Business financing is a must if you plan to grow your business or need to overcome short-term financial challenges. According to the latest business lending statistics, two in five SMEs in the UK opt for external finance with an average loan amount of £10,179.
In this guide, we will explore more than ten business financing options where in some cases you don’t have to pay interest on debt, or even repay the debt at all!
What is business financing?
Business financing is the process of obtaining funds to support your business operations. This can involve borrowing money, taking out loans, or seeking investments from outside sources. This is essential for covering expenses such as equipment purchases, hiring employees, expanding into new markets, or managing your cash flow.
Download the business financing checklist
This checklist covers all the steps and considerations that are crucial to financing a business— from assessing financial needs to planning for future financing.
What are the financing options for a business in the UK?
Here are the major business financing options available in the UK.
1. Self-Funding/Bootstrapping
Self-funding, or bootstrapping, is when a business owner uses their own personal savings or resources to finance their venture.
Examples: funds from personal savings, contributions from friends or family.
Pros:
- Full control: You maintain complete ownership of your business.
- No debt: There’s no interest or repayment schedule to worry about.
- Fewer restrictions: You have more flexibility in your business decisions.
Cons:
- Limited growth: Your growth may be constrained by your personal financial resources.
- Increased risk: You’re personally responsible for the business’s debts and losses.
- Time-consuming: It can take longer to build a substantial business without external funding.
Suitable for:
- Startups with low initial capital requirements.
- Businesses that can generate revenue quickly.
- Entrepreneurs who are willing to take on personal financial risk.
How to get started:
- Calculate how much you can invest without compromising your personal financial stability.
- Outline your business goals, target market, and financial projections.
- Begin with a minimum viable product (MVP) to test your concept and generate initial revenue.
- As your business grows, reinvest profits back into the company to fund expansion.
2. Debt Financing
Debt financing involves borrowing money from external sources, such as banks, credit unions, or investors. This money is typically repaid with interest over a specified period of time. The UK Government offers loans for business financing, which is a type of debt financing.
Examples: bank loans, business credit cards, business overdrafts, asset-based lending and seller financing.
Pros:
- Leverage: You can use borrowed funds to expand your business and increase returns.
- Tax benefits: Interest payments on business loans may be tax-deductible.
- Quick access to funds: Debt financing can provide immediate capital for business needs.
Cons:
- Debt burden: You’ll need to make regular payments including interest, which can strain your cash flow.
- Risk of default: Failure to repay the debt can lead to financial difficulties or even bankruptcy.
- Loss of control: Lenders may have some say in your business decisions, especially if you default on the loan.
Suitable for:
- Established businesses with a solid financial track record.
- Businesses seeking to expand operations or invest in new projects.
- Companies that can generate sufficient revenue to cover debt payments.
How to get started:
- Check your personal and business credit score to assess your loan eligibility.
- Compare the interest rates, terms, and fees offered by different lenders.
- Present your business plan to potential lenders to demonstrate your financial viability. Lenders may require collateral, such as property or equipment, to secure the loan.
- Discuss interest rates, repayment schedules, and other loan terms with the lender.
3. Equity Financing
Equity financing involves selling ownership stakes in your business to investors. These investors, known as shareholders, provide capital in exchange for a portion of the company’s profits.
Examples: angel investors, venture capital and third-party equity investors.
Pros:
- No debt repayment: You don’t need to repay the invested capital.
- Increased capital: You can raise significant amounts of capital for growth and expansion.
- Access to expertise: Investors often bring valuable experience and networks to the business.
Cons:
- Loss of control: Investors have a say in the company’s direction and decisions.
- Dilution of ownership: As you sell more equity, your ownership stake in the business decreases.
- Potential for disagreements: Differences in opinions between founders and investors can lead to conflicts.
Suitable for:
- Startups seeking substantial funding for growth.
- Businesses with high growth potential and a strong management team.
- Companies that are willing to share ownership and decision-making authority.
How to get started:
- Present your business idea and investment opportunity to potential investors.
