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What do start ups looking to get off the ground, small businesses hoping to expand, and organisations struggling with cash flow issues all have in common? The potential need for business finance.
The number of business financing options are almost as vast as the reasons for securing it in the first place.
Below, we dig into the various sources of business finance available in the UK, for established businesses, start ups, and everything in between.
» MORE: Why do businesses need finance?
Sources of business finance: at a glance
- Traditional finance:business loans, business grants, business credit cards, business overdrafts, commercial mortgages
- Alternative finance:working capital loans, asset finance, invoice finance, merchant cash advance, business credit lines, bridging loans, crowdfunding, peer-to-peer lending, venture capitalStart up finance: start up business loans, angel investors, friends and family
Sources of finance for small businesses
Suitable for a variety of purposes, the following sources of business finance can be used by businesses of all different shapes and sizes, as long as you meet the lender’s criteria.
Business loans
When taking out a business loan, you will borrow a sum of money from a lender, and repay that amount back with interest.
There are two main types of business loans: secured and unsecured. A secured business loan is a form of lending that requires you to provide an asset, or collateral, as a guarantee. Typically this is property, equipment, machinery or land. By providing this guarantee, you may be able to access better repayment terms than with an unsecured loan. However, if you fail to meet your repayments, the asset you have used as collateral may be claimed by the lender.
Unsecured business loans, on the other hand, don’t require you to put up an asset as collateral. Instead, the amount you can borrow is based on a few factors, including your annual turnover. This can make unsecured loans harder to get and means you can normally borrow less than with a secured loan.
With both types of loan, there are usually no limitations on what they can be used for, as long as it is for business purposes.
Business grants
One of the biggest advantages with business grants is that, unlike most other forms of business finance, they do not need to be repaid. That, of course, makes them highly competitive and may mean your business needs to satisfy strict eligibility requirements.
Grants are offered on national, regional and local levels, including schemes across the UK, providing dedicated support to businesses in England, Scotland, Wales and Northern Ireland.
There are also grants available for specific groups and demographics, such as start ups, unemployed people, and grants for women.
» MORE: Top small business grants & start up business grants in the UK
Working capital loans
If your business finds itself lacking the funds needed to cover its everyday operations costs, then you could consider a working capital loan. It is best used as a form of short-term finance to cover an immediate cash flow problem, and typically won’t require any collateral for a successful application.
Due to this, working capital loans can have higher interest rates than other business loans. The repayment period can also be as short as a few months, meaning you would need to be confident in your business’s ability to pay back the loan before taking one out.
Business credit cards
Just like a personal credit card, a business credit card can be used to cover short-term expenses and cash flow problems, while allowing you to potentially benefit from additional perks specific to your card provider.
As with most forms of business finance, you should only use your business credit card when you feel confident you can make the required repayments.
Business bank account overdrafts
If you are eligible, you may be able to access an overdraft facility on your business bank account. As with a business credit card, it can be used to cover short-term cash flow problems or dips in seasonal trading.
You should be mindful of the fees and charges that come with using this facility, and try to pay off your overdraft as soon as is possible for your business.
Asset finance
If your business needs to purchase an expensive asset – for example, a vital piece of equipment or machinery – then you could consider asset finance.
There are a few different types of asset financing, such as equipment leasing, where the lender purchases the asset and then leases it to you, or hire purchase, where you are spreading the cost of purchasing the asset over a set amount of time.
There is also asset refinancing. Here you would receive a lump sum of money in exchange for transferring ownership of an asset you already own to the lender. Once you have paid that amount back, ownership of that asset would be returned to you.
It is important to carefully consider whether asset finance is right for your business – if you are unable to keep up with your payments, you could lose an asset crucial to the functioning of your organisation.
Invoice finance
If your business regularly receives customer invoices, then invoice financing might be of interest.
It can help you quickly access a percentage of the funds locked away in outstanding customer invoices, with the lender charging a service fee and interest.
There are two main types of invoice finance. Invoice factoring sees the lender take control of your sales ledger and chase your customers for the outstanding sum directly. Invoice discounting, meanwhile, leaves the job of securing these outstanding customer payments in your hands.
Merchant cash advance
If your business frequently takes customer debit or credit card payments, you could be eligible for a merchant cash advance.
