SMEs – small and medium-sized enterprises – are the lifeblood of the UK economy. They support local communities, drive innovation, and collectively play a critical role in national economic and employment growth.
They’re able to do all this largely because, unlike larger companies, smaller businesses can adapt fast to market changes. And lower overheads give them a competitive advantage.
However, a common issue among SMEs is maintaining financial stability. Adequate working capital and cash flow are critical to achieve full potential through growth and increased profitability.
This is why many SMEs take advantage of external financing in the form of business loans, which provide a flexible funding tool that can be used across multiple, vital areas of a business.
Flexibility isn’t the only benefit of a business loan, as we’ll discover in this post.
How can SMEs use business loans?
SMEs use business loans to keep operations running smoothly with a source of money to cover day-to-day expenses while maintaining the capability of growth.
For instance, SMEs can benefit from business loans to spread the cost of:
- Tax and VAT bills.
- New office equipment.
- Acquiring another business.
Other types of loans common among SMEs are:
- Working capital loans.
- Asset financing for refurbishment or new vehicles.
Tax funding for businesses
Tax loans allow SMEs, including sole traders, to break down tax bill payments into monthly instalments.
Besides streamlining cash flow, this also helps businesses to avoid penalties for late tax payments.
Tax loans for businesses come in the form of:
- Corporation tax funding. Loans to pay corporation tax enable limited companies to maintain growth and competitiveness by consolidating spending power as they meet their tax obligations.
- Self-assessment tax loans. Tax loans help to overcome financial challenges faced by self-employed sole traders by making it easier to pay January or July tax bills after annual self-assessment.
- VAT loans. VAT funding means businesses can spread the cost of quarterly value-added tax bills in order to safeguard working capital for more investment in new developments or assets.
Loans for office equipment
A high standard of office equipment, including office furniture, helps to motivate staff and impress visiting clients.
However, quality office equipment doesn’t come cheap. That’s why many businesses look for equipment loans – a more affordable solution in the long term than renting or hire purchase.
Office equipment financing allows businesses to acquire a broad range of equipment, such as:
- Office desks and chairs.
- Phone systems.
- Printers, photocopiers and scanners.
- IT hardware and software.
- Data storage and retrieval systems.
- Filing cabinets.
- Water coolers.
Spreading the cost of office equipment frees up cash flow to meet ongoing expenses as the new equipment helps you grow your business.
Business acquisition loans
Acquiring another business empowers companies to increase revenue by venturing into new markets or increasing operations and market share.
An acquisition loan can allow your businesses to expand like this without jeopardising capital budget commitments or cash flow.
A key advantage of these loans is that you get immediate acquisition funding without having to spend time generating the necessary capital to buy the target business.
This means you can go ahead and reap the benefits of a business acquisition much sooner, and gain advantages such as:
- Expanding areas of expertise – the target business may have skills your business currently lacks.
- Diversification of services or products.
- Lowering production costs.
- Access to assets from the target business to help development.
Working capital loans
Long-term works in progress by SMEs often result in a cash flow bottleneck that drains working capital.
Working capital finance – also known as work-in-progress (WIP) loans or invoice finance –addresses this issue by generating revenue against unpaid invoices.
This vital cash injection to unlock capital and improve cash flow avoids financial difficulties and keeps the business ticking over.
Businesses that benefit from working capital loans include accountants, law firms, agencies, and practically any other invoicing-based SME with finance tied up due to ongoing works in progress.
Asset financing allows businesses to spread the cost of major purchases in order to avoid straining working capital or disrupting cash flow. SMEs often need this type of funding to refurbish premises or buy new vehicles.
From complete renovation of a commercial property to an office redesign, refurbishment of business premises is a major, costly project, with different contractors requiring payments on varying timescales.
Refurbishment funding enables a business to make timely payments to third parties involved in the project while smoothing out cash flow.
Many types of SMEs get loans to finance acquisition of a large range of vehicles, from cars and vans to fleet buses and HGVs.
If you’re a director of a limited company, you can also buy a car through your business and claim capital allowances to get tax relief on the purchase.
Sources of funding for SMEs
The wide variety of loans available to SMEs allows companies in this crucial business sector to expand capabilities for growth.
They’re able to go ahead and make major purchases that are an investment in their future, while protecting working capital and cash flow.
The problem is that getting some types of business loans from a high street bank may be difficult or involve a drawn-out process while opportunities go begging.
This is why SMEs who don’t want to miss out on the benefits of business loans often turn to credit brokers regulated by the Financial Conduct Authority and with direct access to commercial loan providers.
Benefits of using a commercial finance broker
The expertise and experience of independent commercial finance brokers and the contacts they have enables them to find finance packages that allow SMEs to gain financial control and flexibility.
If you’re looking for a business loan, a broker saves you time and effort in finding the right lender, and they’ll get the best rate by comparing an extensive network of loan companies.
Looking forward, a reputable broker will build a long-term relationship with you, with a clear understanding of your business and its financing needs.