How can smaller businesses finance their sustainability journey?

While there are business benefits to becoming more sustainable, funding can be a bottleneck for smaller businesses looking to kickstart or accelerate their sustainability journey.

According to research by the British Business Bank, 35% of smaller businesses cite costs as a barrier for reducing emissions. 

While the government has committed almost £5 billion to help UK businesses reach net zero by 2050, only 11% of smaller businesses have accessed finance to support their transition. 

In this article, Sabrina Iavarone from the British Business Bank’s Sustainability Team discusses some of the benefits of investing in sustainability and some considerations for finding the right external finance.

What are the challenges for smaller businesses who want to become more sustainable?

The British Business Bank’s SME Finance Survey has highlighted current economic conditions as one of the main obstacles preventing smaller businesses from becoming more sustainable. 

In a recent report by UK Finance on Unlocking the SME Net Zero Transition, business leaders also lamented a lack of actionable guidance, and a proliferation of sources of advice, making it challenging for firms to identify trustworthy information.

The business environment represents an obstacle especially for smaller businesses, who from previous surveys appeared less likely to seek finance and more concerned about their ability to repay.

99.8% of UK businesses are small or medium-sized businesses, accounting for a third of the UK’s greenhouse gas emissions and half of all business emissions, meaning that small businesses are crucial to lead the country to net zero. 

Moreover, sustainability is part of a wider economic trend for which companies need to be prepared. 

By financing the net zero transitions of smaller businesses, we can build a greener, more competitive, and more resilient economy.

How could smaller businesses benefit from external finance to become more sustainable?

External finance can allow smaller businesses to access resources to support their sustainability journey, from the launch of a sustainable start-up, to purchasing zero and ultra-low emission vehicles. 

Finance could enable companies to unlock the benefits of net zero. 

While many businesses are initially motivated to undertake sustainability action because they want to “do the right thing” and contribute to tackling climate change, there are multiple economic and financial benefits from net zero. 

The UK Net Zero Census 2024 Report delves into some of these. 

First, companies could improve their organisational reputation and strengthen their brand. 

A stronger brand could lead businesses to attract additional investments and finance, facilitate the recruitment and retention of staff, as well as retain and grow their customer base.

Through customer growth, companies could increase their market share and establish themselves as industry leaders against their competitors.

Second, sustainability action enables businesses to build resilience. 

This can occur by implementing initiatives that allow companies to mitigate the physical and market risks deriving from climate change, as well as complying with and anticipating upcoming regulation.

Finally, the net zero transition could make it possible for businesses to reduce costs. 

This could take place through the use of cheaper energy sources or by implementing business and process efficiencies that could lead to cost savings in the long term.

What financial support is available to help smaller businesses become more sustainable?

Funding can be provided by public or private financial institutions, and tools vary based on the type of support needed. 

It is essential to get professional, independent financial advice, as there is no one-size-fits-all finance suitable for all businesses, and there is no guarantee that businesses might access funding.

For public funding, the Government’s Find a Grant scheme is constantly updated, and it might be a good place to start. 

Similar schemes might be offered by the Scottish, Welsh, and Northern Irish administrations, as well as local councils. 

If a business is yet to be launched, it might be eligible for a Start Up Loan. 

Businesses planning to launch a green product or service might be eligible for Research and Development (R&D) tax relief. 

The UK Business Climate Hub provides a vast list of sources of public financial support available across the UK. 

Many high street banks and non-bank lenders also offer specific products such as green loans and sustainability-linked lending to support sustainable businesses or those seeking to become more sustainable, for example by replacing assets or equipment with a high carbon footprint with a more energy efficient alternative.  

What should smaller businesses consider when using finance to become more sustainable?

The type of funding available depends on a wide range of factors, including sector, location, the amount of finance needed and why, and the performance and assets of the business.  

The first factor smaller businesses should consider is the reason for finance. 

Innovative businesses might want to launch new products. 

Other firms might want to tap into new markets, for example, by helping staff acquire new skills that allow them to offer additional services, attracting new clients, and develop new revenue streams. 

