Finance can be used to assist a business in paying for numerous company activities such as investing, making accomplishments, and even just improving the business.
There are so many different finance and funding options available to UK businesses that it can be hard to identify which is the most beneficial for your goals. In this guide, we will walk through the different business financing options to ensure your money is well spent.
What Is Business Finance?
Business finance essentially refers to the raising and managing of funds in order to start a business, grow a business, or run it. It can be used for business activities such as budgeting, purchases, saving, or investing.
The Two Main Types Of Business Financing
When it comes to raising cash for purchases or expenses, businesses will often choose either debt financing or equity financing.
What is Debt Financing?
In short, debt financing involves the business borrowing money and then paying it back with interest. One of the most common types of debt financing is by a loan.
This can be as a short-term, revolving, or long-term loan. That being said, the loan must be repaid regardless of whether the business is or isn’t making a profit.
For debt financing, the lender will have no control over your business as once you pay off the loan, your financial relationship ends.
- The interest is tax-deductible, meaning you can reduce your taxable income.
- Retains management control by the lender having no say in how you manage your business or having a claim to your profits.
- It is easy to budget for as you know how much you’ll be paying back each month in advance.
- They are accessible.
- The debt has to be repaid.
- There are set qualification requirements, so you will need a good enough credit rating.
- You will have to provide collateral that could put some of your business assets at risk.
- You may be asked for a personal guarantee which could put your personal assets at risk too.
What is Equity Financing?
Equity financing works by the business owner selling a portion of the company to the lender in exchange for capital.
Unlike debt financing, equity finance doesn’t involve any repayment, but the financial relationship will continue.
- There is no burden of paying back a loan, which can be crucial if the business was not generating enough profit.
- The investors’ money doesn’t have to be returned in the event that the business falls through. This takes the weight off of your shoulders if you were concerned about personal guarantees and other collateral.
- Can be a more suitable option if you have a poor credit score.
- Through a partner, you can gain industry experience and open up new valuable connections.
- The primary downside to equity financing is that you are having to give up a portion of your ownership.
- The lender will have some control over your business.
- You will be expected to share the profit with your lender.
- Equity often costs more than debt financing as investors are risking more.
- It can be more challenging to attract investors in the first place.
Debt Financing Options Available To Businesses
Now we’ve covered what debt and equity financing are, there are many different options available to businesses. Firstly, with debt financing, there are the following:
You can find business loans that span short-term, medium-term, or long-term periods depending on your circumstances. These are repaid in regular payments over a set period.
A short-term loan tends to last from three months to a year and is often used for costs such as cash flow management, expansions, training, inventory purchases, and business emergencies.
Medium-term loans tend to last from one to five years with long-term loans usually lasting from five to thirty years. These are used to cover costs such as starting up a business, expansions, equipment investment, and relocation.
Business Loans (Secured)
Secured business loans use your business assets as security should you not be able to repay the loan. This includes equipment, buildings, and other high-value property.
The loans tend to start at £25,000 and are often cheaper than unsecured loans as there’s less risk involved for the lender.
Unsecured Business Loans
On the flip side, unsecured business loans allow you to borrow money without having to secure it against your business assets or property.
That being said, some lenders may ask for a personal guarantee so that there is less risk for them. Unsecured loans are usually more expensive than secured ones due to the higher risk involved, especially if there is no personal guarantee in place.
Much like with a residential mortgage, businesses can take out a commercial mortgage on business properties.
And like with a residential mortgage, the benefits are the same. For example, businesses will not have to rely on rent and they will have more flexibility for renovation and expansion projects.
Asset Financing or Leasing
Asset financing is a measure businesses can take to raise funds to buy or rent business equipment or machinery. This can include anything from work supplies to vehicles and large machines.
Repayments are usually spread out across the life of the equipment.
Peer to peer lending
With the rise of the internet, peer to peer lending has become incredibly popular. This is because it is an online service that works by matching borrowers with lenders.
When the borrower repays their finance the lenders will also receive a return on their investment. It is a way for them to achieve a higher rate of interest.
Most bank accounts offer the option for businesses to spend more money than what is currently in the bank account’s balance. For this, there will be an agreed set limit and interest rate.
This can be useful for instances such as if there are late customer payments.
