A Complete Guide to Managing Small Business Finances

Managing and Tracking Small Business CashflowManaging small business finances begins with understanding the fundamentals of bookkeeping. It is essential for business owners to be able to record income, expenses, and profits so that they can make sure their company is running smoothly. Establishing good habits for cash flow management, setting up a budget and tracking income are also important steps when it comes to successfully managing small business finances.

Starting a new business can be an exciting and rewarding experience, but it can also be challenging. In the UK alone, roughly 400,000 new businesses are created each year, but unfortunately, only about two-thirds of these businesses are still in operation after three years and just half remain after five years. This high failure rate is often due to a lack of financial resources, rather than a lack of customers or poor quality products or services.

As a small business owner, it is important to make smart financial decisions from the very beginning. Even if you have experience running a business or are financially savvy, managing the finances of a small business can be overwhelming, especially for those who are new to the process. That’s why it’s helpful to have resources and guidance to help you navigate the early stages and the financial tasks you’ll encounter.

This guide to managing small business finance is specifically designed for those with limited experience in business finance. It aims to provide helpful tips and information for those who have a business idea and are ready to turn it into a reality, but need some assistance in managing their finances effectively.

Table of Contents

Part 1: Managing and Tracking Small Business Cashflow

Cashflow management is an important component of any successful business venture. It requires keeping meticulous records, predicting and preparing for expected expenses, and having a clear understanding of the money that’s entering and leaving your business.

By properly tracking cashflow, you will have greater insight into challenges and opportunities within your organization, enabling you to adjust as needed and take advantage of new opportunities. Taking control of your cashflow gives you the basis for making more informed and strategic decisions that can help drive growth.

Positive Cashflow

For any business, positive cash flow is an essential requirement. It ensures that there are sufficient funds to cover daily operations, pay off debt and most importantly reinvest in growth. Unfettered liquidity gives businesses increased ability to sustain themselves going forward in uncertain times while allowing them to capitalise on promising opportunities when they arise.

As the adage goes ‘cash is king’ – having the necessary funds available could be the difference between success and failure for those riding the volatile wave of entrepreneurship. As such it is of utmost importance for business owners to have a strict focus on proper budgeting, debt management and generating healthy income sources as part of their overall strategy for managing potential pitfalls.

Negative Cashflow

No business moves in a forward trajectory all the time, and every entrepreneur will experience times of turmoil including ‘negative cashflow’. This situation can arise for several reasons; from investing in a new piece of machinery or equipment to having to wait for an overdue payment from a customer. It is important that you know how to manage this situation, as it can be easy to become overwhelmed and lose motivation during times like this.

Letting go of certain processes or services may be necessary during these periods, whilst understanding your debtors and creditors can also help minimise any losses. Ensuring you come up with contingency plans and restructuring strategies could also save valuable time and resources

Why is Cashflow so Important for Small Businesses?

Cashflow is the movement of money into and out of a business, and it is essential for the survival and success of any small business. Without proper cashflow management, a business may struggle to meet its financial obligations and may ultimately fail. Here are three reasons why cashflow is so important for small businesses:

  1. Paying bills and meeting financial obligations: Proper cashflow management allows a small business to pay its bills on time, including rent, utilities, and employee salaries. Late payment of bills can lead to penalties and damage a business’s reputation, whereas timely payment can help establish a positive relationship with suppliers and creditors.
  2. Maintaining a healthy business: Good cashflow allows a small business to invest in its growth and development. This can include purchasing inventory, hiring new employees, and upgrading equipment. Without sufficient cashflow, a business may struggle to take advantage of new opportunities and may not have the resources to overcome challenges.
  3. Managing risk: Cashflow also plays a role in managing risk. A business with healthy cashflow is better equipped to weather unexpected expenses or downturns in the market. On the other hand, a business with poor cashflow may be at a higher risk of bankruptcy or insolvency. It is important for small businesses to continuously monitor and manage their cashflow to ensure the long-term stability and success of the business.

How to Manage Your Small Business Cashflow

To avoid financial failure and ensure the stability of your business, what steps can you take to prevent running out of money?

