There are two primary sources of small and medium-sized enterprise financing: ordinary business loan debt and external investments.
Debt financing allows you to get money without having to give up control of your business, but you still have to pay it back no matter what. You can delay making repayments to investors in exchange for a portion of the company’s equity.
Understanding the present state of your SME, the available options, and your long-term goals is essential before settling on the appropriate business loan solution.
At a Glance, Pros and Cons
If you didn’t know the whole story, this section summarises the pros and cons of top financing vs funding in the UK.
Pros
Retaining operational control — When you borrow money from a bank or other lending institution, you are legally bound to repay that money according to the terms you and the lender have established. You are free to operate your company as you see fit without having to answer to any private shareholders.
Rates of interest — The costs of equity financing may exceed those of debt financing. Due to the tax-deductibility of interest payments, the interest rate you earn on a bank loan or other kinds of debt financing will be lower than the cost of equity.3
Accessibility — Small firms have an easier time obtaining debt finance than equity funding. Just 0.07 per cent of small enterprises, for instance, actively pursue equity funding from the venture capital market. The majority of other small enterprises, however, are deeply indebted. Bank loans and merchant cash advances are only two examples of the various debt financing options available. The cost and terms of borrowing debt vary widely.4
Credit rating for businesses — Because no one like being in debt, you may assume that debt financing is bad for firms. By demonstrating responsible debt management, such as paying payments on schedule, businesses may raise their company credit score.
No profit sharing — Debt financing prevents profit distribution to investors since there are no investors. Profits are not required to be distributed to creditors. The proprietor has the right to retain and disperse the company’s earnings as he or she sees proper.
Cons
Repayment — A company that takes on debt in the form of loans must eventually pay back the money it borrowed. Regardless of the company’s financial status, the principal and interest must be repaid. Even if the company goes out of business, the loan must be repaid. In the event of bankruptcy, your debt holders will be repaid before any equity investors.
Funds Flow — Since principal and interest payments must be paid on the loan, excessive debt financing may reduce a company’s cash flow. A company’s debt-to-equity ratio may be used as a proxy for its dependence on debt financing as opposed to equity financing. In this case, a smaller ratio is preferable.5 One of the most common challenges faced by small companies is insufficient cash flow, sometimes even going negative.
Collateral — In order to get debt financing, many small firms may need to put up collateral. Many company owners are reluctant to utilise collateral since it often requires them to pledge personal assets, such as their house.
Credit score — It’s tempting to keep taking out loans whenever your business has a cash crunch (a strategy known as “leveraging up”), but remember that this can negatively impact your credit score. You may expect to pay a higher interest rate on future loans since the more money you borrow, the more danger you pose to the lender.
Top business finance & funding choices — Reviews
Let’s get on with top-rated business finance & funding options in 2023.
As always, please check that your route of choice is covered by the FSCS.
1. Business loans — Best business finance & funding options for those with good credit
In the event that your business or sole proprietor credit is excellent, loans are an option.
The terms “funding” and “loans” are often used interchangeably in the minds of company owners. Despite loans’ longstanding status as a safe and conventional means of financing a company, this is often not the case. After all, loan applications are always welcome, and several enterprises are eligible for funding.
Of course, it doesn’t imply that borrowing money is always the best option. It’s common knowledge that small company owners with the following assets do well when applying for loans, whether personal or commercial.
- High creditworthiness
- A minimum of one year in operation
- Strong earnings
These individuals will be offered the most competitive terms on all types of loans (including business and personal loans). This entails very low interest rates (often under 10%) and extended periods during which payments are due.
Varieties of loans for small businesses
That very much narrows your options down to the following types of loans:
- Term loans provide a large quantity of money upfront, but require monthly payments that include principal and interest. They may be used to pay for any kind of substantial, foreseen expenditure.
- Cash flow problems are a good candidate for a line of credit because of the easy access to money they provide. A revolving line of credit provides ongoing access to cash rather than a single lump payment, and interest is only accrued on the amount actually used.
- Revolving credit is not the only kind that credit cards provide. Business credit cards, in contrast to lines of credit, are ideal for handling incidental costs like buying lunch for the team or ordering new business cards.
Don’t give up hope if your credit is less than perfect; there are still choices available to you. People with less-than-perfect credit or who don’t otherwise match the criteria for traditional business loans benefit the most from these sorts of financing.
Short-term loans, merchant cash advances, and invoice factoring are just some of the business loans for poor credit that are available from a variety of lenders. But you won’t receive the fantastic loan features, like low interest rates and extended payment durations, with these types of financing. If you have a low credit score, you should give serious consideration before making this choice.
However, if your credit is good, a loan might be an excellent option for financing your company.
Pros
Immediately accessible.
