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Medium-sized businesses are defined within the Companies Act 2006 as a business with up to 250 employees.

They may be family-owned and managed businesses but, by virtue of their size, they may also be complex entities where ownership is separated from management. Medium-sized businesses are normally well established and have an observable track record which facilitates financing decisions by lenders or investors. 

Often mature entities operating in mature markets, they may also operate in high growth markets or may be seeking to reposition from a mature market to markets with higher growth potential. 

The financing requirements of a medium-sized business are generally quite articulated and may cover the management of short-term cashflows, the adjustment of the balance of short and long-term debt, the adjustment of the overall capital structure between debt and equity, the replacement of expiring finance facilities, the financing of major items of equipment or the funding of the growth of the business by way of debt or new equity, including possible recourse to a stock market.

The financial structure of a medium-sized business is usually actively managed by in-house professionals, who review the suitability of the current structure and the availability of alternative or additional funding in order to match it with the needs of business in terms of purpose and timing. Medium-sized businesses normally use different types of finance often supplied by different providers, they may deal with two or three banks, and may have access to further types of finance by virtue of their established record and ability to provide security. 

The types of finance potentially available to medium-sized businesses range from cashflow finance, bank overdrafts, bank loans, leasing/hire purchase agreements to venture capitalists and stock market listing.

Small businesses should consider the following finance options:

Cashflow finance / invoice factoring
Businesses ideally suited for cashflow finance/invoice factoring are those that provide tangible goods or services. It is commonly used by businesses that have high levels of working capital tied up within debtors. It is also used by growing businesses who are seeking to manage their working capital. Some examples are manufacturers, wholesalers, engineers, transport companies and labour hire/recruitment service providers.

Grants 
Grants are usually available for specific projects, for example a new product or process, job creation or training programme. They typically provide between 15% and 60% of the cost of the project. The normal growth of a business would therefore not normally qualify for a grant, though an established business looking at creating more jobs could qualify.

Hire Purchase (HP) / leasing 
The use of HP / leasing is particularly common in industries where expensive machinery is required, such as construction, manufacturing, plant hire, printing, road freight, transport, engineering and professional services. It is also used to finance other capital requirements (eg cars or photocopiers). The asset provider usually dictates this type of linked finance.

Bank loans 
Bank loans are frequently used to finance start-up capital and also for larger, long-term purchases. They are generally a quick and straightforward way to secure the funding needed, and are usually provided over a fixed period of time. 

Overdrafts 
Overdrafts are often used by small and medium-sized enterprises (SMEs) to ease pressures on working capital and as a back-up for unexpected expenditures. They are a form of finance for businesses that experience fluctuations in working capital.

Trade credit 
Trade credit is probably the easiest and most important sources of short term finance option available to businesses. The simplest definition is an arrangement to buy goods and/or services on account without making immediate cash or cheque payments. It is short-term finance that is relatively quick to arrange.

Last updated: 28 Jun 2012