(1) Create a Cash Flow Statement and Forecast

Developing a cash flow statement and forecast is a critical component of financial planning. Taking the time to itemize both inbound and outbound cash, expenses, profits and losses allows businesses to see areas where they can recoup costs or invest in new products or services. Creating a cash flow statement and forecast helps business owners stay ahead of the game, so they avoid unnecessary fees or unanticipated financial issues down the road.

With careful attention to detail and a complete understanding of how their finances function, those with an accurate record of their current financial standing will be well-positioned to make decisions that put them on solid footing in the future

(2) Think about Your Payment Terms

One way to manage the cashflow of your small business is to carefully consider the payment terms you offer to your customers. While some businesses, such as restaurants or service providers, may require payment immediately upon completion of a transaction, others that sell to other businesses may offer credit with payment terms ranging from 7 to 90 days. This can be a useful tool for attracting new clients and establishing trust, but it is important to consider how you will maintain financial stability while waiting for payments to be made.

Taking the right approach to payment terms is a structural foundation for sustaining a healthy cash flow situation for small businesses. For those that directly sell to end customers, taking payment immediately is recommended as this will help stabilize their cash flow. However, other businesses may require more flexibility in their payment terms or opt for certain special arrangements such as discounts for early payments or staggered installment payments when selling goods or services to a third party.

No matter what option is selected, it’s important that the choice reflects the financial capacity of your small business and its associated risk appetite. By doing so, you can facilitate better management of cash flows and keep well-within your operating capacities.

(3) Choose who you do business with very carefully

As a small business, it is essential to carefully evaluate potential clients and customers before agreeing to work with them. This is particularly important when it comes to extending credit, as outstanding debts can have a significant impact on your financial stability. To protect your business, it is advisable to credit-check new prospects before committing to a working relationship.

There are several steps you can take to credit-check new prospects. One option is to obtain a credit report from a credit bureau, which will provide detailed information about the individual or company’s credit history. You can also ask for references from previous clients or suppliers, as these can provide valuable insight into the prospect’s financial reliability. In addition, you may wish to consider requiring a deposit or partial payment upfront, which can reduce the risk of non-payment.

Overall, being selective about who you work for and credit-checking new prospects is an important part of managing the financial health of your small business. By taking these precautions, you can safeguard your business and ensure that you are working with reliable, trustworthy clients.

(4) Set expectations and make it watertight

Assuming a new customer has an excellent credit record and you have decided to work with them, it is important to clearly communicate the terms of the business agreement. This includes outlining the payment terms, delivery schedule, and any other important details of the transaction. Ensuring that the customer fully understands the terms of the agreement can help to prevent misunderstandings or disputes in the future.

It is also a good idea to have the terms of the agreement documented in writing, such as in a contract or purchase order, to provide a clear record of the terms of the business relationship. By carefully managing the terms of the agreement, you can help to ensure a smooth and successful business relationship with your new customer.

(5) Get to know the people behind the payments

Establishing a good relationship with the individuals responsible for making payments can be an effective way to reduce the likelihood of payment delays. When you have a positive relationship with these individuals, it can create a sense of mutual trust and respect, which can make them more likely to prioritize your invoices and make payments on time.

One way to build relationships with payment decision-makers is to make an effort to get to know them and understand their needs and priorities. This might involve having regular check-ins or meetings to discuss the status of their orders and any potential issues that might impact payment. In addition, it is important to be responsive to their inquiries and concerns, as this can help to build trust and demonstrate your commitment to their satisfaction.

Overall, building relationships with payment decision-makers can help to ensure a smooth and timely payment process. By taking the time to get to know these individuals and addressing any concerns they may have, you can strengthen the working relationship and reduce the risk of payment delays.

Part 2: Small Business Accounting Basics

As the owner of a small business, it is important to recognize that there are a number of time-consuming but necessary tasks related to bookkeeping, tax, and accounting that must be completed in order to keep your business running smoothly. These tasks may include preparing and submitting financial reports, tracking and recording expenses, managing payroll, and paying taxes.

While these tasks can be tedious and may require a significant amount of time and effort, they are essential for the ongoing success and stability of your business. By staying organized and prioritizing these tasks, you can ensure that your business is in compliance with relevant regulations and that your finances are accurately tracked and managed.

What are the Small Business Accounting Basics you Need to Take Care of?

