The recent Budget announcement gave further evidence of the important role that SMEs will play in driving the economic recovery.

The abolishment of national insurance for under 21s from 2015, the announcement of relief for high energy using industries and tax breaks for businesses that invest in plant and machinery, each provided reasons for Welsh businesses to be optimistic for the future.

In particular, the increase in annual investment allowance (AIA) from £250k to £500k per year means that, in theory, any company making an annual net profit of £500k could re-invest the whole amount and not pay corporation tax for that year. This is likely to encourage SMEs in this space to go out and purchase new plant and machinery. Many of these companies will not have the luxury of a mountain of ready cash to go on a spending spree, and even cash-rich companies will wish to preserve their liquid resources. As such, it is likely that SMEs will be looking to raise finance.

But what options are there for those Welsh SMEs in need of funding to fuel their growth?

The Banks

The bank remains the first port of call for most businesses, with overdrafts and fixed term loans accounting for around 50% of all external finance. However, in general the banks remain risk-averse with their lending and businesses looking for financial support from their banks can be subjected to a lengthy due diligence process. This waiting game – which can sometimes last a number of months - can be prohibitive and many are turning their backs on the banks and looking elsewhere.

Finance Wales

Despite recent – and in my view unjust - criticism in the media, Finance Wales is a viable financing option for those Welsh SMEs that may have been considered ‘too risky’ for investment from their banks. This public sector organisation was established in 2001 to make commercial investments in Wales-based growth businesses and it has to date made 3,222 investments worth a reported £309 million. Finance Wales continues to play a key role in bridging funding gaps in many deals where the banks won’t fully fund. As a result, the higher interest rates charged by Finance Wales are typically reflective of the higher risk profile of the businesses that it agrees to finance.

Asset-based lending

The upshot of tightened lending criteria is that lenders are more receptive to funding requests backed by assets. The key to asset based lending is that lenders are secure in the knowledge that any money lent can be recouped by the physical assets this money is used to purchase. The AIA increase announced in the Budget will likely fuel interest in this type of lending, as the assets acquired through investing in plant and machinery can be used as security under these facilities.

Peer-to-peer funding

Peer-to-peer lending facilities, such as Funding Circle and Market Invoice, have grown rapidly in recent years and this growth looks set to continue. They work by bringing together businesses in need of financing with investors looking for a greater rate of return on their money than currently on offer elsewhere due to the low interest rate environment.

Peer-to-peer lending enables businesses to list their loan requests on an eBay-style marketplace to attract offers from private investors. These investors bid what they deem a fair interest rate to secure the loan and this bidding process often ensures businesses are offered a competitive rate, comparable with other sources of unsecured finance.

The application process is straightforward with no need for extensive business plans or financial projections and there no early repayment charges, making it an ideal short-term solution to help fill a funding gap. Such is the popularity of this type of lending that the government has indicated that the peer-to-peer sector will soon become regulated – a move which is likely to raise the profile of the sector even further by attracting a greater number of investors.

The good news for those businesses in need of additional funding for growth is that there are an increasing number of options out there to consider. Successfully navigating these options and choosing the right source of funding, however, requires careful planning and sound professional advice.