How to get finance for a business

Many small businesses lack the immediate funds to launch or expand their operations. As a result, it’s common to turn to business finance to secure the necessary funding.

But with so much choice available, it can be tricky to know where to start. This guide runs through a variety of business finance options in detail, so you can make the right choice.

Who offers business finance? 

There are several ways to access business finance, depending on the type you choose and how much you need to borrow:

• High street banks and other financial institutions 

• Individual investors

• Venture capitalists

• Private equity firms

• Members of the public

• The government

13 ways to finance a business

Below, we’ve outlined 13 ways to finance your business: 

1. Business loans

A business loan is a popular way for small business owners to borrow funds. You apply for a lump sum that you then repay in monthly instalments over a pre-agreed term. 

Unsecured business loans don’t require you to offer an asset as security, making them more attractive to smaller companies and startups that often don’t have access to valuable assets. But it’s not uncommon to be asked to sign a personal guarantee instead. This means you become personally responsible for the debt if your business can’t repay it. 

You can typically borrow up to around £750,000 with an unsecured loan, but this depends on your business’s annual revenue and credit history. You usually repay this over a term of one to five years.

If you apply for a secured business loan, you must use an asset, such as property or land, as collateral. That asset is at risk if you don’t pay the money back. However, because this reduces the lender’s risk, you can typically borrow much larger sums (often millions) over longer terms of up to 25 years. 

Both established businesses and startups can use business loans. 

Pros

• You borrow a cash lump sum

• Some loans have fixed monthly repayments, helping you budget

• Unsecured loans don’t require collateral

• You don’t need to give up shares in the business

Cons

• Can be harder to qualify if your business has a limited credit history

• You may need a personal guarantee

• You pay interest on your repayments

• You may have to pay an arrangement fee or an early repayment charge

2. Business credit cards

A business credit card offers a flexible way for small businesses to borrow the funds they need as and when required, as long as this doesn’t exceed the credit limit set by the lender. Again, you might be asked to sign a personal guarantee before a lender accepts your application.

Credit cards can work well for everyday business transactions or to help cover the cost of a bigger expense, such as new equipment. You can often provide your employees with cards to make it easier to manage travel expenses or other costs.

Monthly repayments are also flexible, but you must meet at least the minimum repayment. You usually pay interest on any remaining balance, but you can avoid this if you pay off the balance in full each month. 

Some business credit cards also offer perks such as interest-free spending, cashback, travel insurance or air miles. 

Pros

• Flexible way to borrow the cash you need

• You can issue extra cards to employees

• Can benefit from perks such as cashback

• You don’t need to dilute your stake in the business

Cons

• Interest rates can be high if you don’t repay the balance in full

• Annual fees and other charges often apply

• Borrowing limits are smaller than business loans

• May need a personal guarantee

3. Business overdrafts

Many business bank accounts come with a business overdraft, allowing you to dip into these funds to cover expenses as and when required. The size of the overdraft you’re offered depends on your business credit history and annual turnover. 

However, while overdrafts can offer a convenient and flexible way to borrow cash, interest rates tend to be high, so they should only be used as a short-term solution. 

Pros

• Flexible borrowing and repayments

• You don’t need to give up a share of your business

• Easy to arrange

Cons 

• Interest rates are typically high

• The borrowing limits are lower compared to other sources of finance

• Can make it easy to overspend

4. Invoice finance

Invoice finance lets you borrow money by using your business’s unpaid invoices as collateral. An invoice finance provider gives you access to a percentage of the value of those invoices – typically up to 95% – and you repay this once your customers have paid their invoices. 

Depending on the option chosen, the lender either collects payments on your behalf and pays you the balance, minus fees, or you collect invoice payments as normal and then pay back what you owe to the lender.

Pros

• You don’t need additional collateral because the invoices act as security

• Gives you immediate access to cash from invoices

• With invoice factoring, the lender chases payments so you don’t have to

Cons

• Fees can be high

• Customers may know you’re using a finance provider

• Some lenders require a minimum contract length 

5. Asset finance

Asset finance is an option if you need to buy equipment or machinery for your business but don’t have the funds to pay for it upfront. Rather than investing large amounts of capital to buy these items outright, asset finance enables you to spread the cost over time, making smaller regular payments over the term of the agreement.

Depending on the type of asset finance you choose (hire purchase, contract hire, equipment lease and so on), at the end of the agreement, you might own the asset outright, return it or renew the contract. 

Pros

• Manageable repayments, with no large initial outlay

• Some agreements let you upgrade your equipment regularly 

• You don’t need to tie up cash reserves in your assets

Cons

• It can work out more expensive than buying the item outright

• Your lender can repossess your assets if you don’t meet the repayments

• Depending on the type of agreement, you may never own the asset 

6. Peer-to-peer lending

Peer-to-peer (P2P) lending is an alternative source of funding for small businesses. As with traditional business loans, you borrow a lump sum of cash that you repay with interest over a set term. 

However, rather than applying for your loan through a traditional bank, you apply through an online platform that lets your business access funds from a pool of investors. Because of this, rates can be more favourable than those on the high street.

