Significant reforms to small business finance were recently announced by the government. The centrepiece of the plans is an expansion of the British Business Bank's (BBB) Growth Guarantee Scheme (GGS) which provides a 70% government guarantee on commercial loans to SMEs of up to £2 million. The scheme will scale up to facilitate an additional £2 billion of SME lending per year by 2028/29. Here, we consider how small firms can benefit from the reforms.
The Growth Guarantee Scheme
The GGS is designed to help smaller businesses access finance for growth, investment and working capital. It launched in July 2024 and replaced the Recovery Loan Scheme.
Lenders are provided with a 70% government guarantee on eligible loans and other finance facilities. This reduces the lender's risk and can help viable businesses obtain funding that might otherwise be unavailable.
The guarantee is for the lender, not the borrower - businesses remain fully responsible for repaying the debt.
Businesses are able to access term loans; overdrafts; asset finance; invoice finance; and asset-based lending facilities.
Key benefits for small firms
Small businesses stand to benefit from the expansion of the GGS. The reforms may increase the availability of loans, overdrafts, equity investment and alternative finance options for those firms that may have previously struggled to secure funding.
Use of the GGS could also lead to lower borrowing costs as increased competition and greater transparency can aid in reducing interest rates, fees and other costs associated with borrowing.
Lending decisions may be made more quickly: improved data sharing and digital application processes can speed up credit assessments, meaning businesses gain access to funds faster.
The GGS may provide firms with a sense of enhanced financial inclusion: businesses with limited trading history, fewer assets or those operating in underserved regions may find it easier to obtain finance.
A wider range of finance options helps businesses manage cash flow, respond to economic challenges and recover from unexpected disruptions.
Other finance options
Other finance options might be available to small firms. Small businesses may be able to make use of a grant or other type of support. Grants are usually provided by local councils, the government and charities, and can be an inexpensive form of financing. Grants and similar subsidies are typically non-repayable, but tend to be highly sought-after, resulting in fierce competition for this type of funding.
Some firms may prefer to use investment: this option involves selling part of your stake in the business to an interested investor. The investor could be a wealthy individual, a private equity company or a larger company operating in the same sector. As only limited companies can sell shares, sole traders and partnerships are not able to use investment finance as a source of funding.
Debt factoring involves selling any unpaid invoices to a third party and paying interest and/or a fee on them. The third party will then collect the debt themselves.
Invoice discounting provides a means of borrowing money against any unpaid invoices owed to your company (again, for a fee). As your invoices are paid, the amount you owe the lender decreases.
These forms of finance can often be a good way of releasing cash tied up in unpaid invoices back into your business.
We can advise on the most suitable type of finance to suit your needs - please contact us for further information.