- Attend industry events, connect with venture capitalists, and explore crowdfunding platforms.
- Discuss the valuation of your business, the amount of equity to be sold, and the rights and responsibilities of investors.
- Be prepared to provide detailed information about your business including financial statements and market analysis.
- Once terms are agreed upon, the investment agreement will be finalised and ownership will be transferred.
4. Alternative Financing
Alternative financing refers to funding sources outside of traditional banks and financial institutions. These options can include peer-to-peer lending, crowdfunding, invoice factoring, and merchant cash advances.
Examples: crowdfunding ( equity or rewards-based), peer-to-peer lending, leveraged buyout, and assumption of debt.
Pros:
- Faster approval: Alternative lenders often have quicker approval processes compared to traditional banks.
- Flexible terms: They may offer more flexible repayment options or terms for businesses with less-than-perfect credit.
- Access to funding: Alternative financing can be a viable option for businesses that struggle to obtain traditional loans due to credit scores or other reasons.
Cons:
- Higher interest rates: Alternative lenders typically charge higher interest rates than traditional banks.
- Limited funding amounts: The amount of funding available through alternative sources may be limited.
- Potential for predatory practices: Some alternative lenders may engage in unfair or exploitative practices.
Suitable for:
- Startups or small businesses with limited credit history or collateral.
- Businesses seeking short-term funding or bridge financing.
- Companies that need funds quickly to address urgent cash flow requirements.
How to get started:
- Search online platforms, crowdfunding websites, and invoice factoring companies.
- Compare interest rates, fees, and repayment terms offered by different lenders.
- Be ready to provide financial statements, tax returns, and other required documents.
- Submit your application and provide any requested information. If approved, discuss the loan terms and conditions with the lender.
5. Grants
Grants are typically non-repayable funds provided by government agencies, foundations, or corporations to support specific projects or initiatives. They are often awarded based on a competitive application process.
Examples include both government and private foundation grants. You can find a list of the UK Government grants on their website, along with the eligibility criteria.
Pros:
- Non-repayable: Grants do not need to be repaid.
- No ownership dilution: Grants do not involve giving up equity in your business.
- Potential for significant funding: Grants can provide substantial amounts of capital for eligible projects.
Cons:
- Competitive: Grants are often highly competitive, and the application process can be time-consuming.
- Specific requirements: Grants typically have specific eligibility criteria and reporting requirements.
- Limited availability: Not all businesses or projects will qualify for grants.
Suitable for:
- Businesses engaged in research and development, education, or social impact projects.
- Organisations that align with the goals and priorities of grant-giving entities.
- Businesses looking for funding for specific initiatives or projects.
How to get started:
- Find a grant-giving organisation and consider the eligibility criteria.
- Create a proposal that clearly outlines your project goals, budget, and impact. Ensure that your project matches their specific requirements.
- Follow the application guidelines and deadlines carefully.
6. Customer-Based Financing
Customer-based financing involves obtaining funds directly from your customers. In other words, you take money from the customers before actually producing the product.
Example: pre-ordering and pre-pay
Pros:
- No external debt: You don’t need to borrow money from external sources.
- Getting to know the market for free: In this process, you can test the market by selling the idea first. You can assess what percentage of the target audience is convinced by your product and what their initial thoughts are.
- Acquire loyal customers: If customers are investing in your product, you can already tell they believe in your product. Hence, you can nurture them further to turn them into a loyal customer base through exclusive offers and bonuses.
- Save on production cost: You can save on production costs as you would only need to produce the number of items that are already pre-booked and paid for.
Cons:
- Limited funding: Customer-based financing may not provide as much capital as other options.
- Difficulty in convincing: You’ll need to convince your customers to pay in advance.
Suitable for:
- Businesses with loyal customer bases.
- Companies that sell high-value products or services.
- Businesses that want to improve customer retention and satisfaction.
How to get started:
- Find out if your customers are open to customer-based financing options.
- Highlight the benefits they’ll get from pre-booking/pre-paying.