(1) Open a separate business current account

It is important for all limited companies to have a separate business bank account, as this is a legal requirement. A separate business bank account can help to ensure that your personal and business finances are kept separate, which can make it easier to track and manage your financial affairs. In addition, having a separate business bank account can help to establish the credibility of your business and make it easier to apply for loans or other forms of financing.

While sole traders are not legally required to open a separate business bank account, it is still advisable to do so. Having a separate business bank account can make it easier to keep your finances organized and avoid confusion between your personal and business expenses. It can also be beneficial for tax purposes, as it can make it easier to track and report your business income and expenses. Overall, opening a separate business bank account can provide a number of benefits and is worth considering, even if it is not a legal requirement.

(2) Choose cloud accounting software

Cloud accounting software is a popular choice among businesses of all sizes, with the exception of very small businesses. One of the main reasons for this is that it can be an effective solution for business owners who want to manage their own finances but may not have the budget to hire a professional accountant. Cloud accounting software allows you to track your income and expenses, prepare and file tax returns, and generate financial reports from anywhere with an internet connection.

Some of the benefits of using cloud accounting software include the ability to access your financial data from any device, automatic updates and backups, and the ability to collaborate with other users in real-time. In addition, many cloud accounting software providers offer a range of features and integrations that can help to streamline your financial processes and save time. Overall, cloud accounting software can be an excellent option for businesses looking to manage their finances in-house while still taking advantage of advanced technology and features.

Popular examples of accounting software include Xero, QuickBooks, and FreeAgent. To help you choose which is the greatest fit for your company before committing, they all provide a free 30-day trial.

(3) Consider hiring an accountant

Maintaining accurate and up-to-date financial records is an ongoing task for small business owners. In the early days of your business, you may be able to handle your accounting obligations yourself using cloud accounting software to track your income and expenses, prepare and file tax returns, and generate financial reports. However, as your business grows and your accounting needs become more complex, it may become necessary to seek additional help.

It is important to stay current on your accounting obligations, as failing to do so can result in financial penalties and damage to your business’s reputation. To ensure that your accounting is being handled properly, you may want to consider seeking the assistance of a professional accountant, especially if you are unable to devote sufficient time to your financial records. By keeping on top of your accounting obligations, you can maintain the financial health of your business and ensure that it is in compliance with relevant regulations.

The Small Business Accounting Terms you Must know

Whether you decide to work with a small company accountant or are content to handle your accounting responsibilities on your own, there are key words in small business accounting that you need to be aware of.


Bookkeeping is an important part of running a successful small business. It allows you to keep track of all your finances, helping to make sure your business is on the right financial path. Developing and maintaining a comprehensive bookkeeping system is essential for ensuring accuracy.

This includes keeping up with receipts and expenses, balancing the books regularly, invoicing customers in a timely fashion, setting aside funds for taxes, and accurately reporting any income or losses. Not only will careful bookkeeping save money in the long-term, it can also be used as an important resource when making decisions about the future of your business.

Annual accounts

As a limited company, it is vital to ensure you manage and file your annual accounts with Companies House every year. Annual accounts are necessary to provide accurate information in regards to an organisation’s financial situation, including key performance indicators such as the net worth or losses and expenses incurred during the year.

If these accounts are not received by the end of your accounting deadline, a hefty penalty fee could be applied, which could have an impact on the financial stability of your business. Therefore, it is essential that these annual accounts are correctly managed and submitted on time in order to avoid any potential legal ramifications.

Corporation tax

Corporation tax is an important part of the UK corporate landscape, with all limited companies obliged to pay this charge on any of their income that is not otherwise protected by regulation. In line with current legislation, the rate for corporation tax is 19%, and these funds are used to support a variety of public services, infrastructure initiatives and other components of the state budget.

Adherence to Corporation Tax regulations must be taken seriously by all businesses, as failure to do so can result in significant financial penalties Payments have a deadline at the end of each quarter-yearly period, but businesses should also be mindful of Corporation Tax planning throughout the year in order to minimise overall Corporation Tax liabilities.

