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different sources of finance for businesses
7 min read

What are the different sources of finance for businesses?

Whether you are just starting out or have been in business for a while, there are lots of reasons you might need a cash injection to take your company to the next stage.

But where’s the best place to find that cash?

Here’s a round-up of some of the main sources of finance you could consider…

Borrowing from banks

The business loans you can get from banks come in two main forms: secured, which means you put up an asset such as property or equipment as security for the loan, and unsecured.

For short-term borrowing, meanwhile, you may want to consider a business overdraft and/or credit card, and for property purchase, commercial mortgages are a popular solution.

Banks can also be a source of asset finance and invoice finance deals.

  • Unsecured business loans

    Like personal loans, business loans involve borrowing a set amount over a fixed period at a predetermined interest rate.

    You pay the capital plus interest back over the loan term, usually by making monthly payments that stay at the same level throughout.

    However, while unsecured personal loans can generally only be for up to say £25,000, unsecured business loans can sometimes be for £100,000 or more, depending on the circumstances.

    Pros of unsecured business loans include that they are straightforward and can often be arranged in a matter of days.

    However, the cost of borrowing may be lower with other types of finance, and the amount you can borrow will probably be higher too.

  • Secured business loans

    With a secured loan, you use one or more company assets as security, meaning that you could lose those assets if you become unable to meet the repayments.

    Often cheaper than unsecured loans, the amount you can borrow will depend on the value of the assets provided as security, making loans of this kind a good way to raise a substantial amount for expansion purposes despite the risks involved.

  • Business overdrafts

    Business overdrafts are handy for short-term borrowing.

    However, they generally charge higher interest rates than business loans.

    The amount you can borrow on a business overdraft is also relatively small, with most banks limiting unsecured overdrafts to around £50,000.

  • Business credit cards

    Business credit cards can be a great way to manage expenses and allow colleagues to make payments as and when needed.

    However, the aim should always be to avoid interest charges by paying them off in full each month.

    If you do need to borrow on a business credit card, the charges are likely to be in line with those on a business overdraft, while the maximum balance will depend on your circumstances but will almost certainly be lower than with a business loan.

  • Commercial mortgages

    A commercial mortgage is a loan taken out to finance ownership of any property you do not live in, meaning buy-to-let mortgages fall into this category alongside mortgages for office buildings or warehouses.

    You’ll usually need to provide a deposit of at least 20% to qualify and agree to repay the loan in anything from three to 25 years.

    The interest is tax deductible and is generally charged at a higher rate than on a standard mortgage, but at a lower rate than on a business loan.

  • Invoice finance

    If you’re struggling to obtain a loan, invoice finance offers an alternative way of accessing funds by unlocking the cash tied up in your outstanding invoices.

    It can be a good solution if you have long payment terms, or are looking to grow your business, and can be set up in two main ways: invoice factoring and invoice discounting.

    Invoice discounting works like a traditional secured loan, while with invoice factoring, an external factoring company “buys” your invoices and pays your company between 75-90% of the value before collecting the total from your customer.

  • Asset finance

    Asset finance is designed to provide funding for companies looking to make essential purchases such as equipment and stock.

    It allows you to spread the cost of the asset and can be a good way to preserve capital and generate an income from an asset while you’re paying for it.

    However, it also means paying more for the assets in question than you would if you bought them up front.

Borrowing from the government

There are several government-backed finance schemes for businesses in need of some extra cash.

  • Start Up Loans

    New business owners can apply for a Start Up Loan of £500 to £25,000 that lasts for between one and five years and charges interest at a fixed rate of 6%.

    Other advantages include that there are no application or early repayment fees, while successful applicants also receive free business plan guidance and up to 12 months of free mentoring as part of the deal.

    You can find out more on the government website.

  • Business grants

    Other options include grants and loans from programmes and associations set up to help local businesses create jobs or reduce carbon emissions, for example.

    The big benefit of grants is that they don’t need to be repaid.

    However, you’ll usually need to meet an extensive range of criteria to be awarded the funds.

    The government’s Business Support Helpline (0800 998 1098; 0300 303 0660 in Scotland; 0300 060 3000 in Wales; 0800 181 4422 in Northern Ireland) can also be a valuable source of advice if you’re unsure where to start.

Borrowing from other sources

The possibilities available to business owners in need of finance have burgeoned in recent years.

  • External investment

    Offering a share of your company in return for an investment by a third party is an effective way to raise cash – especially as it often avoids the need to repay the money invested.

    That doesn’t mean investment of this kind comes at no cost, though.

    Angel investors (wealthy individuals who invest their own money) and venture capitalists often strike a hard bargain, meaning they could end up with a very valuable stake – and potentially some of the control – in your business for a relatively small sum.

    They’re also only likely to be interested if they believe your business can grow very quickly over the next few years.

  • Crowdfunding

    With crowdfunding, businesses can raise money by collecting small amounts from lots of people via online platforms and websites such as Crowdcube and Kickstarter.

    There will usually be fees of between 5% and 10% to pay to access the funding, while the investors themselves generally receive an equity share along with associated benefits such as discounts on your company’s products or services.

    It can be a great way to fund a new project or get your company off the ground.

    However, you’ll need a convincing pitch to make your business stand out from the crowd.

  • Peer-to-peer lending

    Like crowdfunding, peer-to-peer lending connects your business with corporates and individuals that want to lend money, often at lower interest rates than you can get from a bank.

    Arranged via online platforms such as Assetz Capital, it’s a quick and easy way to access money, especially as the borrowing criteria can be less strict than with most traditional lenders.

    Do your sums beforehand, though; once all the related costs are taken into account, a peer-to-peer loan can still prove more expensive than a standard business loan.

  • Family and friends

    Borrowing from family and friends is a cheap and flexible way to raise funds for your business.

    Remember, though, that your relationships with your loved ones could be damaged should you be unable to meet the agreed repayment terms.

  • Working capital loans

    Offered by specialist lenders, working capital loans are specifically designed to help you cover a cash flow – or working capital – shortfall and, as such, generally run for a shorter term and often charge higher interest rates than standard business loans.

    While useful in some circumstances, they should therefore usually be treated as a last resort.

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