Everything you need to know about business finance

Whether you’re running a startup or a well-established company, business finance can provide access to capital, help manage cash flow, and support expansion. This guide explains how. 

Key takeaways

• Business finance involves raising money to support business growth

• You can use business finance to expand, pay for marketing, hire skilled staff or cover acquisition costs

• There are several different types of business finance, including debt financing, credit facilities, asset finance, equity finance and business grants

• It’s essential to compare your finance options carefully – consider how much money you need and what you might qualify for

What is business finance? 

Business finance refers to the process of securing funding to help a company grow. There are multiple ways to access finance, whether through selling shares, borrowing through a loan, or seeking public funding.

Business finance can be crucial to success, but it’s important to understand the different options to make the best choice for your business.

Why is business finance so important? 

There are many reasons why your business might need finance. Even if it’s already profitable, you may still require funding to support growth, acquire another business, or bridge short-term cash flow gaps.

Common reasons for using business finance include:

• Expansion – Whether you’re opening a new location, entering new markets or scaling up operations, finance can provide the capital needed

• Marketing and advertising:  – It can help cover the high costs of marketing campaigns

• Talent acquisition– If you want to attract top talent, you may need funding to offer competitive salaries, benefits and training  

• Debt management – Finance can help consolidate business debts and secure lower interest rates 

• Equipment upgrades – Investing in new equipment can improve productivity and keep you competitive 

• Research and development – R&D initiatives often require extra funding 

• Working capital – Maintaining cash flow is essential for daily operations and finance can help cover cash flow shortfalls 

• Acquisitions – If you’re looking to acquire or merge with another company, finance can provide the necessary funds 

Types of business finance available in the UK

If you’re considering business finance, there are numerous options available to you, including:

Debt financing

Debt financing simply means taking on debt to borrow money. Typical ways of doing this include taking out a business loan or overdraft, where you must repay the amount borrowed over time, with added interest. You can choose from short- and long-term business loans, as well as secured and unsecured. 

Debt financing can be a good option for companies with little or no equity. If repayments are made on time, it can also help build business credit. However, it does affect cash flow, so careful planning is needed.  

Credit facilities

Credit facilities offer a more flexible way to borrow, although the amounts are usually smaller than traditional forms of debt financing, such as loans.

Examples include a business credit card and a business line of credit. Both allow you to withdraw funds up to your set credit limit when needed and repay in flexible instalments, with interest added.

Credit facilities can be useful for boosting cash flow or covering unexpected expenses and, if used responsibly, can help build a credit history. 

Equity financing

Equity financing involves raising cash for your business by selling off part of it to investors via shares. These investors could be private individuals, international businesses, or the public, if you list on a stock market such as the London Stock Exchange.

While this can provide a substantial cash injection, it does mean giving up some ownership and control of your business.

Asset finance

Asset finance allows you to acquire equipment, machinery, or vehicles without paying the full cost upfront. Instead, you spread the payments over time in smaller instalments.

This can make it easier to replace old equipment or buy additional assets without putting pressure on cash flow. 

At the end of the agreement, you may own the asset outright, return it, or renew the contract. 

Business grants

If your business operates in a specific sector, such as energy or innovation, you may qualify for a grant. The main advantage is that grants don’t need to be repaid. However, qualifying criteria are usually strict.

What are the main sources of business finance? 

Just as there are many types of business finance, there are several ways to access it, including:

Banks and financial institutions

Banks and other financial institutions are popular choices for business loans and credit facilities.

Choosing a lender that is regulated by the Financial Conduct Authority (FCA) means they must follow strict rules and standards, offering additional consumer protection. If you believe you’ve been treated unfairly, you can also complain to the Financial Ombudsman Service (FOS).

Peer-to-peer lenders

Another way to secure a business loan is through a peer-to-peer lending platform. These platforms match businesses looking for funds with individuals or organisations willing to invest.

Interest rates can often be more competitive than those found on the high street, making the cost of borrowing cheaper.  

The government 

The government typically provides business grants, low-cost loans or tax credits. To qualify, your business may need to be in a particular sector or specific geographical location.

Angel investors and venture capitalists

If you’re looking for investors, you might consider angel investors or venture capitalists.

Angel investors – High-net-worth individuals who invest their own money in startups or early-stage businesses in exchange for a minority stake. Many also provide industry knowledge, experience, and useful contacts. 

Venture capitalists – These investors also focus on startups and early-stage businesses, but instead of using their own money, they channel finance from investment companies, such as pension funds. This often allows them to invest larger sums, though they typically require a bigger stake in return. 

Private equity firms

Private equity firms raise capital from institutional investors, including pension and insurance funds, and use these alongside their own money to create a private equity fund. They invest this capital in businesses in return for a significant ownership stake.

Crowdfunding platforms

Crowdfunding allows businesses to raise funds from a large number of people. Depending on the type of crowdfunding, investors may receive a share in your business or another form of reward in return for their investment.

Not all crowdfunding efforts succeed, but businesses with strong growth potential tend to have a better chance. 

Personal investments 

If you have enough personal savings or investments, using your own funds to finance your business can be a faster alternative to seeking external funding. As you’re not borrowing, you also won’t pay interest.

Friends or family

You could approach friends or family for investment, but it’s crucial to draw up a formal written agreement outlining the terms, including what happens if you’re unable to repay.

How to choose the right financing option for your business

Before deciding on a business finance option, consider:

• How much funding do you need?

  • Be as accurate as possible to avoid borrowing too much or too little

• What do you need the funds for?

  •  If you need to buy new equipment, asset finance might be a suitable option

• Are you willing to give up a stake in your business?

  •  If not, a traditional loan may be a better fit than equity financing

• Does your business have a strong credit history?

  • A good credit score can improve your chances of securing debt financing or credit facilities

• Do you work in R&D or innovation?

  • If so, you might qualify for a grant

How to secure business finance

There are several steps you can take to increase your chances of securing business finance.

If you’re planning to apply for debt financing or a credit facility, it pays to check your business credit report first. This can indicate how likely you are to qualify for a loan or line of credit. The higher your credit score, the better your chances. If your score is low, you may be able to take steps to improve it.

You should also check eligibility criteria carefully. Some finance providers require businesses to have been trading for a minimum period or to meet a specific turnover threshold.

Having a comprehensive business plan can also strengthen your application. Banks and investors will often ask to see one when assessing whether to approve funding.  

Can you get business finance with bad credit? 

Yes, but your options may be more limited. If you’re applying for a bank loan, you may face higher interest rates or restrictions on the amount you can borrow.

Startups may have better success with angel investors or venture capitalists, as these investors focus on business potential rather than credit history.

Tips to manage business finance effectively 

Once you successfully secure business finance, it’s essential to know how to manage it. The tips below can help:

• Update budgets and forecasts – When receiving a cash injection, review and adjust your budget and forecasts to reflect the new funds. If you’ve taken out a loan, make sure to account for repayment costs

• Keep financial records up to date – Ensure your financial reports and accounts are accurate. If you don’t already work with an accountant, consider hiring one or using suitable accounting software

• Monitor cash flow carefully – Regularly track income and expenses to ensure you can meet your financial obligations

• Separate accounts – It’s crucial to separate your personal and business finances so that you have a clearer picture of how your business is performing. If you don’t already have a business bank account, now’s the time to open one 

In summary

Securing business finance can enable your company to take advantage of new opportunities, expand, hire staff, invest in equipment and so on. Ultimately, it can be key to ensuring you have sufficient cash to lead your business to success.  

However, it’s essential to choose the right type of finance for your business. Compare the different options carefully, and consider what’s affordable and what type of finance your business is most likely to qualify for.