Self-assessment income tax

Self-assessment tax returns are an important responsibility for anyone who receives untaxed income, such as sole traders. Any income earned must be reported on a Self-Assessment Tax Return, ensuring that the correct amount of income tax and National Insurance contributions are paid. Self-assessment encourages individuals to be aware of their financial obligations and enables them to plan their taxes accordingly. Failure to meet Self-Assessment requirements can lead to substantial penalties, so it is essential that those who need to file Self-Assessments understand and submit them on time.

You can use an online tool on the gov.uk website to determine whether you must submit a Self-Assessment tax return.

Income tax rates

For the tax year 2021/22, the tax-free personal allowance in the UK is £12,570. This means that you can earn up to this amount without paying any income tax. Income earned above this amount may be subject to income tax at different rates, depending on the amount of income and the tax bracket in which it falls. It is important to be aware of the current tax rates and personal allowance amounts, as this can help you to plan your finances and ensure that you are paying the correct amount of tax.

Dividend income is a type of payment that is distributed to shareholders out of a company’s profits. One of the benefits of receiving dividend income is that it is taxed at lower rates compared to other types of income, such as salary or self-employment income. In addition, there are no National Insurance contributions to pay on dividend income, making it a tax-efficient way to take money out of a limited company.


In the UK, businesses with an annual turnover of £85,000 or more are required to register for VAT, regardless of their legal structure. VAT, or value-added tax, is a tax on the sale of goods and services that is charged at a rate of 20 percent. If your business’s turnover is below £85,000, VAT registration is optional.

As a VAT-registered business, you are required to file VAT returns and pay or reclaim the difference between the VAT you have paid on business-related expenses and the VAT payments you have received. VAT returns and payments must be filed and paid quarterly. It is important to keep accurate records of your VAT payments and receipts, as failure to file VAT returns or pay VAT on time can result in financial penalties. By understanding your VAT obligations and staying current on your VAT returns and payments, you can ensure that your business is in compliance with relevant regulations.


As an employer, it is your responsibility to calculate and deduct income tax and National Insurance contributions from the salaries of your employees and pay them over to HMRC, the UK’s tax authority. This process is known as PAYE, or Pay As You Earn. PAYE must be paid monthly. In addition to paying income tax and National Insurance contributions on behalf of your employees, you are also required to pay employer’s National Insurance at a rate of 13.80 percent.

It is important to accurately calculate and pay the appropriate amounts of income tax and National Insurance, as failure to do so can result in financial penalties. It is also advisable to keep accurate records of your PAYE payments and employee salaries, as this can help to ensure that you are in compliance with relevant regulations. By understanding your responsibilities as an employer and staying current on your PAYE payments, you can help to ensure the financial health of your business and maintain a positive relationship with your employees.

Part 3: Financial Planning and Forecasting for Small Businesses

Financial planning and forecasting are essential components of any successful small business venture. By implementing a comprehensive structure for budgeting, businesses can identify potential issues before they occur and make adjustments as necessary to ensure profitability over the long-term.

Forecasting also provides small businesses with valuable insight into their industry, allowing them to anticipate changes in customer behavior or in the market that require immediate action through optimized allocation of resources. With proper financial planning and forecasting, small business owners can empower themselves to make sound decisions that provide a strong foundation for their company’s future growth.

What financial planning and forecasting documents should a small business have?

Every owner of a small business should create and maintain the following four primary financial planning and forecasting papers.

(1) Balance sheet

A balance sheet provides you with a current picture of your company’s financial situation at any given time. There are three components to a balance sheet:

  • Assets – The things the business owns (machinery, vehicles, buildings, etc.)
  • Liabilities – The money the business owes (bank loans, debts to suppliers, etc.)
  • Equity – The amount the owners have invested in the business

The net worth of your company can always be determined using these three pieces of financial data. A positive balance on the balance sheet, which means that the total value of the company’s assets exceeds the sum of its obligations and equity, indicates that your small business is based on sound financial principles.

The balance sheet also provides a clear picture of the business’s financing to outside parties like the bank and potential investors. Liabilities will be worth more if you lack the capital to participate in the company yourself (equity).

Here are several templates and a sample balance sheet that you may use to make your own.

(2) Profit and loss statement

A profit and loss statement (also known as an income statement) is a fundamental financial document which enables businesses to analyze the profitability and performance of their company. It is used to determine essential aspects of their operation, such as the cost of goods sold, total revenue, expenses and net income. This type of statement is absolutely integral to ensure that a company achieves its goals and renders itself most profitable with the given resources.