Quick and easy financing.
Abundant resources are available.
Cons
You must comply with borrower criteria.
There may be a lot of interest and charges.
2. Crowdfunding — Popular business finance & funding options for creative new businesses
Avoid all of the administrative system prerequisites.
With crowdfunding, potential financiers are actively sought out. Okay, kind of. You’ll need to create a compelling presentation outlining your product’s benefits, upload it to one of the finest crowdfunding sites, and then put in some effort to ensure that people really see it.
Lenders will come to you when you’ve completed all those steps. You use public support, or at least the willingness to part with their money, to make your dream a reality.
What distinguishes crowdfunding from loans?
Crowdfunding is distinct from other financing options because it often supports ventures that conventional lenders would not. People may view your product before it ever enters the market, which gives you a chance to collect early feedback from them.
Donations are often made in return for several tiers of prizes (e.g., a £20 donation nets a t-shirt, a £30 donation nets a t-shirt and early access, and a £1 million donation nets dinner with Bono at a wildlife preserve of the donor’s choosing). However, there are crowdfunding platforms that do not provide any stock in return for monetary contributions.
Crowdfunding is most successful for firms that sell physical goods or for individuals who have developed novel goods that they wish to bring to market. Crowdfunding is worth exploring if you have a product you believe the public would like, such as a new board game or a line of snack foods. (Service industries often do poorly.)
However, it is difficult to make a profit through crowdsourcing. Again, you’ll need to invest both time and resources into crafting a compelling pitch for your idea.
This will likely include extensive text and a high-quality video. As was previously discussed, you’ll need to think of incentives that are both sensible and appealing to attract donors. Then you need to perform enough promotion for people to find your campaign among the many that already exist.
Remember that fees charged by crowdfunding platforms will reduce your final reward. Before launching your campaign, be sure you know how much it will cost. Make sure you know the rules of the taxation of the funds you generate (before you blow them all).
Crowdfunding’s payout is substantial, but don’t believe it’s simpler than other financing options just because of it.
Pros
Low entry-barrier.
Acquiring funding through p2p channels.
There is (usually) no need to make any repayments.
Cons
It takes a lot of work to run a campaign effectively.
Costs of platforms.
Only suited for certain types of companies.
3. Grants — Top business finance & funding options for subsidiary businesses
Subsidiary businesses are the ones most likely to succeed with the help of grants.
The money you get from grants is, certainly, free. What a fantastic idea! Well, here are two disclaimers to read before you get too excited:
What are the two main things to know about grants?
Everyone wants a grant, but relatively few actually get one. You can count on facing stiff competition.
The time required to apply for and complete all the necessary steps to get a grant might easily exceed a few months. The application procedure for business grants may be lengthy and involved, requiring applicants to produce essays, videos, or even attend interviews.
The wait may be much longer since many awards are only available for a limited time each year.
Now, after dampening your enthusiasm about your gift, let’s get down to business. In contrast to loans, grants do not need repayment. As long as you utilise it in accordance with the terms and conditions of the grant, it’s yours to do with as you choose. A grant that is intended for machinery cannot be used to purchase land.
Furthermore, underprivileged populations, who have a more difficult time obtaining conventional loans, are often recipients of handouts. For instance, numerous organisations provide funding for firms that are run by minorities, veterans, or women.
To be clear, these funds are only available to members of the targeted categories and are not disbursed in the same way that, say, loans to female business owners would.
In a similar vein, there are grants available for certain types of enterprises, such as those serving the rural community, those employing less than five people, or those dealing with animals.
Sounds intriguing, right? Here are some places to look for the appropriate grant for your company:
Grants are a terrific source of cash, and you should definitely look into applying for one. Grants may be helpful, but they shouldn’t be your only source of capital. Due to high levels of competition and lengthy application processes, grants are not a dependable source of funding. Don’t rely on them exclusively; rather, add them to your other means of financial support.
Pros
A grant does not need to be repaid.
Absolutely no need for credit.
Fewer conditions than usual for borrowers, such as income.
Cons
Application delays.
Tough to get.
4. Personal assets — Ideal UK business finance & funding options for retaining freedom from debt
According to an infographic created by Fundable, 58% of companies are funded via personal savings and credit.
We understand that private assets don’t have the same allure as crowdfunding or angel investors. Self-funding has drawbacks, but it also has advantages.
For example, instead of taking on a lot of hazardous loans or losing equity, you may finance your company with your savings and/or retirement assets (like a self-directed HMRC). That is to say, you shouldn’t be concerned about a third party seizing control of your company or its assets.
Similarly, you won’t have to stress about interest rates, annual percentage rates, or even being approved for loans. Even if you exhaust your funds, at least you won’t have any outstanding debts. Additionally, you won’t have to spend time and effort seeking for money. It’s no surprise so many company owners risk their own funds.
