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How do I get funding for an existing business?

An existing business may need additional funding to pay for its day-to-day running, to grow its sales, expand into new markets, or to develop new products or services. Here’s key information about funding an existing business.

What’s the difference between debt and equity finance?

When it comes to financing your small business, one of the fundamental decisions you’ll face is whether to pursue debt or equity financing. Both options offer unique advantages and considerations, and understanding the differences between them is crucial for making informed decisions about your business’s financial future.

Debt finance

Debt financing involves borrowing money that must be repaid over time, typically with interest. This can take various forms, including traditional bank loans, lines of credit, or even loans from friends and family. Here’s a closer look at the key features of debt finance:

  1. Fixed repayment obligations: With debt financing, you’re obligated to make regular payments, usually monthly or quarterly, to repay the principal amount plus interest. These fixed repayment obligations can provide predictability for budgeting purposes.

  2. Maintain control: When you take on debt, you retain full ownership and control of your business. Lenders typically don’t have a say in how you run your operations or make strategic decisions.

  3. Interest costs: While debt can provide quick access to capital, it comes with the cost of interest payments. The total cost of borrowing includes not only the principal amount but also the interest accrued over the loan term.

  4. Collateral requirements: Many lenders require collateral, such as business assets or personal guarantees, to secure the loan. This provides assurance to the lender but may pose a risk to your personal assets if you’re unable to repay the debt.

Examples of debt finance include: bank loans, overdrafts, lease hire, asset-based (such as invoice financing and supply chain finance)

Equity finance:

Equity financing involves raising capital by selling shares of ownership in your business to investors. Unlike debt financing, equity financing doesn’t require repayment of funds but instead offers investors a stake in the company’s potential success. Here’s what you need to know about equity finance:

  1. No repayment obligations: Unlike loans, equity financing doesn’t involve regular repayment obligations. Instead, investors receive a share of the profits and losses of the business.

  2. Shared ownership: By selling equity, you’re giving up a portion of ownership and decision-making control in your business. Depending on the terms of the agreement, investors may have a say in strategic decisions and operations.

  3. Risk sharing: Equity investors share in the risks and rewards of your business. If your business succeeds, investors stand to benefit from capital appreciation and potential dividends. However, if the business fails, investors may lose their investment.

  4. Long-term commitment: Equity financing often involves a long-term commitment from investors, as they typically expect to see a return on their investment over time. This can provide stability and ongoing support for your business’s growth initiatives.

Examples of equity finance include: venture capital, angel finance, crowdfunding and IPO/public offering.

1:24

Video: Should I try to arrange a larger overdraft or loan?

by Informi

It makes sense to explore your funding options firstly with your bank. Your two most likely funding options are:

  • Arranging or extending an overdraft facility.
  • Taking out a business loan. 

As with all funding options, it really depends on what you’re looking to achieve.

An overdraft tends to be a short-term option for managing your cash flow. So, if your business is growing, you may benefit from an larger overdraft facility that reflects your increased turnover. However, you shouldn’t use an overdraft as a permanent source of finance or to grow your business, e.g when buying new equipment. Your bank may take a dim view on using an overdraft to finance specific investments and may ask you for personal guarantees.

You may therefore decide a business loan is better suited to help you achieve your goals: whether that’s buying new equipment, expanding overseas, or launching a new product/service/brand. 

What types of business loan can I get?

It’s worth focusing on different loan types that are typically available to businesses:

  • Secured loans: Secured loans, backed by collateral like property or assets, offer businesses substantial borrowing capacity with lower risk for lenders. They boast larger drawdowns, longer payment terms, and lower interest rates, making them ideal for businesses seeking significant capital injections. However, they entail the risk of asset loss and may involve arrangement costs and longer approval times. Examples of secured loans include invoice financing and bridging loans. 
  • Unsecured loans: In contrast, unsecured loans don’t require collateral, making them accessible to businesses without substantial assets. They offer flexibility and quick access to funds, but typically come with higher interest rates and stricter eligibility criteria, such as a strong credit history. Examples of unsecured loans include Start Up Loans.

Let’s explore some of these loan examples in more detail. 

How can I get a loan from a bank or other commercial lender?

Knowing what factors banks and commercial lenders use to decide whether to make a loan to a business will help you to prepare your application. Scroll through the carousel below to find out what a bank is usually looking for.