A thorough understanding of the profit and loss statement helps in assessing enterprise risks associated with revenue and allows for better decision making come budgeting time. Additionally, this document is valuable in predicting future projections based on previous trends. Without it, businesses may struggle to assess their success accurately or manage the cash flow necessary for success in the long-term.

You can obtain a straightforward template and a sample profit and loss statement from this page.

(3) Cashflow statement

A cashflow statement is an important financial document that provides insight into a company’s financial performance. A cashflow statement offers an overview of the inflow and outflow of cash over a specific time period, making it beneficial for finance professionals to assess the liquidity and solvency levels of their organization.

This type of statement is integral in financial planning as it demonstrates how efficiently the operation of a business is being handled and where any potential pitfalls may be occurring. Additionally, having knowledge of a company’s cashflow can facilitate better decision making with regard to investments and managing debt. For these reasons, understanding what a cashflow statement entails is essential for achieving success in the modern business world.

The ACCA has provided a straightforward cash flow statement template.

(4) Breakeven analysis

Breakeven analysis is a useful tool to help business owners make important decisions. It helps to identify the point at which total revenue equals total costs, and helps business owners understand the level of sales they must reach to make a profit. By analysing fixed and variable costs, it makes it easier to determine what changes need to be made in order for the business to realize profitability.

In addition, breakeven analysis can also be used to develop pricing strategies and set goals for cost control and efficiency. When used effectively, this analysis gives an understanding of how much a company needs to sell in order for profits begin being made.

Here is a straightforward manual that will help you perform your own breakeven analysis.

Read more: What does breaking even mean

Part 4: Managing Small Business Debt

When it comes to managing small business debt, there are a variety of available options depending on your current financial situation. Creating an organized payment schedule and regularly monitoring your finances can help reduce the stress associated with this type of debt. It is also important to consider refinancing if you find yourself in a position where you are taking on more debt to cover expenses.

With careful planning, consolidating debts from different sources into one loan can help keep payments at a manageable rate and manage cash flow more efficiently. Consulting with a financial specialist or Credit Counsellor can provide valuable advice and guidance when exploring your small business debt management options.

What Steps can you Take to Manage Small Business Debt More Effectively?

(1) Create a rainy day fund

As a business owner, it’s important to plan for the future and be mindful of your expenses. While you can anticipate certain expenses, there are inevitably unforeseen costs that arise. To protect against such eventualities, it’s wise to set aside savings in what is often referred to as a “rainy day fund”. Having this financial buffer helps bridge potential gaps in cash flow and provides you with peace of mind that your business is protected should an unexpected expense arise. By establishing a rainy day fund, you can take comfort knowing that you’re better prepared to face whatever the future may bring.

(2) Cut unnecessary spending

Cutting costs is an effective way to diminish your business’s debt, but it does not have to mean compromising effectiveness. There are a number of measures you can take to reduce spending without substantially altering how your organization operates. Examining upcoming expenditures and eliminating what is unnecessary will help curb unnecessary expenditure that do nothing but increase debt, while ensuring the quality of your product remains uncompromised. Additionally, negotiating prices on long-term contracts or capital investments can reduce major expenses without any impact on the company’s ability to provide its services. Through careful consideration and wise decision making, it is possible to reduce debt without sacrificing quality of work.

(3) Increase your revenue

It is easy to become overwhelmed when running a business, which can cause us to overlook ways to increase our revenue. However, re-examining your current model can reveal simple yet effective strategies that could add an additional source of income. Taking the time to analyze different factors such as pricing, services and any promotional opportunities can open up new possibilities. A thorough examination of your business plan is an important part of keeping your cash flow in check and ensuring the economic success of your operations.

(4) Consider refinancing

If you are currently paying a business loan at an interest rate higher than the market rate, then it pays to consider refinancing. Refinancing your loan could mean significantly lower monthly repayments, which can bring peace of mind and provide some much needed financial respite for business owners. Taking a new loan at more competitive rates of interest can greatly reduce the financial strain and allow for better budgeting for the future. Consider taking some time to explore the different options available when refinancing your loan – it could save you both money and stress in the long run!

