For small businesses at any stage, cashflow management can make or break the business. To help, many business owners will use finance to support liquidity and growth at critical stages of their journey.

Access to funding is often a key component in transforming an idea into a reality, particularly in sectors where initial start-up costs may be high. Businesses differ vastly from one another across industry, size, ambition, trading conditions and more, which can make finding the right funding for your business and circumstance both challenging and critical.

The different stages of a small business

To ascertain what business funding options are suitable for you, and where you can get them from, it’s important to identify which stage your small business is at. We have identified four key stages that businesses tend to go through:

Start-up: this is the first stage, where the main priority is getting the business off the ground

Establish: in this stage, the owners refine their business plan learning from early-stage successes and failures to prepare the business for growth

Scale-up: this stage is all about expanding the business through acquiring new customers which often means investing in things that will help the business grow

Exit: once the business reaches maturity, often the owners will look to exit. We tend to see small businesses being sold, merged, or acquired

What are the funding options available at each stage?

Start-ups

Start-ups will be looking for that initial cash injection to set up and get their business off the ground. These initial costs come in many forms, whether it be the cost of research, rentals, media or investing in equipment.

Banks and lenders are limited as to how much monetary support they can provide at this stage due to the lack of trading history which forms a key part of their decision process. As such, initial funding will be in the form of equity or shareholder loans. These tend to come from the business owner themselves; often through savings or perhaps borrowings in a personal capacity such as re-mortgaging their home. External funds can also be obtained, typically through raising seed capital most often from friends, family, or angel investors.

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Establish

The next stage is the establish phase, where businesses have completed their set up activities, begin to trade in their marketplaces and evolve their proposition.

During this period, business will start to incur new costs associated with the supply of their goods and services, often needing to settle these bills ahead of collecting cash from their sales activity. Such costs might include equipment, technology, materials, or stock.

If the funding raised during the start-up phase is no longer available or can’t be topped up, additional funding will be required to bridge this gap. Unsecured borrowing products such as a business overdraft, unsecured loan (often available between £10,000 and £100,000) or credit card may be possible, although can be limited due to the short trading history.

Secured borrowing is a more likely option. Factoring or discounting invoices with a lender to receive a percentage of your client invoices much sooner than if you had to wait for them to be settled is becoming commonplace.

In addition, it may be possible to lease finance equipment, spreading the cost of the purchase over several years. It is likely that the owners of the business will be asked to personally guarantee any funding at this stage. These funding products bring the cashflow forward and can enable you to reinvest and in the longer term grow your business faster. Whilst this does add some complexity into your finance function in terms of creating and maintaining strong invoice controls, it is growing in popularity.

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Scale-up

After this, small businesses enter the scale-up stage. This phase is where the business feels confident in its foundations and market proposition and money is needed to invest for expansion and scale.

These costs can include things like opening additional sites, investing in new technology, expanding production capacity, growing the salesforce or seeking out acquisitions to fast track growth.

As a scale-up, more financing options become available as the company begins to pick up a steady and more consistent flow of business and can demonstrate a trading history and growth trajectory to a lender or investor. Early-stage investors such as venture capital trusts or regional growth funds are viable options for equity investment which will dilute owners’ shareholdings but not place additional financial obligations on the business. Commercial loans are a popular debt option as they are flexible and can be structured to help fund a basket of things needed to grow a small business, such as operational infrastructure, commercial property investment, and even recruitment. Often, a combination of debt and equity works well at this stage to balance founder dilution and financial strain on the business.

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Exit

The fourth and final stage is exit. This is where businesses reach maturity, and the owners often look to exit through a sale of their shares. Selling a business can come in many forms with founders seeking to exit in full, or in part.

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Two popular options are selling the shares to a private equity investor who has the expertise and capital to take the business to the next level, or selling shares into an employee ownership trust for the benefit of the staff. In both scenarios, the business is typically able to borrow a material percentage of purchase price, reducing the amount of equity required. High growth companies may also choose to go public, particularly on the Alternative Investment Market (AIM) as it caters to smaller businesses and allows them greater access to capital from the public market.

High street banks vs specialist lenders

It’s important to consider the types of finance available, but it’s equally important to think about the problem you are trying to solve, and whether flexibility or cost are the most important factors to you. Most high street banks will offer a variety of products and services including variable rate or fixed rate loans, business accounts and even offer additional benefits such as access to business advice or support with international expansion. However, these banks also tend to have a strict criteria which can make it difficult for small business owners to get access to the finance they need when they may sit outside of the standard risk model, even if they have a really interesting story to tell.

This is where exploring finance facilities from a specialist lender can add value. Specialist lenders tend to be very flexible in the way in which they can provide facilities, working with a business to really understand its needs and providing a tailored solution that is right for them. Their relationship managers will typically have far less clients than a high street bank counterpart, which allows them to spend more time understanding the ins and outs of a specific business. This means complex cases can benefit from the increased attention, making it much easier to secure the right type of finance from these lenders and importantly ensure this support continues through the life of the loan.

The importance of understanding your finances

No matter which type of finance you choose or where you get it from, understanding the financial options available can help you to optimise the way in which you manage your cashflow, ensuring that you can continue to grow your business.

One thing we see in a lot of owner-operated businesses is that owners are talented in their specific fields, but may not be as well versed in finance, which can hinder their businesses growth. We strongly recommend having a good, clear dialogue with your accountant or a commercial finance broker to ensure financial efficiency and stop you from spending any more than you need to. It’s also worth working with lenders who understand your business as they’ll be able to present options to you at each stage based on what is best suited to your situation and aspirations.

There is a wealth of business funding options out there for start-ups and SMEs, so it’s important to consider them all before picking the one that caters to your circumstances and the potential of your business.

Neil Rudge is the head of enterprise at Shawbrook Bank, a specialist provider of finance to SME and real estate businesses.

Further reading:

Funding rounds: A Growth Business guide – From pre-seed stage to Series C and beyond, here’s what the fundraising jargon means and what to expect for each round

What are potential sources of funding for your business? – Matthew Byatt takes a brief look at several sources of funding for your business

Fifteen ways to raise £1 million in business finance – Expansion requires financial muscle, be it for operations, research and development or an acquisition. Marc Barber looks at 15 ways to raise finance