  • Character

    Banks want to be sure that the businesses they’re lending to are run by respectful and trustworthy characters. When you go to meet them, dress the part and act in a way that inspires confidence that you’re the ‘right sort’ of person – someone who is honest, has high integrity, meets their commitments and is totally committed to their business.

  • Ability

    You need to convince them that you’ve got the ability it takes to use their loan successfully. Emphasise your track record, both in your current business and in other ones you’ve been involved in. Inform them of the skills, strengths and experience of all the key people in your business. Underline your financial acumen and skills. Present your accounts for the last two or three years.

  • Margin

    They need to calculate how much money they are going to make from the loan – convincing them of your ability to pay it off is essential.

  • Purpose

    Banks don’t normally like making loans simply to cover ongoing expenses. You need to explain the precise purpose of the loan, for example to enable you to fulfil a major order, or to create a new product or service for which there’s a demonstrable need. Show them that it’s not just a knee-jerk request, but a highly sensible and carefully considered application.

  • Amount

    What amount do you require and how have you come up with that figure? Make sure it’s not too much, or conversely too little.

  • Repayment

    Show them how you plan to repay the loan, including the interest. Go through your cashflow forecasts and other financial information – make sure you’re being realistic. Let them know if you’ve had loans before and successfully repaid them.

  • Insurance

    If push comes to shove, what security can you offer against the loan? Some lenders may offer you up to £25,000 unsecured but anything over that will probably need to be secured. This is as much of a issue for you as it is for the lender. It’s in your own interest not to exaggerate forecasts and profits as you may stand to lose your business assets or your property if you can’t meet the loan terms.

How can I get more working capital?

Sometimes you need a sum of money to tide you over which would exceed your overdraft limit, for example while you are waiting for a large invoice to be paid, or when you need to order stock to fulfil a big order.

One option is to ask your bank for a bridging loan. Other options include going to companies which specialise in providing fast short-term loans – for example of between three to 12 months – such as Iwoca. As you might expect, the interest rates can be higher than longer-term loans, but an advantage is that they can be put in place extremely quickly.

If your business involves receiving lots of credit card payments, such as retail, hospitality or leisure, you might consider merchant cash advances. This is where you take out a loan and the lender then takes a proportion of income received through your credit card terminal until the loan is paid back. Many lenders only work with specific terminal providers, so your choice can be limited.

Another option is invoice financing – see below for more on this. 

1:28

Video: How could invoice financing help me?

by Informi

Invoice financing can be a useful way of assisting cash flow by releasing cash tied up in outstanding sales invoices.  It can be particularly beneficial for businesses that have a turnover of more than £100,000 and which issue a large number of invoices, or large value invoices. It’s usually only available for businesses that trade with other businesses, not the public.

Invoice financing involves a third-party – such as a bank or other financial firm – buying your unpaid invoices in return for a fee.

One type of this is factoring. This involves the third-party buying the invoice and then collecting the money owed by your customers. This is how the process works: 

  • It starts with you issuing the invoice to the customer
  • The third party pays you a large proportion (80%-90%) of the invoice value
  • The third party then collects the invoice payment from the customer, and pays you the balance
  • You then pay the third party interest and fees.

Another type of invoice financing is known as invoice discounting. This involves the bank or financer lending you a percentage of the total value of your invoices knowing that you should get the payments in the near future. In return you pay a fee. You are still responsible for collecting the debts.

The advantages of invoice financing include helping you to maintain a steady cash flow, providing more financial security and in the case of factoring, freeing up time you might otherwise need to spend chasing payment. The disadvantages of invoice financing include the costs, and in the case of factoring, another business entering the relationships between you and your customers. Watch out for companies who want to lock you into long contracts or charge you hidden fees. You could try a company that allows you to just put through just one invoice at a time.

The video below runs the basics of invoice financing, describing how the process benefits businesses and improves cash flow.

Where else could I get a business loan?

One of the ‘alternative lending’ schemes that have arrived on the scene over the last few years is peer-to-peer lending (P2P), which is a type of crowdfunding.

Peer-to-peer lenders are individuals who lend out their money in return for earning interest. The lending is carried out through intermediaries who operate online platforms. Peer-to-peer lending to businesses – as opposed to lending to private individuals – is sometimes known as peer-to-business (P2B).

P2B lending is a fast growing sector. Some can lend between £5,000 – £1 million, with up to £250,000 being unsecured, depending on your circumstances. To qualify there may be requirements such as having been trading for at least 2-3 years and having a specific minimum turnover.