- Create a marketing plan and outreach to the right people.
- Make it easy for them to pay immediately. You can set up an online store with a quick “book now” button or send emails with instant payment links.
7. Asset Finance
Asset finance is a type of financing that allows you to acquire assets, such as equipment, machinery, or vehicles, by making regular payments over a specified period of time. It is essentially a loan secured by the asset itself.
Examples: equipment leasing, invoice factoring and inventory financing.
Pros:
- Preserve cash flow: Asset finance allows you to acquire assets without the upfront costs, hence preserving your cash flow.
- Tax benefits: In some cases, the interest portion of asset finance payments may be tax-deductible.
- Ownership: You’ll eventually own the asset after making the final payment.
Cons:
- Regular payments: You’ll need to make regular payments, including interest, over the term of the agreement.
- Security: The asset serves as collateral, so you could lose it if you default on the payments.
- Limited flexibility: You may have restrictions on how you can use the asset during the financing period.
Suitable for:
- Businesses that need to acquire equipment or machinery for operations.
- Companies that want to spread out the cost of asset purchases over time.
- Businesses with a solid financial track record and the ability to make regular payments.
How to get started:
- Finalise the type and value of the asset you would be putting up as collateral.
- Compare the interest rates, terms, and fees offered by different asset finance providers.
- Provide financial statements, tax returns, and other required documents to the lender.
- Discuss the loan amount, interest rate, repayment schedule, and any additional fees. Once terms are agreed upon, sign the asset finance agreement.
8. Specialised Financing
Special financing or specialised financing is a type of lending that is specially curated for individuals with poor credit history.
Examples: microloans and merchant cash advances.
Pros:
- Accessibility: Microloans and merchant cash advances are often more accessible to businesses with less-than-perfect credit.
- Quick approval: These financing options can provide funds quickly, especially for urgent cash flow needs.
- Flexibility: Lenders may offer flexible repayment terms or collateral requirements.
Cons:
- Higher interest rates: These types of financing often come with significantly higher interest rates compared to traditional loans.
- Limited funding amounts: The amount of funding available through microloans or merchant cash advances may be limited.
- Potential for predatory practices: Some lenders may engage in unfair or exploitative practices, especially with businesses in vulnerable situations.
Suitable for:
- Startups or small businesses with limited credit history or collateral.
- Businesses that are facing financial difficulties or need urgent cash flow.
- Companies that cannot obtain traditional loans due to credit challenges.
How to get started:
- Find lenders that offer microloans or merchant cash advances.
- Be ready to provide financial statements, tax returns, and other required documents.
- Submit your application and provide any requested information.
- If approved, discuss the loan amount, interest rate, repayment schedule, and any additional fees.
- Carefully evaluate the high interest rates and potential risks before accepting these types of financing.
9. Hybrid Financing
Hybrid financing combines elements of both debt and equity financing. It offers flexibility and potential upsides but also carries its own risks.
Examples: convertible debt and mezzanine financing.
Pros:
- You get the best of both: With hybrid financing, you get to enjoy the stability of debt financing and the potential upside of equity financing, which is great for minimising risk.
- Easy to qualify: Hybrid financing is easier to qualify for than equity financing alone.
- Less dilutive: You are likely to give up less ownership of your company compared to with equity financing.
Cons:
- High interest rates: You will have to pay higher interest rates than with traditional debt financing as there is more risk involved.
- Giving up control: While it is less dilutive, you’ll still give up some portion of control to the investors in the form of equity.
- Difficulty in finding lenders: Hybrid financing is not that common. Thus, it can be difficult to find lenders who are willing to provide it.
Suitable for:
- Startups or small businesses seeking additional capital for growth.
- Companies with a strong business plan and potential for significant returns.
- Businesses that want to avoid diluting ownership too early on in their development.
How to get started:
- Make sure you understand the different types of hybrid financing and their implications.
- Highlight your company’s potential for growth and value through a detailed business plan.