Line of Credit/Credit Card
Credit cards are useful for paying business expenses but it does come with a set monthly limit. These tend to have a higher interest rate than methods like loans and overdrafts. However, if you pay the balance in full every month then you will not have to pay the interest.
A business line of credit lets you access a set credit limit to pay for your business’s needs. Like with a credit card, you will only repay what you’ve used.
A hire purchase is a type of asset finance that gives you instant access and ownership to the assets once you have completed your payments.
These agreements usually last between one and six years and require you to make an initial deposit.
The government provides UK Export Finance which is designed to help businesses with their international trade. It helps with order fulfilment and insurance in the event that a buyer falls through.
Trade, Import & Export Finance
Like with export finance, trade and import finance are in place to aid businesses in international trade. This helps to cover the upfront costs and deliver successful imports and trade.
Unfortunately, unpaid invoices can have an impact on small businesses in particular. Invoice finance allows business owners to borrow the amount of an unpaid invoice to provide an immediate cash flow. Then once the customer pays, they can repay the finance.
Merchant Cash Advances
Merchant Cash Advance is for businesses that take payments from customers through a card terminal. This includes businesses like retailers and restaurants. The payments are not fixed and vary depending on your business’s income.
However, they can be an easy-to-manage way of raising and repaying the finance.
Start-Up and New Business Loans
Start-up and new business loans are designed to help fledgling businesses fund their company or brand. These are typically provided by private loan companies, but some larger banks may also provide start-up and new business loans.
Bridging loans are most commonly taken out when your business is buying property or moving to new business premises. They essentially bridge the gap as a transaction goes through.
These are short-term loans that usually last less than a year.
Equity finance broadly means the selling of shares in your business in exchange for cash investment. There are different types of equity funding for different purposes, such as the following:
Venture capital is a type of investment for businesses with promising ideas they want to develop. Here, investors usually receive equity in your business in exchange for their funding. This is a good option for businesses with shorter trading histories.
The risk for the investor comes if the idea isn’t successful.
Angel investors are individuals who have a high net worth and want to invest in small businesses and start-ups. This is normally in exchange for equity in the business.
The challenge for small business owners when it comes to angel investors is that there is a lot of competition.
Equity crowdfunding is where early-stage and start-up businesses offer shares or other securities to potential investors in exchange for funding. This has become a popular way for businesses to launch their ideas and projects.
Crowdfunding can be done using various online platforms such as Kickstarter, but different rules may apply to each platform, so always check carefully.
Private equity differs because as the name suggests, financing is given to businesses that are not listed publicly. The funding is given to help the business develop and is often in exchange for a share in the company or buying the business altogether.
Corporate Venture Capital
Corporate Venture Capital is a type of venture capital except that it is corporations investing in private companies.
This is typically done by large- or medium-sized businesses that want to invest in small businesses or start-ups. Like with venture capital, this typically comes with an equity agreement.
Public Listing / IPO
A public listing or Initial Public Offering (IPO) is where a private business offers shares of the company to the public. This is usually to institutional or individual investors.
Incubators and Accelerators
In short, incubators and accelerators help to support start-ups and early-stage business growth. Incubators help develop business plans and ideas and build the business up.
Accelerators help develop businesses that already have the minimum viable product, and need the resources to promote it and grow.
While equity funding and debt funding are the most popular options for businesses, there are other means of funding you can consider.
Government & Other Grants
These loans and grants can be difficult to access as they are intended for those most in need. If you receive a grant, you do not need to repay it. If you receive a loan, you will have to repay it, but these may come with low-interest rates.
While tax reliefs don’t offer complete funding like other means, they can be useful in making back money. Tax reliefs allow you to deduct payments you make during the tax year, so you ultimately get taxed less.
Friends & Family
Start-up businesses particularly favour raising money from friends and family due to the flexibility and good terms. The downside is that there is emotional involvement that can sway decision-making.
Debenture bonds are a type of debt instrument that are typically used to fund projects that are expected to produce revenue in the future. They are medium- to long-term debt instruments that normally come with a fixed rate of interest. These are not always secured against collateral.
Choosing The Right Type Of Funding For Your Small Business
There are so many different options you can opt for funding your small business. Understanding what your options are can help you make the most rewarding decision for your goals and business plans.
Important factors to consider about getting business finance
When considering different finance options, weigh up the pros and cons of each and be realistic about your business forecast. When looking around, you should keep the following factors in mind:
- Analyse the level of risk you deem that you are and what you are comfortable with.