(5) Negotiate with suppliers

Negotiating with suppliers is an essential part of doing business. Negotiating can save substantially in purchasing costs and may also empower you to purchase better quality items than originally planned. When placing bulk orders, don’t hesitate to negotiate with your suppliers and insist on discounts. Negotiations will allow you to discuss greater rebates, payment terms and possibly even free shipping that in turn can further reduce your overall expenses. Negotiation also acts as a way of fostering a healthy long-term supplier relationship. It allows both parties to arrive at an agreement based on mutual interests and trust, thus resulting in lower prices as well as success in reaching shared goals.

(6) Manage and boost your credit score

When it comes to business credit qualification, ensuring a strong and consistent credit score is of utmost importance. To manage and boost your credit score, paying bills on time and keeping balances low are fundamental pieces of advice. Additionally, understanding how lenders evaluate small businesses by taking into account their financial history such as past payments, number of lines already opened, the age of the business and its overall financial health will help you create a plan to improve your prospects for future qualifications.

Understanding lenders’ decision-making process helps you better prepare your business so that when applying for any kind of business credit – whether that be a small business loan or a credit card – you can be sure that you have the best chance at qualification.

Here are some tips for improving your credit rating:

  • Pay your bills on time: One of the most important factors in your credit rating is your payment history. By consistently paying your bills on time, you can demonstrate your financial responsibility and improve your credit rating.
  • Keep your credit utilisation low: Credit utilisation refers to the amount of credit you are using relative to your credit limit. It is generally advisable to keep your credit utilisation below 30 percent, as higher utilisation can negatively impact your credit rating.
  • Don’t apply for too much credit at once: Applying for too much credit in a short period of time can be viewed as a sign of financial instability, which can negatively impact your credit rating.
  • Use a mix of credit: Having a mix of credit, such as a mortgage, a credit card, and a personal loan, can improve your credit rating.
  • Check your credit report regularly: Reviewing your credit report regularly can help you to identify and correct any errors or inaccuracies that may be affecting your credit rating.

(7) Raise funds to repay your debts

Here are some ways to raise funds to repay your business debts:

  • Sell assets: If your business has assets that are no longer needed or used, such as equipment or real estate, you can sell them to raise funds to pay off your debts.
  • Increase your sales: Increasing your sales can provide additional income to help you pay off your debts. This might involve finding new customers, expanding into new markets, or offering new products or services.
  • Cut expenses: Reducing your expenses can free up more money to pay off your debts. Look for ways to save money on your bills, such as by negotiating lower rates with your service providers or switching to more affordable options.
  • Borrow money: Depending on your creditworthiness and the availability of financing options, you may be able to borrow money to help pay off your business debts. This might include a traditional loan from a bank, an investment from a venture capital firm, or a crowdfunding campaign.
  • Sell equity: If you are willing to give up a portion of ownership in your business, you may be able to raise funds by selling equity to investors.
  • Consolidate your debts: If your business has multiple debts, consolidating them into a single loan can make it easier to manage your payments and may help you to pay off your debts more quickly.

Part 5: Understanding Your Small Business Finance Options

As a small business owner, it is likely that you will need to seek business finance at some point in the development of your business. This could be to address short-term cashflow issues or to fund the growth of your business over the longer term. There are a number of different types of business finance available, and the right option for you will depend on your specific needs and circumstances.

However, the way in which you go about securing the funds you need can have a significant impact on the success or failure of your business. It is therefore important to carefully consider all of your options and choose the financing solution that is most suitable for your needs.

There are a variety of ways to raise money for your business, including bank loans, venture capital, crowdfunding, and small business grants. Each option has its own benefits and drawbacks, and it is important to carefully evaluate the pros and cons of each option before making a decision. Factors to consider may include the amount of money you need, the terms of the financing, the level of risk involved, and the potential return on investment.

By taking the time to research and compare different financing options, you can find the solution that is best suited to your business’s needs and goals.

What’s the difference between debt financing and equity financing?

Debt finance and equity financing are the two basic types of business financing.