In addition to your own resources, you may discover that friends and relatives are eager to help you launch your company. There is, of course, the possibility of harm to oneself. You could have some uncomfortable holiday gatherings with loved ones if they disapprove of your spending habits, but they are more likely to take a risk on you than a financial institution.
Whether you choose to self-fund or seek assistance from family and friends, you shouldn’t feel like you have to risk everyone’s retirement funds on your company. If you don’t have $48,000 to put into your company as Fundable says you should, don’t worry. These low-cost company ideas are just some of the many that may be launched for less than £1,000.
You may always go outside to raise money for your company if you want to start it with your own money. Who can say? Our last remaining financing alternative might be attracted to you.
Pros
No repayment needed.
No borrower specifications.
Retain leadership.
Cons
Inaccessible to certain would-be business owners.
Typical financing levels are on the low end.
Danger to personal possessions.
5. Angel investors — Top business finance & funding for high-risk projects
Angel investors are rich people or organisations that invest in small and medium-sized enterprises (SMEs) in return for ownership stakes. These investors, who typically want returns of 20–25 per cent, may bridge the funding gap between personal and VC (venture capital) contributions for small and medium-sized enterprises. Typically, they seek towards expanding businesses and corporate giants.
Unlike debt, angel investments do not need to be repaid if the firm fails, making them a safer option than traditional loans. Furthermore, many angel investors are just seeking for a way to make a personal impact via their investment. If you value complete independence in running your firm and do not want anybody else to have a say in its operations, this is not the best choice for you.
Everyone is looking for an investor since the popularity of Shark Tank. That angel investor is sought for.
Individuals known as “angel investors” may put up capital for your firm in return for equity stakes. That means you won’t have to worry about paying back a loan, but rather, your angel investor will want a cut of your future earnings. Angel investors are often more risk-tolerant than conventional lenders and are willing to provide mentoring without demanding a board membership.
Looks pretty divine.
We get it if the idea of selling a piece of your company to a private investor is daunting. Even yet, trading shares for cash might be a lifesaver in the early stages of your company’s development when cash flow is a little sluggish. It’s been used by big companies like Monzo and Starling. There’s good reason for Shark Tank’s success.
How it operates
Debt finance includes things like loans and lines of credit, in which the borrower owes the lender money and must pay it back (often with interest) over time. Equity funding includes contributions from angel investors (and VCs). Someone lends you money without asking for repayment in return for stock in your firm.
Angel investors, by definition, must be high-net-worth individuals. The U.S. Securities and Exchange Commission states that angel investors must have a minimum of £1 million in liquid assets or a minimum of £200,000 in income over the preceding two years.
In a practical sense, you may also consider friends and relatives who invest in your company to be angel investors. Do you recall seeing the Fundable infographic? Friends and family are the second most common source of funding for startups. We consider your loved ones to be angels if they are willing to take a chance on potentially lucrative ventures on your behalf.
However, if you’re looking for genuine angel investors, “Shark Tank” is your best bet. You may also pitch your idea to angel investing groups if making TV appearances isn’t your thing. Yes, there are groups of angel investors just waiting to make their next deal.
Also, make sure you distinguish between angel investors and venture capitalists. A common misconception is that venture capital companies are more interested in mentoring than in making a return on their investments.
Therefore, only accept investments from angel investors, whether they are accredited or just buddies.
Pros
Absolutely no need to repay.
Potentially significant expenditures.
The investor’s knowledge and direction in business.
Cons
Reduced ownership stake and power.
Finding investors might be a time-consuming process.
How much work is involved in finding and pitching investors.
Financing based on invoices
Invoice financing is an option if you receive large amounts of money via invoices. Invoice financing, as the name implies, is a kind of loan secured only by your invoices. Your service provider may either lend you money based on the value of your accounts receivable or purchase your outstanding bills outright.
You send over invoices for services or products you’ve already provided to consumers to a third party, who then pays you a cut of the money they collect. After the provider’s service fee has been paid and the invoice is settled, you will get the remaining funds.
Invoice finance is a kind of loan in which invoices are seen as collateral. Lending firms will often advance a proportion of an invoice’s total in exchange for a fee if you can guarantee payment from your customer.
Companies with large amounts of money stuck in unpaid bills might benefit from this form of business loan financing. This is a low-risk and steady financing alternative if you are a business-to-business (B2B) that issues bills to customers and finds that those invoices go unpaid for extended periods of time.
As the lender won’t do a credit check, new small and medium-sized enterprises (SMEs) may benefit from this method as well.
R&D
The successful R&D tax credit scheme in the United Kingdom enables businesses to deduct R&D costs from their taxable income or earn a cash dividend for their participation in significant research initiatives.