Pros

• No need to give up any ownership in your business

• More favourable interest rates

• The application process is usually quicker than traditional lending methods

Cons

• Fees usually apply

• You may not be able to borrow as much as you could with a traditional bank loan

• You may have to pay higher rates if you have a poor credit history

7. Merchant cash advance

A merchant cash advance could be a suitable option if your small business takes most of its sales through card terminals. It gives you a lump sum upfront and you repay this through a percentage of your card sales. There’s no interest to pay, but fees usually apply. 

You typically receive 1.5 times your business’s monthly card sales, and repayments fluctuate depending on how well your business is doing. You pay more when business is booming and less during quiet patches.

Pros

• Adaptable repayment plan

• No collateral required

• You don’t necessarily need a healthy credit history because lenders base their decision on your card payment turnover

Cons

• Can be more expensive than other types of finance

• Not suitable for borrowing large sums

• You can only use card payments – cash payments, invoices and bank transfers don’t count

8. Equity crowdfunding

Equity crowdfunding enables you to raise funds from several different investors, without taking on debt. It can be a good option if you’re funding a startup. 

It works by pitching your business idea online and offering a stake in your business in exchange for investment. Usually, crowdfunding investors only pledge small sums, so you may end up with lots of investors to secure the funds you need.

Pros

• The money you receive is an investment, so there’s no debt to repay

• Investors can also provide a network of support to help your business grow

• You can decide how much of your business you’re willing to give away

Cons

• You may not achieve your funding goal

• You must give up a portion of ownership in your business

• You must keep your investors updated on your progress and financial performance 

9. Angel investors

Angel investors are wealthy individuals who invest money in your business in exchange for some equity in your company. Some invest alone but others join together as syndicates. 

Angel investors tend to invest in early-stage businesses and can also act as mentors, offering support with their time, knowledge and contacts. 

Pros

• The money you receive is an investment, so there’s no debt to repay

• Can provide an alternative option for startups that might struggle to get a loan

• Angel investors can use their expertise to help your business grow

Cons

• You must give up a stake in your business

• Angel investors can have high expectations, putting pressure on you to hit targets

• It can take a long time to find suitable angel investors 

10. Venture capital

Venture capitalists usually invest in startup and early-stage businesses, but rather than investing their own money, they channel finance from investment companies, such as pension funds. 

This enables them to invest larger sums of cash, but in return, you usually need to give up a larger stake in your business. Venture capitalists often want a say in your company’s strategy and management, too. 

Pros

• Can provide quick access to cash

• Venture capitalists often bring valuable industry experience

• The money you receive is an investment, so there’s no debt to repay

Cons

• Typically requires you to give up a significant equity stake in your business

• Venture capitalists expect high returns on their investments 

• Investors may insist on making business decisions

11. Private equity

Private equity is more suited to established private businesses. Private equity firms raise funds from institutional investors, such as pension funds and insurance firms. They use this cash alongside their own money to create a private equity fund that they invest into your business. In return, they expect a large stake in your company. 

Pros

• Private equity firms bring a wealth of knowledge and expertise

• The money you receive is an investment, so there’s no debt to repay

• Offers access to finance that might be difficult to obtain through traditional banks

Cons

• You need to hand over a significant stake in your company

• Investors may insist on making business decisions

• Private equity firms expect detailed documentation, including financial statements and cash flow analysis, before they agree to invest

12. Bootstrapping

Bootstrapping refers to the process of starting your own business using your own money. Rather than relying on external funding, you use your personal savings or money borrowed from friends and family to get your business up and running. Once revenue begins to flow in, you re-invest some of the income to help your business grow.

Pros

• By avoiding external funding, you don’t take on debt

• You don’t need to give away a share of your business

• Avoids the stress and hassle of applying for loans and other funding

Cons

• You could lose the money you’ve invested

• You might not have enough money to get your plans off the ground

• You might need to continue with your main job while launching your business

13. Government grants

Government grants aim to support new businesses, or those in certain sectors of the economy or specific areas of the UK. Unlike a loan, you don’t need to repay the funds, and unlike equity finance, you retain full ownership of your business.

However, eligibility criteria can be strict, making it much harder to qualify. 

Pros

• You don’t need to repay the funds

• You could receive a substantial sum of money

• You keep ownership of your business

Cons

• Eligibility criteria are strict and competition is fierce 

• The application process can be time-consuming 

• Some grants require you to invest an equivalent amount of money from your own funds

Equity vs debt financing: what’s the difference? 

Business finance broadly falls into two categories: equity financing and debt financing. With debt financing, such as loans and overdrafts, you borrow money and pay it back with interest. Provided you meet the repayments, it’s a straightforward way to fund your business and can enable you to build a business credit history. 

Equity financing, on the other hand, involves selling a share of your business to investors. The more successful your business, the more your investors profit. Your business might also benefit from your investors’ experience and contacts. However, equity finance is more complex to arrange. It also means giving up some ownership and control of your business.

You therefore need to consider which of these two options works best for you and your company.