  • Equity financing is a great way for businesses to gain working capital without the burden of additional debt, by offering shares of ownership in exchange for seed funding. In the long run, this type of financing can be beneficial for both parties – investors get partial ownership and voting rights as well as financial returns from company profits, while companies benefit from having access to external resources and funds. Additionally, business owners can retain greater control over their businesses with equity-based financing and have the flexibility to expand operations without worrying about obligations such as loan repayments.
  • Debt financing is a method of raising capital that is used by businesses of all sizes. A loan can be secured from a bank or other financial institution with the intention to pay it back over a period of time, typically with agreed-upon interest. Debt financing makes sense for businesses that need to raise money quickly and may not have a large amount of collateral available to use in exchange for investment funds. If the business has strong growth prospects and is willing to take on debt, this could allow them to acquire new equipment, borrow working capital, and invest in projects more quickly than they would have been able to otherwise.

What are the pros and cons of equity financing?

Equity financing involves raising money for your business by selling ownership stakes in your company to investors. Here are some pros and cons of equity financing:


  • You retain control of your business: Unlike debt financing, which involves borrowing money and repaying it with interest, equity financing does not involve borrowing money or incurring debt. This means that you can retain control of your business and make decisions without the need to consult with lenders or other creditors.
  • You can access a larger amount of capital: Depending on the size and success of your business, you may be able to raise a larger amount of capital through equity financing than you could through other options, such as bank loans or crowdfunding.
  • Investors may bring expertise and connections: In addition to providing capital, investors may also bring valuable expertise and connections to your business. This can be particularly beneficial if you are seeking to expand or enter new markets.


  • You give up ownership: By selling ownership stakes in your company, you are giving up a portion of ownership and control. This can be a significant decision, and it is important to carefully consider the terms of the investment and the impact on your long-term goals.
  • You may have to share profits: Depending on the terms of the investment, you may be required to share a portion of your profits with your investors. This can impact your ability to generate income and grow your business.
  • You may face additional reporting and compliance requirements: Equity financing may involve additional reporting and compliance requirements, such as regular financial disclosures or annual audits. This can add additional costs and responsibilities to your business.

What are the pros and cons of debt financing?

Debt financing involves borrowing money and repaying it with interest. Here are some pros and cons of debt financing:


  • You retain control of your business: Unlike equity financing, which involves selling ownership stakes in your business, debt financing does not involve giving up any ownership or control. You are able to make decisions and run your business as you see fit.
  • You can access a large amount of capital: Depending on your creditworthiness and the terms of the loan, you may be able to borrow a significant amount of money through debt financing. This can be particularly useful if you need to make a large upfront investment or fund long-term growth.
  • Interest payments may be tax deductible: In some cases, the interest payments on your debt may be tax deductible, which can reduce the overall cost of borrowing.


  • You incur debt: Debt financing involves borrowing money and incurring debt, which can be a significant financial obligation. It is important to carefully consider your ability to repay the loan and the impact on your business’s financial health.
  • You may face additional reporting and compliance requirements: Depending on the terms of the loan, you may be required to provide regular financial reports or meet other compliance requirements. This can add additional costs and responsibilities to your business.
  • You may face restrictions on the use of funds: Some lenders may have restrictions on how you can use the funds that you borrow, which can impact your flexibility and decision-making power.

What different types of small business finance are available?

(1) Bank loans

Bank loans are one of the most common sources of financing for businesses of varying sizes. Bank loans offer a level of security and assurance often not seen in other forms of debt financing, making them well-suited for small businesses and startups looking to establish a reliable platform with which to grow their business. Bank loans can also be beneficial in that they typically have relatively low interest rates and may even come with advantages like flexible repayment schedules or additional funds available if certain growth goals are met. As long as the business is able to meet its repayment terms, traditional bank loans can go a long way towards providing the necessary capital to start or run a successful small business.

(2) Crowdfunding

Crowdfunding is an exciting solution for business owners in need of financial assistance. Through crowdfunding platforms such as Kickstarter, GoFundMe and Indiegogo, businesses have the opportunity to reach out to the public, who can then contribute money to help them invest in their project or venture. Crowdfunding has revolutionized the way companies obtain capital, as it allows businesses to solicit investments and donations within an online community. This form of fundraising also gives back to investors, providing potential financial returns and rewards on projects they have backed. Crowdfunding offers an excellent way for entrepreneurs to build up a broad investor base while gaining access to significant resources.

