Sources of business finance for the COVID economy

Summary:

• COVID-19 has had a detrimental impact on SMEs across the UK and has also disrupted the business finance sector.

• We explain what the difference is between external and internal sources of finance and how they’re affected by COVID.

• SME Loans have looked at sources of business finance available to SMEs, Startups, Limited Companies, and Sole Traders in the COVID economy.

• We’ve condensed a number of business finance solutions provided by the government and from alternative business finance sources to help survive the coronavirus.

• What are the Sources of Finance?
• Government Sources of Finance during COVID-19
• Alternative Sources of Finance during COVID-19
• Other sources of business finance to consider during COVID-19
• FAQs

COVID-19 has decimated the economy and deeply affected businesses across the UK. Despite intervention from the government to try and prevent complete economic collapse by providing various business schemes, many small and medium-sized businesses have still struggled to find sources of business finance during the crisis.

This is partly due to how the virus also disrupted the business finance sector. Even though there was a substantial increase in demand for business finance, many lenders were unwilling to lend money due to the risk involved. SME Loans saw a 370% increase in users looking for startup business finance from Q2 to Q3.

The introduction of the Coronavirus Business Interruption Loan Scheme (CBILS) has encouraged lenders to continue lending, as loans are backed by the government on a partial guarantee. This is considered a positive step for those looking for business finance.

As lockdown begins to ease, it will be important for business owners to be aware of the different sources of finance available to businesses during the COVID economy. We have put together a comprehensive list of alternative finance options to consider if your business is struggling due to COVID-19.

What are the Sources of Finance?

The sources of business finance can be split into three main categories, internal, external and personal sources of finance. Together they include forms of finance such as retained profits, share capital, business bank loans, unsecured business loans, merchant cash advance, credit card pooling, savings and investments.

What are the internal sources of finance?

Internal sources of finance are funds that are found within the business, such as retained profits or share capital. It’s often used as a way to help generate expansion or to free up cash in the business. Sourcing funding internally may require the company to have already been trading for a period of time.

If your SME has suffered as a result of COVID, it could be the case that internal sources of financing are not readily available to you. However, many startups have negotiated their workspace rent to help reduce payments and free up money. So it may be an option to consider.

What are the external sources of business finance?

External sources of finance are funding that exists outside of the company, such as borrowing money from banks or creditors. Typical forms of external business finance include business overdrafts, unsecured business loans, Government grants, merchant cash advances, venture capital, hire purchase, and more.

Many SMEs in this current crisis will likely be looking at external sources of business finance to help fund their business needs, especially from government and alternative sources of finance such as lenders.

Government sources of finance during COVID-19

Before exploring alternative sources of finance, it is a smart idea to understand what funding the government has to offer for SMEs as well as self-employed workers.

What sources of finance are being provided by the government during COVID-19?

Currently, the government is offering grants, loans and tax relief to help support businesses who have been directly affected as a result of COVID-19. This includes financial support for the self-employed, small and medium-sized businesses, large businesses and restaurants.

COVID-19 Support for SMEs:

• Business Interruption Loans (CBILS) - These loans allow SMEs to borrow up to £5m as long as you can prove that your business would be viable if not for the pandemic and has been adversely affected as a result of COVID-19. The length of the loan varies from 3 - 6 years. The government is currently working with 50 different lenders to provide these loans so that you can apply for CBILS directly via a lender’s website.
• Bounce Back Loan - The bounce back loan allows businesses to borrow between £2,000 and up to 25% of their turnover, capped at £50,000. The bounce back loan is 100% guaranteed by the government, and no fees or interest have to be paid in the first 12 months. You are ineligible for this loan if your business was established after 1st March 2020.
• Future Fund Loan - These loans range from £125k - £5m, but require private investors to match the loan amount. The government suggests that this loan is useful for businesses that rely on equity investment. It’s also a viable option for businesses that cannot access other government support as they are ‘pre-revenue or pre-profit’.

COVID-19 Support for Self Employed workers:

• Self-Employment Income Support Scheme - This is a grant for self-employed workers whose business has been deeply affected by the Coronavirus after the 14th July 2020. If you are eligible for the grant, you can continue work. Although it does not need to be repaid, it is still subject to Income Tax and self-employed National Insurance.

Alternative sources of finance during COVID-19

If you are not eligible for government funding or if government funding does not cover the full expenses of your business, then you may want to consider alternative finance methods instead.

Figure out your business credit score

33% of startup businesses in the UK believe that they’re not eligible for the Coronavirus Business Interruption Loan Scheme, according to Sifted.

If you share this concern, then the best place to start is by checking the credit score of your business. By checking your business’ credit history, it will give you greater clarity to where your business stands and gives you a better understanding of what finance is available.

How can I check my business’ credit score?

You can check your business’ credit score by using Credit Passport for free. It has recently implemented tools to help with COVID-19 such as a liquidity shortfall calculator and a pre-COVID-19 report to help prove eligibility for finance. It directly connects you to 134 business lenders, including those in the CBILS scheme.

What finance is available for my business?

Below we have listed some of the top products for different business types to help with sourcing finance during the pandemic.

Startups and companies that have not started trading

Startup funding can be challenging to acquire normally, let alone during an international crisis. That’s why many startups are increasingly worried about their prospects, meaning finance is increasingly more important than it ever has been.