- Connect with venture capitalists, angel investors, or specialised lenders that offer hybrid financing.
- Discuss interest rates, conversion terms, equity warrants, and other relevant conditions. Once terms are agreed upon, finalise the financing agreement.
10. Trade Credit
Trade credit (aka supplier financing) is a form of financing where a business can purchase goods or services on credit from suppliers, deferring payment for a specified period of time.
Pros:
- Interest-free financing: In many cases, trade credit can be obtained without paying interest.
- Improved cash flow: Deferring payments can help manage cash flow and support business operations.
- Stronger supplier relationships: Building good relationships with suppliers can lead to better terms and conditions.
Cons:
- Limited funding: Trade credit is typically limited to the amount of credit extended by suppliers.
- Late payment fees: Failure to pay on time can result in late fees or penalties.
- Loss of discounts: Taking advantage of trade credit may mean forgoing early payment discounts offered by suppliers.
Suitable for:
- Businesses who have good relationships with suppliers.
- Companies that need to manage their cash flow or purchase inventory.
How to get started:
- Discuss payment terms, credit limits, and any associated fees with the suppliers.
- Establish your creditworthiness by showing your business’s financial stability and ability to repay the credit.
- Avoid exceeding your credit limits and pay invoices on time to maintain good credit.
11. Revenue-Based Financing
Revenue-based financing is a type of funding where investors provide capital in exchange for a share of the business’s future revenue.
Pros:
- No equity dilution: Investors do not acquire ownership stakes in the company.
- Flexible repayment terms: Payments are based on the company’s revenue, making them more manageable.
- Focus on performance: Investors are incentivised to see the business succeed as their returns are directly tied to revenue.
Cons:
- Higher cost of capital: Revenue-based financing often comes with higher interest rates or fees compared to traditional debt.
- Limited upside for investors: Investors may have a capped return, even if the business performs exceptionally well.
- Potential for disputes: Disagreements over revenue calculations or payment terms can arise.
Suitable for:
- Businesses with predictable revenue streams.
- Businesses seeking funding without traditional debt or equity financing.
How to get started:
- Find investors or other funding platforms that specialise in this type of financing.
- Provide detailed information about your revenue forecasts and growth potential through financial projections.
- Discuss the royalty rate, payment terms, and any other relevant conditions.
- Once terms are agreed upon, finalise the financing agreement.
12. Business Incubators and Accelerators
Business incubators and accelerators are organisations that provide support, resources, and often seed funding to early-stage startups. They offer mentorship, networking opportunities, and access to workspace, technology, and other essential resources.
Pros:
- Seed funding: Incubators and accelerators often provide seed funding to help startups get off the ground.
- Mentorship and guidance: Experienced entrepreneurs and industry experts can offer valuable advice and support.
- Networking opportunities: Connect with other startups, investors, and industry leaders.
- Access to resources: Benefit from shared workspace, technology, and other essential resources.
Cons:
- Competition: Admission to incubators and accelerators can be competitive.
- Equity dilution: Some incubators or accelerators may require equity stakes in exchange for their support.
- Limited time: Programs often have a fixed duration, and startups may need to graduate to continue receiving support.
Suitable for:
- Early-stage startups who are seeking initial funding and support.
- Businesses that can benefit from mentorship, networking, and access to resources.
How to get started:
- Find programs or participate in industry events that align with your business goals and particular industry.
- Create a solid pitch and business plan to showcase your potential.
- Connect with individuals who can provide referrals or insights.
13. Corporate Venture Capital
Corporate venture capital (CVC) is a type of investment made by established corporations into early-stage startups or other companies. The profit you make on those investments is then redirected to your business finances.
Pros:
- Strategic advantages: CVC investments can provide corporations with access to new technologies, markets, or talent.
- Portfolio diversification: Investing in startups can diversify a corporation’s revenue streams and reduce risk.
- Financial returns: CVC investments can generate financial returns, including capital gains and dividends.
Cons:
- Higher risk: Investing in early-stage startups carries a higher risk of failure.