(3) Invoice finance

Invoice finance is an innovative process designed to help businesses increase their cash flow. By selling unpaid invoices at a discounted rate, businesses can obtain the full value of the invoice upfront and use that money right away. Invoice financing makes it far easier for companies to access cash without needing to rely on traditional bank loans or other types of financing. This process can provide quick access to much needed funds and make it simpler for businesses to stay afloat in difficult times. In short, invoice finance provides a straightforward way for businesses to get the financial push they need when they need it most

(4) Business credit card

Business credit cards can be an easy way to fund a small business, providing the convenience of ready cash without having to go through lengthy bank procedures. However, it is important to remember that using a business credit card carries its own risks. A business credit card often comes with high interest rates and fees, which can turn into a major headache if not managed properly. Business owners should evaluate their financial situation before deciding on whether or not they should take out a business credit card, and create a plan to ensure that any debt incurred is paid back in a timely manner. Businesses should also consider alternatives such as saving money or seeking investment options when funding their businesses.

(5) Small business grants

Small business grants provide entrepreneurs with the resources they need to grow their businesses and make their dreams come true. With these grants, entrepreneurs don’t have to face the burden of repaying the money once it has been used – instead, they can focus on turning their ideas into profitable enterprises. Small business grants can greatly increase the chances of success for many new and fledgling companies, giving them the best possible chance of becoming a success.

(6) Venture capital

Venture capital is an integral part of the business world, helping to fund ambitious and innovative businesses. Venture capitalists are professional investors who seek to maximize their returns by investing a significant amount of money into a business in return for an equity stake. Venture capital investments can often attract additional investors, often leading to more comprehensive funding for businesses than would otherwise be available. This helps ensure businesses have the resources necessary to succeed and allows them to take risks that might not be possible without the additional investment of venture capital.

(7) Enterprise Finance Guarantee

Starting a small-scale business and getting it to the point where it is a viable investment can take a considerable amount of time and financial resources. Unfortunately, many businesses in this category do not meet the requirements of banks when they attempt to secure loans, as there is often not enough security to collateralise the debt. However, government Enterprise Finance Guarantee (EFG) can provide a way forward, enabling small businesses to borrow money without being required to offer up sufficient levels of security. EFG guarantees cover up to 75 percent of the loan value, helping those businesses that wouldn’t otherwise have access to bank lending solutions

(8) Short-term business loans

Short-term business loans offer a tremendous opportunity for businesses that need quick access to financial resources. With repayment terms ranging from just six months up to 18 months, these relatively small loans can be an invaluable source of capital for a range of purposes such as filling out accounting records, purchasing new equipment, or meeting any number of other emergency expenses. The application process is straightforward and the approval times are typically far faster than those associated with long-term financing options; this means that funds can often be received within days or weeks, allowing businesses to achieve their goals in the most efficient manner possible. Short-term loans offer a great way for businesses to get the resources they need now – but only if responsible lending practices are followed.

Make financial management the core of your company.

Managing the finances of your small business is crucial to its long-term success. If you want your business to survive past the five-year mark, when 50 percent of small businesses in the UK have already failed, it is essential that you make financial management a fundamental part of your business strategy. This means not only monitoring and controlling your spending, but also planning for the future and making informed financial decisions.

Effective financial management involves understanding your financial situation and setting clear financial goals. It also involves keeping accurate and up-to-date financial records, monitoring your cashflow, and making informed decisions about how to allocate your resources. By taking a proactive approach to financial management, you can increase the chances of success for your small business and position it for long-term growth and stability

We provide guidance to solo proprietors and corporate directors whose small business finances have gotten out of hand. That might be brought on by a lack of cash flow, bank loans, unpaid taxes, and unpaid wages. We can provide you a wide selection of options to assist in guiding your company through a challenging financial situation and back to profitability. In order to assist you find the best resolution for both you and your business, we can also advise you on the legal and informal insolvency proceedings.

Lee Jones Profile
Business Finance Expert at Business Insolvency Helpline

Lee Jones is a seasoned expert in the field of business finance with over two decades of experience. With a keen understanding of financial markets and a passion for helping businesses thrive, Lee has become a trusted advisor to countless companies across the United Kingdom.