Other businesses might want to adapt to meet changing client demands and government regulation.

Other factors to consider include:

• the business’ sector: as some industries have more stringent regulation due to higher environmental impact
• its location: as many country and regional governments offer resources to transition to net zero
• the amount of funding required
• profits and assets: which allow lenders to understand a business’ ambitions and ability to repay.

How has the British Business Bank has helped small businesses meet their sustainability goals

Thanks to its delivery partners, the British Business Bank has funded several sustainable businesses.

Through Maven Capital Partners, the British Business Bank has funded Power Roll, a solar energy pioneer, as part of the Northern Powerhouse Investment Fund II. 

The £1.5 million funding will allow the company to commercialise their innovative solar product and open the door to harnessing the power of solar energy in previously unreachable areas.

Another success story is Transcend Packaging, a leading sustainable packaging manufacturer. 

British Business Investments’ delivery partner SFC Capital participated in a £7.5m fundraise to increase the company’s manufacturing capacity and support its growth.

Sustainable business examples

To better understand how business finance works in practice, let’s explore some examples of businesses which might be looking for resources to finance their sustainability journey. 

An innovative start-up

A young innovative company developing a new product to measure and report greenhouse gas emissions, which has the potential to disrupt existing products in this area. 

The company has the potential for strong growth should the product gain traction in the market.  

The company lacks steady cashflows and, given its young age, a financial track record which makes it unsuitable for debt finance. 

Since the business is developing a new product with the potential for strong growth, then equity could be an appropriate finance type to support their venture. 

There are a few sources of funding that this company could consider:

• Angel investment: the business could identify an Angel Investor willing to provide guidance and invest money in their business for a share in the company. This finance type is available to all businesses, but it is particularly suitable for companies keen to create new products or enter new markets.
• Venture capital: if the business is close to commercialising its product and has a high growth potential, venture capital could further contribute to getting the business started.
• Equity crowdfunding: equity crowdfunding allows the business to use an online platform to gather resources by selling business shares to investors. 
• Private equity: if the business is an established business, a private equity firm could invest in the company in return for a large or controlling stake to help them grow.
• Grants: several grants are available for research and development, particularly regarding sustainability. Grants are usually awarded by governments, organisations, or companies to invest in certain assets or activities, or to achieve a particular goal.

An established plumbing company

A plumbing company wants to train their staff to install heat pumps, following an increased demand for these jobs. Which finance types could this business make use of?

The company could grow its revenue with this investment, and, as they are looking to invest in a predictable area of business, then they could consider using debt to finance their enterprise. 

The company could consider one of the following finance types:

• Term loans: the company could borrow money from a loan provider such as a bank and then pay it back with interest over an agreed period.
• Invoice finance: the business could sell or borrow against their unpaid invoices, giving them access to the money before invoices are paid.

A residential landlord

A landlord wants to install solar panels on the roof of their property to reduce energy costs and is looking for finance to support their purchase. 

For this reason, the landlord could consider using asset finance. 

There are a few tools to consider:

• The Green Deal: Connecting with a private sector provider authorised under the Green Deal and explore potential support for energy-saving improvements, including renewable energy generation through solar panels
• Asset-based lending: the landlord could secure finance against its existing assets, including invoices, but also machinery, property, and even intangible assets such as IP.
• Leasing or Hire purchase: the landlord could use Leasing or Hire purchase to buy specific assets such as solar panels.

Want to learn more?

Disclaimer: We make reasonable efforts to keep the content of this article up to date, but we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. This article is intended for general information purposes only and does not constitute advice of any kind, including legal, financial, tax or other professional advice. You should always seek professional or specialist advice or support before doing anything on the basis of the content of this article. 

Neither British Business Bank plc nor any of its subsidiaries are liable for any loss or damage (foreseeable or not) that may come from relying on this article, whether as result of our negligence, breach of contract or otherwise. “Loss” includes (but is not limited to) any direct, indirect or consequential loss, loss of income, revenue, benefits, profits, opportunity, anticipated savings, data. We do not exclude liability for any liability which cannot be excluded or limited under English law.