefully considered.
When acquiring assets such as ofce equipment,
company cars or vans, or machinery, a business will
need to decide whether to lease or buy them.
Buying equipment may be advantageous; the asset is
owned and capital allowances can be claimed to offset
against tax. The overall cost should be less than using a
lease or hire purchase agreement.
Disadvantages of buying include the fact that paying
the full cost up front could create a strain on company
cash ow. The business will also be responsible for
maintaining and replacing machinery, the value of
which will depreciate over time.
Leasing can be better for equipment that becomes
outdated quickly, has high maintenance costs or is only
used occasionally. It is also a way for a business to gain
access to a higher standard of equipment which would
otherwise be unaffordable if the business was buying it
With leasing, it is far simpler to budget in terms
of monthly payments and to forecast cash ow
payments are spread over a longer time period to
match income.
A disadvantage of leasing is that capital allowances
cannot be claimed if the lease period is less than a
certain time and leasing arrangements may only be
available to established companies or those prepared
to offer additional security. It can also work out to be
more expensive than buying the assets outright and
the business could be locked into inexible medium-
or long-term agreements which may be difcult to
There are two main types of lease:
A nance lease is a long-term lease over the
expected life of the equipment usually at least
three years. After this period the business can
pay a nominal rent, sell or scrap the equipment.
The leasing company recovers the full cost of
the equipment plus charges over the period
of the lease. The business will be responsible for
maintaining and insuring the leased asset and it
must be shown on the balance sheet as a capital
item. Capital allowances can be claimed if the asset
has been bought outright for leases over seven years
long. In some cases this may be as short as ve.
An operating lease, also called contract hire, is a
good idea if a business will not need the equipment
for its entire working life. The leasing company
will take it back at the end of the lease and is
responsible for maintenance. The business does not
have to show the asset on its balance sheet.
Debt factoring or invoice discounting can be used to
raise capital by raising money against unpaid invoices.
These sources of funding are collectively known as
asset-based lending (ABL). Factoring is only available
to businesses that sell products or services on credit to
other businesses. It is potentially useful to businesses
where turnover is growing by increasing cash ow.
Debt factoring involves selling invoices to a factor
which pays an advance typically 85% on all
approved invoices. The factor will then work on
behalf of the business managing the sales ledger
and collecting money owed by customers. Once
a customer settles an invoice with the factor, the
factor will release the remaining balance less their
In recourse factoring, the factor does not risk bad
debts and can reclaim the money advanced if a
customer does not pay. 13
Invoice discounting is a similar way of drawing
money against invoices, but the business retains
control over the administration of the sales ledger.
Discounters have strict requirements regarding the
quality of sales ledger systems and procedures.
Some factoring companies also offer export
factoring, which is nance for international
sales. This typically involves them working with
an agent overseas to collect payments in the
country to which the business is exporting. Careful
consideration is advised if given a choice of which
country to be paid in. It may also be worthwhile
investing in protection against uctuations in the
exchange rate.
Supplier nance or, as it is sometimes called,
reverse factoring is an option for businesses that
regularly supply a far larger organisation. Once the
buyer has approved the invoice, the payment less
a fee is made immediately (and ahead of terms)
by the nancier. This allows the supplier to receive
quick payment while allowing the buyer to repay
the nancier according to the original contract
Both factoring and discounting are long-term
agreements that can have an effect on the
management and development of a business. It is
important to get advice on the legal, nancial and tax
implications before entering into any agreement.
Particular attention should be paid to the notice period
required to end the factoring or discounting contract.
Most companies require three months notice, but
some notice periods can be as long as a year. The Asset
Based Finance Association in the UK is the member
organisation for asset-based lenders. Pros and cons of
ABL are listed in Box 15.
Mezzanine nance is a form of debt which shares
the characteristics of equity. Mezzanine ranks below
senior debt. Mezzanine is a exible product that can
be tailored to the risk and repayment prole of the
business or transaction. It is typically used to nance the
expansion of existing companies. Mezzanine nancing
is basically debt capital that gives the lender the rights
to convert to an ownership or equity interest in the
company if the loan is not paid back in time and in full.
Mezzanine nance can be used in product
development, penetration of new markets,
infrastructure investments or strategic merger and
acquisition plans. As it can be structured with low cash
dividends, this form of nance is particularly suited
to high-growth companies where more senior debt
may be less appropriate as mezzanine can reduce
the cash burden in their early stages. However, the
understanding and take-up of mezzanine is generally
low in the UK, and low among SMEs.
Box 15: Pros and cons of asset-based lending
Should generate more cash against assets than
any other form of lending.
Attractive to growth companies as funding
tracks sales and so avoids the need to constantly
renegotiate nancing lines.
Costly administration processes such as credit
control can be outsourced.
Funding is contingent on inherent strength of
sales rather the state of the balance sheet, making
it available even to loss-making businesses.
Personal guarantees and other forms of additional
security are rarely required.
Some companies and advisers have a limited
understanding of the mechanics of ABL, resulting
in reticence in accessing it.
Some industry sectors notably construction
can attract a signicant risk premium.
Companies with shrinking order books would see
their ABL funding diminish.
Putting the facility in place can be difcult.
14 SME Finance
Preventing late payments
In most circumstances an SME will have to produce and
deliver goods or services before receiving payment.
An effective invoicing system and clear payment terms
is key to a healthy cash ow. In addition to the amount
payable by the customer, key payment terms should
cover: costs; delivery arrangements; payment terms;
credit limits; credit periods (which the law will set at
30 days if not specied); the right to charge interest on
late payments; and the right to claim compensation for
debt recovery costs.