You may utilise the funds for working capital or take out a loan against future tax credit revenue. The loan is subsequently reimbursed by the HMRC as a refundable research and development tax credit.
UK enterprises and organisations with a strong potential for innovation and no income yet would benefit greatly from this form of SME financing. It’s a common source of capital for small and medium-sized businesses in fields that rely heavily on research, including computing and engineering.
You must be a for-profit business and have made prior investments in R&D in order to qualify. In addition, you cannot have more than 500 employees or a yearly revenue of more than €100 million.
Venture capitalists
When angel investors aren’t enough, venture capitalists often come in. Venture capital firms (VCs) are companies that give financial backing to SMEs and startups, sometimes in addition to additional services like mentorship, counselling, and access to professional networks.
The goal of a venture capital firm is to increase the company’s value and profits as rapidly as possible. It’s very uncommon for VC companies to desire a say in how the money is spent and what the company’s overall goals are.
VC capital, like that from angel investors, is safer than debt but requires you to give up part of your company’s ownership. Following equity funding, venture debt is another viable alternative.
Startup financing
Small and medium-sized enterprises (SMEs) and startups often turn to alternative financing sources before approaching traditional banks. Loans for enterprises and startups in the UK may be available via government-backed lending initiatives and lenders.
With a startup loan, you may get cash while still keeping all of the rights to your company. Small and medium-sized enterprise loans are more competitive, and some lenders may require personal collateral to reduce their risk. Your company’s future cash flow may be hampered by the business loan’s monthly payments because of inefficient resource allocation.
Finance based on earnings
Loan repayments in revenue-based financing, also known as cash flow-based lending, are tied to the company’s monthly revenue. You get a loan, and the amount you repay is based on a percentage of your income.
When it comes to small and medium-sized enterprise funding, this particular loan style is more accommodating since it does not need a high credit score or collateral.
The key advantage of this form of company loan is that you won’t have to give up any control throughout the application procedure. The biggest drawback is that the loans are only available to small and medium firms in certain sectors, and the terms span from 4 to 18 months.
Crowdfunding with equity and rewards
A last word on crowdfunding: UK companies also have access to equity finance. Funding is obtained by the sale of “parts” of the firm, thus the name. Small and medium-sized enterprises (SMEs) may generate private equity via owners and investors in addition to the stock market.
Similar to venture capital and angel investment, you will have to give up some control in exchange for the financial backing and maybe the guidance of your investors.
Funds may be raised via reward-based crowdsourcing on sites like Kickstarter and Indiegogo. You may get product-specific investment, boost brand recognition, and expand your consumer base without having to sell a majority stake in your business.
You may incentivize donations by providing things like early access, freebies, and price breaks in the future. Small and medium-sized enterprises that are offering novel items and are doing market research benefit most from this sort of financing.
Top business finance & funding options — Buying Guide
Let’s explore business financing and funding options further as a topic.
Where do I start looking for startup capital?
If your credit is strong, a loan might be a quick and cheap option to receive the money you need. To apply, you need to provide evidence that your firm and its owners fulfil the stated credit, income, and age criteria.
Crowdfunding and grants both provide access to nonrepayable cash, but grant applications have stricter standards and are only accepted during certain times of the year.
There are no rules when it comes to crowdfunding projects, although there may be costs involved depending on the site you choose.
Competition for grants and crowdfunding campaigns is high, therefore a compelling narrative in support of your cause is essential.
If you have them, your own assets are the most convenient and inexpensive source of startup capital. There are no prerequisites in terms of credit, income, or length of time in the company.
Angel investors provide another option for obtaining debt-free financing. You should just be ready to conform to your investor’s particular business demands and to accept a reduction in your overall degree of autonomy.
Financing options other than borrowing
When it’s not possible to get loan funding, think about these other options.
- Hybrid finance allows businesses to lower their weighted average cost of capital by taking use of both loan and equity funding.
- Mezzanine finance is an alternative to traditional debt financing that offers high interest rates and the possibility of conversion to equity in the form of business shares in the event of a default on the loan.
- Crowdfunding is a method of obtaining money online that is occasionally used by small enterprises.
- You can get a business loan using a credit card, but you’ll have to pay a hefty interest rate and comply with stringent repayment restrictions. Your credit score and the quantity of money you need will determine whether or not credit card financing is a good option for you.
- Internal equity finance refers to funding that comes from inside the company, such as savings or gifts from close contacts.
Leading business finance & funding options: The Verdict
Funding is crucial, and we understand that as well as you do. You can choose a suitable financing solution, thanks to the wide variety of choices accessible to you.
Money in the bank!
For more, see our top business loan accounts.