- Time-consuming: Managing CVC investments can be time-consuming and require specialised expertise.
- Potential conflicts of interest: CVC investments can sometimes create conflicts of interest between the corporation and its portfolio companies.
Suitable for:
- Established corporations with excess capital.
- Companies looking to expand into new markets or acquire new technologies.
How to get started:
- Create a dedicated fund for corporate venture capital investments.
- Outline your investment criteria, focus areas, and risk tolerance.
- Find potential startups or companies that align with your strategy. Thoroughly evaluate the investment opportunity, including the company’s management, technology, and market potential.
- Once selecting potential companies, discuss investment amounts, valuation, and any other relevant terms.
14. Initial Public Offering (IPO)
An IPO is the process of offering a company’s stock to the public for the first time. This allows the company to raise significant amounts of capital by selling shares to investors.
Pros:
- Significant capital: IPOs can raise substantial amounts of capital for business growth and expansion.
- Increased visibility: Going public can enhance a company’s reputation and visibility.
- Exit strategy: For existing investors, an IPO can provide an opportunity to sell their shares and realise a return on their investment.
Cons:
- Increased scrutiny: Public companies need increased regulatory oversight and public scrutiny.
- Loss of control: Public shareholders have a say in the company’s affairs, which can dilute the control of existing owners.
- Expensive process: IPOs can be costly and time-consuming to undertake.
Suitable for:
- Mature companies with a strong track record and significant growth potential.
- Businesses that need to raise large amounts of capital for expansion or acquisitions.
How to get started:
- Prepare your company for IPO by checking whether you meet the financial and governance requirements for a public listing.
- Select investment banks to underwrite the IPO and manage the process.
- Submit a registration statement with the relevant regulatory body, the Financial Conduct Authority (FCA) in the UK.
- Conduct a roadshow to present your company to potential investors and gauge interest.
- Determine the IPO price and allocate shares to investors. Once that happens, the company shares will start getting traded on a public stock exchange.
Why would a new business need finance?
A new business needs finance to cover various expenses, including:
- Running costs include rent, equipment, inventory, marketing, and legal fees.
- Paying salaries and utility bills.
- Investing in new growth opportunities such as hiring additional staff or investing in new products.
- Covering short-term cash shortages or unexpected expenses.
When to get funding for a startup?
Generally, you should seek funding when your startup has:
- Proven to resonate with your target market.
- Established a reliable revenue stream and can demonstrate traction.
- A business model that can be scaled efficiently with additional capital.
- Need to hire key talent or expand your team to support growth.
What is the best loan option for a new business?
The best loan option for new startups would be a start-up loan from the UK government. The UK government offers startup loans through various schemes, such as the Start-Up Loan.
Here, you can apply for a loan amount anywhere between £500 and £25,000 with a 6% interest rate. You can repay the loan over the course of 1 to 5 years. There is no application fee or early repayment fee.
Requirements and eligibility for the loan-
- You must be a UK resident.
- Aged 18 or above.
- Have a UK-based business (or business plan) that has been trading for less than 36 months.
However, if your business is older than that, here are some other options for you.
- Business credit cards
- Small Business Administration loans (SBA)
- Online lenders
- Crowdfunding
- Alternative Financing
- Hybrid financing
- Trade Credit
- Business incubators and accelerators
How Mergers Acquisitions UK can help you with financing your new business
At Mergers Acquisitions UK, we can help you grow your business:
- Connecting you with potential investors: Mergers Acquisitions UK can introduce you to relevant investors who align with your business goals.
- Guide with pitching: With our guidance, you can craft a persuasive pitch that attracts investor interest.
- Navigate funding: Our team will assist you in every step and help with the complexities of fundraising and negotiating favourable terms.
- Explore alternative financing options: Our expert team can suggest other funding avenues such as grants, crowdfunding, or strategic partnerships.
- Plan for the future: Extending beyond initial funding, our experts will help with exit strategies, mergers and acquisitions, and ongoing financial planning as well.