Small business and corporate finance

Small businesses play a big role in the health of the UK’s economy. In fact, the UK is the leading start-up nation in Europe. At the beginning of 2021 there were 5.5 million small businesses operating and by the end of 2021, UK start-ups had raised a record £29.4bn from venture capital. According to these figures, SMEs (Small & Medium Size Enterprises) account for an amazing 99.9% of all businesses in the UK. Unfortunately, in 2020, many small businesses felt the effects of the global pandemic and between 2020 and 2021, the total business population decreased by 390,000 (6.5%). For comparison, the second largest decrease since 2000 was only 0.5% between 2017 and 2018.

So, how can corporate finance support small business? Corporate finance is concerned with exploring funding sources, capital structuring, and investment decisions. These activities are related to business growth and scaling up operations. However, not all small businesses want to scale up beyond recognition and hand over power to shareholders or investors. This is because sometimes, being a small business is part of the brand’s USP (unique selling point). Still, these businesses need to understand their options even if they only require a small business loan to expand their offering.

The popularity of small, independent businesses

During lockdowns, people spent more time shopping in their own neighbourhoods or searched for small businesses online to support them through the crisis. They rediscovered the personal touch that small businesses can offer. This consumer trend seems to have affected people’s long-term decision-making as a survey by Barclaycard Payments in 2021 showed that 91% of Brits would continue to shop locally. The survey also showed that in February 2021 shoppers spent an extra 63.3% in February at food and drink specialist stores, such as butchers, bakeries, and greengrocers, compared with the same month in the previous year (pre-pandemic lockdown). 

Small businesses often have an advantage when they manufacture locally, and even more of an advantage when they manage to source raw materials locally too. Haeckels is a skincare brand based in Margate in Kent. They harvest seaweed from the coast and use it to make natural products. Instead of shipping products from the Kent coast to worldwide locations, they look to utilise natural resources specific to different store sites such as the Eel Grass, Hinoka Oil, and Orange Blossom of Japan. This supports the local community, lowers their carbon footprint, and protects the business from supply chain issues and logistical problems.

Haeckels received a minority investment from Estée Lauder Companies in February 2022. This is a move that lost them some customers who admire them for their ethical and sustainable stance, which some did not believe was compatible with the multinational. However, as is often the case, it is very difficult for a small business to grow beyond a certain point and reach new audiences without this kind of capital structure or some sort of equity investment.

Why cash is king

Small business owners may take on many of the tasks associated with accounting such as bookkeeping and financial management. Some others may employ an accountant, and certainly as a business grows, support with forecasting and budgeting is crucial if a business is not to feel overstretched. In terms of risk management, the pandemic also tested the strength of a small business’ financial decisions. In an interview with Draper’s, Julie Deane, founder of The Cambridge Satchel Company, said of the time, “As we paused we looked at the financial modelling, in particular cash flow. Cash is king, and never more so than at that moment.”

Cash flow is indeed a priority for all businesses and a metric which becomes much harder to track when a business is experiencing growth spurts with lots of income, but also expenditures to record in the company accounts. When a business is doing well, it’s natural to believe that it will continue to do so, and therefore investment in further growth and expansion feels like a good move. However all businesses are subject to the whims of the market as well as unexpected events like the pandemic and the knock-on effect on the supply chain. In tough times, working capital is helpful but it’s even better to maintain good cash flow. For one-person companies in particular, the liquidation of personal assets should be avoided as should relying on a credit card for any kind of repayment.

Julie Deane explains that The Cambridge Satchel Company, “did not fall foul of the stock mountain that many retailers had needed to invest in, as we keep to the important principle of selling fewer, well-made things that will last.” Like Haeckels, they also manufacture in the UK, so were better equipped to deal with the peaks and troughs of demand and not fall into debt.

Growing an online business

The onset of the pandemic saw many companies investing in their online sales platforms if they hadn’t already. According to research from TalkTalk Business carried out before Christmas 2021, six out of ten SMEs said that their customers spend more with them online than they would in-person. Even without lockdowns, the desire to shop online is greater than it was before. By investing in online presence, 56% of respondents said that they were in a better position to grow than pre-pandemic. The same percentage of people (56%) said that the pandemic forced them to make changes to their business that they know they should have made earlier.

Making these kinds of investments in a business before circumstances demand them is a kind of due diligence. Venture capitalists, lenders, and providers of business loans look for a robust business plan and sound financial forecasting that indicate a healthy financial track record. Whether a small company is looking for private equity from crowdfunding or a short-term loan, the level of accounting offered by corporate finance practices can help to give a growing business the credibility it needs. Further down the line, when mergers, partnerships, or equity financing are on the table, an accurate valuation of the company and a clean balance sheet with no corporate debt are vital. Whatever the type of financing a company seeks, instilling good financial management practices from the start will pay off for any new business.

How corporate finance can save small businesses

With interest rates increasing in the UK and showing signs that they will continue to do so, business activity will certainly be affected. Small business finance is a key area for supporting the SMEs that make up 99.9% of businesses in the UK and keep the economy buoyant. 

Working with small businesses so they understand the basics of corporate finance can be an extremely rewarding specialisation. From implementing capital budgeting to avoiding debt financing, find out how you could excel in small businesses by studying an online MBA Finance and taking your expertise to the next level.