Your must-read guide to where to find business funding

Whether you’re launching a new company or looking to grow an existing one, you’re likely to need a cash injection at some point to help cover the cost of your plans. This guide explains the different business funding options available and where to find them, so you can make the right choice for your company.

What are the different sources of business funding?

A business loan is one way to fund the launch, development or growth of a business, but there are plenty of others, including: 

• Angel investors

• Equity/debt finance

• Startup loans

• Venture capitalists

• Government grants

• Crowdfunding

• Asset finance

• Peer-to-peer lending

If you have savings, you can also use your own money to finance your business dreams. Just remember to protect your personal finances by leaving yourself a cushion of cash you could use in an emergency. 

What type of funding is right for my business?

The right type of funding for your business depends on the answers to the following questions:

• Is it a startup or an existing business?

• Are you prepared to sell a stake in your company in return for funding?

• Are you eligible for any government grants?

• Can you afford to make regular loan repayments?

• Do you have assets, such as vehicles or equipment, that you can use as security for a finance deal?

Business funding options explained

It’s important to consider all the options when deciding where to seek funding for a business. 

Not every funding source will be suitable for your needs. For example, while some forms of business funding are aimed at entrepreneurs who need to meet startup costs, others can only be used by companies that are already up and running. 

Here, we run through the main options and explain what sort of businesses they can help finance.

Angel investors

Angel investors are typically high-net-worth individuals with a background in business or finance who seek out opportunities to provide startup funding and finance for young, high-growth companies in return for a stake in the business. This could be between, say, 10% and 25% of the company.

The amounts available through angel investment are typically between £5,000 and £500,000, although you may be able to borrow more via an angel investor syndicate.

This money provided is an investment rather than a loan, meaning the company receiving the money does not have to pay it back. 

However, once it starts making money, the angel investor(s) can claim a percentage share of the profis equivalent to their stake in the business.

Many angel investors also want a say in the running of the businesses they support – which can be a blessing or a curse depending on whether their vision corresponds with the business’s owner.

Good for: startups that would find it hard to get a standard business loan, early-stage companies looking for up to £500,000.

Equity finance

Equity finance involves raising capital in exchange for shares in a business. 

Unlike debt financing – which involves borrowing money that you must repay with interest – equity finance does not need to be repaid. Instead, the investors become partial owners of the business and can therefore claim a share of any profits made. 

Equity finance investors include both angel investors and venture capitalists, as well as private equity companies.

As with angel investment, the downside with this type of finance is that  investors often want a hands-on role in company operations.

On the upside, it’s a long-term form of financial support that often offers the potential for further investment. It’s also often an easier way for startups to borrow significant sums of money.

Good for: early-stage businesses, especially those in high-growth industries.

Start-up loans 

The government operates a Start Up Loan Scheme that can provide more modest sums to a maximum of £25,000. One advantage of the scheme is that it offers loans at a competitive interest rate. It also provides free mentoring support for interested entrepreneurs. 

Some banks and other lenders also offer their own startup loans. You can find out more about these with our short guide: Startup loans explained.

Good for: startups looking to borrow relatively small amounts who prefer to make loan repayments rather than give up a stake in their business.

Venture capital

Venture capital is equity finance provided by a company or organisation rather than an individual angel investor. Like business angels, venture capitalists seek out startups and small companies with lots of growth potential. As such, they often – but not always – concentrate on the technology and digital media sectors. 

UK businesses that have received venture capital funding include Pizza Express, Odeon and Spotify.

Good for: ambitious startups looking for significant cash injections in return for a share in their companies.

Government grants

The UK government offers a range of free grants for startups and small businesses. However, competition is fierce, the application process usually takes a long time, and you can only qualify if your plans match the specific purpose or project of the grant in question.

These purposes include:

• Boosting the regional economy

• Cutting energy costs or saving energy

• Creating jobs

• Reducing carbon emissions

• Buying specialist equipment

• Repairing or conserving buildings

You can find a list of what’s currently available on the government website. 

Good for: small businesses and startups that can meet their chosen grant’s requirements, and who are happy to spend the time and effort needed to make a successful application.

Crowdfunding platforms 

There are a growing number of online investment platforms that allow businesses to raise funds via a digital marketplace that attracts smaller investors, known as crowdfunding investors.  

These investors do a similar thing to business angels, although they generally invest much smaller amounts and do not provide support or guidance. Nor do they ask for a say in the management of the company.

If you want to try to raise funds for your business from friends and family, a crowdfunding platform can be a good place to set this up.

Good for: young companies and startups that would prefer not to borrow from a traditional lender, or for whom this is not an option.

Asset Finance 

Asset financing is a form of commercial finance that allows you to spread the cost of a car or a piece of expensive business machinery. 

In essence, you rent the asset in question from the lender until the loan has been paid in full. As a result, you need to demonstrate that you can afford the asset to get this type of finance.

Good for: small companies who have an asset they can use as security.

Invoice finance

Another form of business finance is invoice discounting, which you can use to bolster your cash flow in the short term by borrowing money against unpaid invoices. Once you receive payment for the invoices in question, you pay off the loan. 

Good for: small companies with unpaid invoices that they can use as collateral to get a loan.

Peer-to-peer lending 

Peer-to-peer lending is an online process that connects investors with borrowers. These borrowers may be individuals or businesses. For business funding, the loans provided typically come from a group of investors who agree to lend money to the company at a set interest rate.  In this sense peer-to-peer loans are similar to those a bank provides.

Good for: startups and young companies that are seeking smaller amounts and would prefer to avoid standard business loans.

Other sources of business funding 

You can also secure business funding by taking on a business partner or asking wealthy friends and family to support you. However, it’s important to recognise that if the business fails, you could sour the relationships you have with those who invested.

You may also find there are differences of opinion when it comes to how to manage the company once it is trading.So, it’s important to set up a proper loan agreement, or investment plan, if you choose this route.

If you are struggling to raise the funds to buy an existing business, another option is to ask the seller to accept stage payments.

This means you pay an initial deposit followed by a series of payments until you meet the agreed sale price. This allows you to use profits from the business to help cover the cost of its purchase.