The advantages of P2B lending include quick decisions and fast availability of funds for approved applications. Interest rates are fixed for the duration of the loan. Loan terms can be flexible  –  from a few months to five years – and there are often no early repayment penalties.

The disadvantages include that interest rates can be quite high for some sites, as can set-up fees. Because your application may not be subject to quite the same degree of scrutiny by the lender as a bank might, you need to ensure that you’ll be able to repay the loan to avoid landing yourself with unmanageable debt. As repayment periods can be quite short, monthly repayments can be quite high.

Applying for P2B loans is normally a straightforward online process. Funding Circle for example, enables you to compare the monthly and total repayments for different loan amounts over various repayment periods.

How could I get equity investment in my business?

We’ve run through some of the common debt financing options available to you but there are various ways of raising funds by selling part of your ownership in your business. 

Sources of investments

Here are some of the equity investment funding options available to you.

Private equity (PE)

Private Equity (PE) firms make medium- to long-term investments in high-growth companies, aiming to enhance profitability and revenue through operational improvements and expansion. They introduce corporate disciplines and management structures, providing strategic, financial, and operational expertise.

Find out more

PE investors actively manage their investments for about five to seven years, aiming for growth. They exit investments by selling shares to other PE firms, corporate buyers, or through public listings.

PE also provides non-financial support, such as access to marketing channels. Overall, the PE model combines financial investment with active management to maximise the value of invested companies.

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Business angels

Another way of getting equity investment is through business angels. These are high net worth individuals investors who invest in early-stage businesses. But if you’re looking to significantly grow your business – e.g. through a new product or service – it may be worth investigating this type of funding.

Find out more

An angel investor will typically put between £10,000 and £500,000 into a business. Some form groups or syndicates to make their investments. Most will look for the business to generate up to five times their initial investment over a three to five year period. 

Business angels tend to be entrepreneurs, and many seek to play a fairly active role in supporting the business they invest in.  For example, some angels become the chair of the management board. You may face pressure from angel investors to sell off your business when they think the time is right.

For more information on business angels, go to the website of the UK Business Angels Association.

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Venture capital (VC)

If you’re looking for a significant investment to grow your business – say £500,000 or more – venture capital (VC) may be the answer. Venture capitalists invest in businesses through funds that are raised with private or public money.

Find out more

One of the advantages of venture capitalists is that they can generally lend larger amounts than individual business angels. VCs also tend to be less involved with the running of businesses they invest in than business angels.

A disadvantage of VCs is that because they’re investing other people’s money they have strict criteria about who they can lend to. They tend to take less risks than business angels, and also want to get a quick return on their investment, e.g. within about three years. Typically this would involve them looking for an ‘exit’ by selling the business or ‘floating’ it so that more shares can be sold.

For more information on venture capital, go to the British Venture Capital Association website.

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Public listing

Public listing is a pivotal step in a company’s growth, involving listing shares on stock exchanges like the London Stock Exchange’s Main Market, AIM, or ISDX. This process, while time-consuming and requiring various advisors, allows a critical self-examination of the company.

Find out more

A public listing raises capital for growth, acquisitions, or balance sheet adjustments. It also boosts the company’s profile among stakeholders and facilitates employee incentivisation through share options.

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What is mezzanine funding?

Mezzanine funding is a cross between a loan and an equity investment.

There are different types of mezzanine funding, but essentially the funder provides the business with a loan and if this isn’t paid back in full and on time, the lender is entitled to take a share in the business – in other words they get equity.

An advantage of mezzanine funding is that there is no need to provide company or personal assets as security against the loan. There’s not a huge amount of ‘due diligence’ so arranging mezzanine finance tends not to take as long or cost as much as other options. 

The disadvantages of mezzanine funding include interest rates being high and of course the risk of giving up a stake in your business if things go wrong and you can’t repay the loan.

What costs do I need to factor when seeking outside investment?

Make sure that you budget for the costs involved in finding investors and concluding legal agreements with them. To raise a couple of hundred thousand pounds of equity investment may cost at least £20,000.

If within a couple of years, you need more money your investors may be worried about pouring good money after bad. However, if in the medium-term you need additional funding to move into new markets, increase production, or take advantage of a new opportunity, they may be willing to increase their investment.

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Video: The pros and cons of leasing and buying equipment

by Informi

The following video highlights the pros and cons of leasing business equipment against buying it outright.  We run through the different approaches, explaining why a business may wish to lease or buy equipment.

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