A solicitor will be able to offer additional advice on
drawing up terms and conditions. Preventing late
payment is preferable to the time and effort involved
in recovering debts. If recovering a late payment, the
business has a statutory right (but no obligation) under
the Late Payment of Commercial Debts (Interest) Act
1998 to claim interest on it. In reality, legal action to
recover late payment would only be taken as a last
Managing your intangible assets
You should make sure you keep track of, and protect,
your intangible assets. These have real value, especially
as your business grows. You should develop a strategy
for managing these assets to maximise their value.
Having this in place can help demonstrate to a lender
that you have thought about the longer-term success
of your business, have identied potential ways to
maximise revenue and have minimised risks. Your
business plan should identify your intangible assets and
set out your strategy for managing them. Intangible
assets include:
Company names and trademarks. A trademark can
help build your brand so you stand out in a market,
and develop customer loyalty and goodwill.
You should consider copyright in the material you
produce, for example your website. If you are using
other peoples material, or getting a third party to
develop your website, they will own copyright in
that material you should make sure you have the
right permissions from them to minimise any risk of
disputes arising later.
If you develop new technology you may wish to
patent this, or alternatively you may wish to keep
things within your business condential as trade
secrets. If this is the case, have your staff signed
non-disclosure agreements?
The Intellectual Property Ofce can point you to sources
of help in this area including the IP Healthcheck under
the IP for Business section on its website.
The Technology Strategy Board delivers a number of
business research and development (R&D) and innovation
schemes to support technology-led innovation in SMEs.
Previously known as Grant for Research and
Development, this scheme offers funding to SMEs to
engage in R&D projects from which successful new
products, processes and services could emerge. Three
types of grant are available:
Proof of market up to 25,000 to assess the
commercial viability of the project.
Proof of concept up to 100,000 to explore the
technical feasibility and the commercial potential of
a new technology, product or process.
Development of prototype up to 250,000
to develop a technologically innovative product,
service or process.
Pre start-ups, start-ups, and small and medium-sized
businesses from all sectors may apply.
Innovation Vouchers
The Innovation Vouchers programme allows SMEs
to obtain help from a range of expert suppliers
universities, further education colleges, research and
technology organisations, technical consultancies
and Catapult centres, design advisers and intellectual
property advisers to develop new ideas and potential
new commercial products.
Small Business Research Initiative
SBRI enables government bodies to connect with
innovative businesses, nding novel solutions to specic
public sector challenges and needs. SBRI uses the power
of government procurement to connect, engage and
nd solutions, supporting projects through the stages 15
of feasibility and prototyping which are typically hard to
fund. It offers an excellent opportunity for businesses,
especially early-stage companies, to develop and
demonstrate technology, supported by an intelligent
lead customer.
Knowledge Transfer Partnerships
KTPs enable companies to obtain knowledge,
technology or skills which they consider to be of
strategic competitive importance to the business, from
the further/higher education sector or from a research
and technology organisation. The knowledge sought
is embedded into the company through a project
or projects undertaken by a good quality individual
recruited for the purpose to work in the company.
UK Export Finance (UKEF) is a government department
dedicated to providing support to UK exporters. It
works with UK banks to provide exporters with trade
nance solutions to help them both win and deliver
specic export contracts. Its range of products can
provide support to exporters of any size. It has a range
of short-term products, particularly aimed at SMEs.
UKEF can provide support by:
guaranteeing bank loans to overseas buyers to
nance the purchase of goods and services from UK
insuring UK exporters against non-payment by their
overseas buyers; and
sharing credit risks with banks in order to help
exporters raise contract bonds, access working
capital nance and secure conrmations of letters of
Free advice for UK exporters is available through UKEFs
network of Export Finance Advisors who work directly
with exporters to support companies trying to access
trade nance solutions whether they are from the
private sector or government.
SME R&D tax credits
Investing in R&D and innovation is critical for many
companies so that they can remain competitive and
grow by developing new technologies, products and
services. The government encourages this by providing
tax relief and in some cases payable credit worth the
equivalent of up to about 30% of R&D expenditure.
Essentially, any company with under 500 employees
undertaking R&D seeking an advance in science or
technology and which is liable to pay corporation tax
can claim and HMRC specialist units provide free advice
about how to do this.
Business in You
Business in You supports starting and growing businesses
by connecting entrepreneurs with organisations that
provide information on nance, mentoring, exporting,
employment, and other relevant topics. Through sharing
the stories of real-life companies, the campaign inspires
people to start their own business and helps others to
access the essential guidance and support to make them
even more successful.
This guideline is an updated version of a previous
publication produced by Business Link in collaboration
with ICAEW. Since the guideline was last published,
Business Link has been replaced by a new on-line
GOV.UK makes it simpler, clearer and faster for
businesses to access high quality, detailed and impartial
guidance. Its a single website that contains information
for the public as well as guidance for specialists and
professionals conducting business in the UK.
You can get information about:
setting up a business;
trademarks, copyright and intellectual property;
licences and licence applications;
corporation tax and capital allowances;
running a limited company;
business premises and business rates, and more.
Find out more at
ICAEW is a professional membership organisation, supporting over 138,000
chartered accountants around the world. Through our technical knowledge,
skills and expertise, we provide insight and leadership to the global
accountancy and nance profession.
Our members provide nancial knowledge and guidance based on the
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Because of us, people can do business with confidence.
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ICAEW 2012 TECPLN11488 11/12 ICAEW Corporate Finance Faculty
The Corporate Finance Faculty is the largest network of professionals involved in corporate
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Its membership is drawn from major professional services groups, specialist advisory rms,
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The faculty initiated the development of the rst international Corporate Finance
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