With availability and access to debt funding for SMEs having increased considerably in the last few years, there is increased choice for businesses in their funding options, whether to support working capital requirements, expand or invest.

Choose the right lender

If you do not already have an existing banking relationship, it can be difficult choosing the right lender to fund your SME, depending on your business needs and priorities. Traditional banks and finance companies are tried and tested. Challenger banks, peer-to-peer lenders, private finance companies, asset finance houses, and invoice financiers can all offer flexible short-term debt funding for your business. Many offer faster turnaround times in terms of the time period between offer acceptance and transaction completion than more traditional options.

With many of the UK’s 5.7m SMEs embracing digital platforms in the operation of their businesses, it might also be worth considering digital-only banks which offer similarly efficient services via online platforms.

Employ a broker

A broker can be incredibly useful in showing what’s available and the best deal for a particular SME’s circumstances. If traditional bank debt funding is not easily available, then a broker can highlight the wider options that fit the transaction and can offer an important introduction facility. A broker can also assist with review and presentation of your business plan.

Create a business plan

Key to obtaining funding is having a robust and well-organised business plan. You need to accurately demonstrate the purpose of the loan and the projected rate of return your SME hopes to achieve from taking on the debt. You will also need to demonstrate your ability to afford loan repayments on top of all current and future business expenditure of your SME, a clear credit history, and historical evidence of any debts being paid off.

Review your term sheet

Prior to obtaining funding, a prospective lender will provide you with heads of terms, also known as a term sheet. This document will detail the loan amount, duration, interest rates, and fees applicable to your loan. Funders know that generic products are not suitable for most SMEs and so they tailor products accordingly. As such, you should review this document carefully prior to signifying your agreement to the terms.

It may be advisable for your solicitor to review the heads of terms on your behalf prior to signing. This can highlight those terms that are market standard or those which could be particularly onerous for your business.

Decide what you can offer as collateral

You should identify potential assets that you could offer your funder as collateral for your business loan. Different lenders may have different collateral requirements, depending on a range of factors. In addition to traditional security over land, other options can include equity sacrifice or control over invoices (known as ‘factoring’).

In a worst-case scenario, the funder may enforce its security and sell assets if the borrower SME cannot repay sums owed when due. Your solicitor should be able to advise you on the standard terms of security documents. So you are aware of the legal and practical implications both before and after enforcement.

Take legal advice

Lenders can sometimes require that you offer a personal guarantee in support of their loan offer. This often means you must obtain legal advice in relation to the guarantee from independent solicitors. In the past, some guarantors have claimed that they were unaware of the implications of signing a guarantee.

Because of this, lenders are understandably keen to ensure that all appropriate advice has been taken. You should therefore factor in the additional costs of procuring legal advice and decide who will be covering these costs as part of the whole transaction.

It is also advisable to have this legal meeting organised well in advance to avoid any delays to drawdown of funds.

Have any historic security removed

If you have obtained funding before, check Companies House and the Land Registry for historic security and take steps with former creditors to have such security removed. Any new provider of funding to your SME will require that all fixed and floating charges, as well as guarantees, have been fully released so that your business and assets are free from any potential liabilities to another creditor. Sorting out the release of old security can often take several weeks to be processed and can add significant delays to your ability to obtain funding, so it’s always best to raise this with your solicitors at the outset of a transaction to ensure you have your (Companies) house in order.

Rebecca Dury and Jonathan Hyde are corporate solicitors at Ashfords

Further reading

Mezzanine finance – how to use senior debt to fund your scale-up