- Look at the cost of the finance.
- Consider the amount of control you want to maintain.
- Identify whether you are looking for short term or long term financing.
What Do I Need To Apply For A Business Loan?
When applying for a business loan, it is important that you are well-prepared before submitting an application. Generally, you will need the following:
- Business plan – Detail how you’ll be successful, how you will use the finance, and how you’ll repay the investor.
- Financials – Bank statements, financial statements, tax returns etc.
- Creditworthiness – You need to pass credit checks and show how you can afford the loan.
- Security – You may need to demonstrate what you’ll use as security.
Choosing The Right Type Of Lender For Your Small Business
There are various lenders small business owners can look for when it comes to funding, with each having its own advantages and disadvantages.
The Main Types of Lenders Are:
Traditional High-Street Banks
This method seeks out the right British business bank to provide a loan to grow your business.
- A convenient way to access extra finance
- Lending is available for numerous uses
- You maintain control over your company
- Low fixed rates of interest
- A trustworthy reputation
- Can access other services
- A strict lending criterion makes it hard for small businesses to access their services
- A long application procedure
- Requires a good credit report
- May use specific collateral
Online and alternative business lenders
Online lenders have become increasingly popular for small businesses, and there are a lot of available options.
- Quick hassle-free applications
- Fast funding where you can receive the finances within days
- Are more lenient on poor credit history
- There’s often no collateral involved
- Vast options available
- Usually higher risk compared to bank loans
- Repayments can be unrealistic
- No in-person interaction as the process and your details are all online
- Often high costing
Peer-to-peer lenders are a form of crowdfunding by receiving finances from multiple investors.
- A simple and quick application process
- Usually have low rates of interest
- Maintain control over your business
- Flexible loan amounts
- Do not need to offer collateral as security
- Although rates of interest are low, they can vary drastically depending on your lender
- No personal interaction
- Carry out credit checks on your personal and business account profiles
- Less protection if you struggle to repay the loan
- May have additional fees
How Can I Apply For Small Business Grants?
The UK government offers a helpful Business Finance Support Finder tool that allows you to look for support in your area.
Understandably, each application procedure is different and may require you to meet different criteria. Therefore, be sure you thoroughly check these to ensure you don’t waste time realising you won’t qualify further down the line.
In your application, explain how you meet the grant’s criteria and how you’ll use the funding. Create a thorough and detailed business plan which should cover your trading history, how you’ll be successful and again, how you’ll use the money.
The Benefits Of Business Financing
There are many benefits of business financing as it can provide a boost for your small business to grow and develop the company, products, and services. The following are just some of the benefits:
- Can help you launch or expand your business
- Can build your business credit
- Covers emergency expenses
- Can be used on a range of business developments including property or equipment
- Could sustain your business during slow times
There are various small business finance options on the market. This is why it is important to spend time shopping around to choose the right loan or finance for your needs and circumstances.
Overall, finance can be incredibly useful in helping give your small business a boost to either setup, improve the operations or equipment, or offer internal support such as training.
Do I need to be the owner of a business to get a business loan?
To access most business loans, you will need to be either the business owner or a registered company director.
Where do I find small business grants?
There are firstly different types of grants you can apply for, which can usually be categorised under the following:
- Direct grants
- Soft loans
- Resource and training grants
- Tax relief
A good place to start looking for small business grants is through the Business Finance Support Finder or the Local Enterprise Partnerships’ Growth Hub which can help you find local support.
Some of the most popular grants in the UK include:
- The National Lottery Heritage Fund
- Innovate UK
- New Enterprise Allowance
- Arts Council England
- Seed Enterprise Investment Scheme
- The Prince’s Trust
What is the easiest business loan to get in the UK?
It is worth noting that the loan that is deemed to easiest to qualify may not be the best for your circumstances as all loan types come with pros and cons.
Generally, it is deemed that an unsecured business loan is one of the fastest and easiest routes to business finance as you are not having to secure assets.
Can you get a business loan with no income?
If you are unemployed due to retirement or other circumstances, you can still qualify for a business loan, but you will need a good credit score and another source of income, such as if you’re self-employed.
You will need to be able to show the lender that you can afford to make the monthly payments. If you have no income, this may be more challenging.