Providers will lend you a lump sum of money, which is then paid back – with a fee on top calculated by a factor rate – through a pre-agreed percentage of your future card sales.
It is a flexible form of borrowing, where your repayments will rise and fall in line with your trading, and can be accessed by businesses lacking a strong credit history. The trade-off is that the total cost of a merchant cash advance can be higher than other forms of business finance.
Business credit lines
Business credit lines provide a flexible form of borrowing where you can draw down any amount from within a fixed overall limit. You will then only be charged interest on the amount you have drawn down, rather than the total amount available. In a sense, it works somewhat like a credit card.
With a revolving credit facility, you can borrow a sum of money from the total amount available, repay it, and then have access to the full borrowable amount once again, until your overall agreement ends.
A non-revolving business credit line is not replenished in the same way. Once you have borrowed a sum from your overall limit, and repaid it in full, your account is closed. You would then need to reapply to regain access to credit.
Commercial mortgages
Just as you would take out a personal mortgage to buy a residential property to live in, commercial mortgages are used to buy commercial properties.
There are four main types of commercial mortgage:
- Owner-occupied commercial mortgages:if you are buying premises for the use of your own business.
- Commercial buy-to-let mortgages:if you are purchasing a commercial property to let out to another business.
- Residential buy-to-let mortgages:if you are buying a residential property to rent to a third party.
- Semi-commercial mortgages:if you are purchasing a ‘mixed-use property’, i.e. a building that has dedicated residential and commercial spaces.
Bridging loans
Primarily used by professional landlords and property developers, a bridging loan is designed to cover a short-term cash flow issue. Typically, they are used to purchase property before a mortgage has been agreed – for example, if you wanted to buy a property at auction.
You would need to prove to the lender you have an exit strategy to pay back the loan. You would also repay the borrowed amount in one lump sum by the end of your term, rather than in monthly instalments.
Crowdfunding
Most people will be familiar with rewards-based crowdfunding – for example, on sites such as Kickstarter or Indiegogo. This is where, in exchange for money, a ‘backer’ would receive a product or service.
However, there is also equity-based crowdfunding, where you receive funds in exchange for a stake in your business, and debt-based crowdfunding, sometimes known as peer-to-peer lending.
» MORE: What is crowdfunding for businesses?
Peer-to-peer lending
Peer-to-peer lending (P2P) is a way to access a business loan without going through traditional providers, such as a high street bank.
Instead, you would set the amount you want to borrow on a P2P platform, and, after an assessment from your platform itself, be matched with investors willing to lend you some, or all, of the money you are asking for.
You would then pay back this sum, with interest, as you would most other forms of business finance.
Venture capital
If you can prove that your business has strong long-term potential (though not necessarily making a profit), then you could be able to secure venture capital. This can be as much as a multi-million pound investment, typically from a bank or professional investors looking to help take your business to the next level and for a substantial return on their funding.
Sources of business finance for start ups
While most of the sources of business finance mentioned above are accessible for start ups – especially business grants and crowdfunding – new businesses may find it harder to secure funds through those methods than more established organisations.
The sources of business finance listed below,, on the other hand, might be more suitable if you are an early-stage start up.
Start up business loans
Start up business loans are, as the name suggests, business loans specifically offered to start ups. The most well-known new business loan is the government-backed Start Up Loans scheme.
Through the Start Up Loans scheme, you may be able to borrow up to £25,000 as an unsecured personal loan, at a fixed interest rate of 6% a year, to be repaid over one to five years.
Angel investors
Typically interested in early-stage start ups with growth potential, angel investors can offer ‘seed funding’ to help your business get off the ground. As well as their financial support, angel investors may also provide expertise and assistance.
You can try to find an angel investor through one of the online platforms designed for such a purpose, as well as communities such as the Angel Investment Network and the UK Business Angels Association.
» MORE: What is an angel investor?
Friends and family
If you are just starting out, you may be able to turn to your family and friends for financial and business support. If you do borrow money from people close to you, it is always a good idea to create a structured financial agreement in writing, including a repayment plan, to avoid potentially souring an important relationship if things go wrong in the future.
» MORE: Complete guide to lending money to friends and family
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