Nonetheless, there are startup business loan sources currently being provided by brokers and lenders. These products also stretch to businesses that have not started trading.

• Transmit

  Transmit Startups is a lender that specialises in providing loans for startup businesses. They offer low interest unsecured personal loans up to £25k, on the condition that it is used for business purposes. Repayment ranges from 1-5 years, and no fees are charged if you decide to repay early.

  They also offer free business planning help and post-loan advice to help ensure that you make the most of the money you borrow. Also, having both a short term and long term repayment plan can help as currently it is unclear how long this will last.

What are the requirements for a startup loan?

Requirements for a startup loan differ from lender to lender. Generally, most lenders require a business to have been trading between 0-24 months if they are explicitly applying for startup finance. You will also have to be over the age of 18 to be accepted.

You will likely have to provide information about your startup business, such as turnover, expenses, information about the directors, and personal information. However, as requirements vary between lenders, it is a good idea to check before applying for a loan. That way, you will be prepared, which in turn will make the process smoother.

Limited Company Loans

A limited company is a separate entity from its owners. In the past, it has been considered easier for limited companies to seek investment. However, COVID-19 has made finding business finance more difficult, despite interest for ‘business loans’ increasing by 41% from April to May according to Google Trends.

If your business is turning over £10k a month and has been trading for more than three months, you could try applying for an unsecured business loan. You can do this either by going directly to a lender or by using a credit broker.

SME Loans

SME Loans is a credit broker which aims to help limited companies and SMEs receive the funding that they need. We work with a panel of top UK lenders who understand how COVID-19 has affected business and can offer a variety of financial products.

An unsecured business loan from an online credit broker can be a useful alternative if unable to qualify for government grants or from traditional lenders such as high street banks.

What if I can’t get a business loan?

If you can’t get a business loan, you can always try applying for a business credit card, such as Capital on Tap. It can give you quick access to the funding your business needs, and can also help you build a credit profile should you meet your repayments on time.

The positive of building your credit profile is that it can help you apply for business loans in the future, and it shows you have a track record of making repayments on time. This could be useful for businesses who need to prove their creditworthiness to apply for more finance in the future.

Capital on Tap

Capital on Tap is a business credit card that offers credit up to £50,000 and interest rates as low as 9.9%. They are currently accredited under CBILS and can now offer credit from £50,001-£100k via their revolving credit facility, which is useful for businesses currently affected by COVID.

Consider looking for professional advice

If you’ve found yourself struggling with finance during COVID, it might be an idea to hire a professional to help with your business’ finances, such as a financial adviser. Hiring a financial advisor may seem daunting, but luckily there are websites that help make the process easier.

Unbiased

Unbiased is a company that helps connect small businesses with over 26,000 regulated independent advisors. They work with accountants and financial advisors across the UK to help small businesses with their finances. You can choose to browse the selection to find a financial advisor within your area or you can let Unbiased match a financial advisor for you.

The financial advisors that Unbiased use are all regulated by the relevant bodies, which ensures that you can trust that the advice you receive is strictly sound. The advisers that Unibiased provide are well suited for small businesses and sole traders who are looking for some help when it comes to managing their finances.

Other sources of business finance to consider during COVID-19

Research and Development

If your business conducts research and development, then you may be eligible to claim tax relief on your R&D activity. This is an extra source of income that many businesses do not fully utilise but could be a wanted financial boost in the current circumstances.

• GovGrant

  GovGrant helps companies that undertake R&D to claim up to 33% in tax relief, with the average claim worth £53,713 from HMRC. They do all the work for you and have an HMRC enquiry rate of less than 0.2% compared to the industry-wide rate of 14%.

  GovGrant can be used by startups, growing businesses and businesses that are running regularly. This could be useful for companies struggling to get a loan as well as for startups struggling to find finance.

Invoice Finance

Relying upon invoices to be paid on time during the pandemic is difficult. With many customers and clients being affected by the lockdown, many invoices have failed to be paid on time. According to Fortune, the amount of money that is overdue by 10 days or more has grown 25% in the UK. This is a big concern for sole traders and limited companies who rely on invoices to keep their businesses running.

• Government Help

  If you are concerned you can always try checking the payment practices of a company you’re owed money by. This government run service allows you to check the average time it took for large companies to pay invoices and the proportion of payments it does not pay on time. This allows you to see what companies adhere by the Prompt Payment Code.

  In addition, the government is currently offering guidance on invoice payments that are either late or failed during COVID-19.

• Penny

  Penny is an invoice factoring service that offers instant cash advances on unpaid invoices up to £100,000. It helps fix late repayments and requires no credit check or minimum trading time to be eligible to use Penny. Penny also takes care of all of the administration.

  In addition, you are not required to provide turnover or business forecasts, which makes it a straightforward way to receive the money you’re owed instantly.

Final Words

The COVID economy is likely to be fraught with slow growth, instability, and further uncertainty for businesses across the UK and internationally. However, restrictions are being eased which offers hope for SMEs as they begin trading again after a long hiatus. Furthermore, by understanding what financial options are available to your business it can give you an edge and may even provide a vital lifeline for keeping your business afloat.