18 Top Sources of Business Finance

Securing adequate financing is a critical step in the journey of any business, whether it's a fresh startup or an established enterprise looking to expand. The choice of financing can significantly influence a company’s ability to innovate, grow, and achieve its strategic goals. However, navigating the myriad of available financial options can be daunting. This article explores the top sources of business finance, providing a comprehensive guide to help business owners make informed decisions about funding their company ventures.

Uncovering The Top Sources of Business Finance

The following business finance solutions combine traditional methods (such as bank loans) and alternative solutions (such as peer-to-peer lending). For example, if you require finance solutions to help your business expand, deal with seasonal trade or access important equipment, consider how each one could apply to your specific needs. Ask yourself relevant questions, such as how much do you need to borrow, or how often will you need access to these funds?

Business Loans

This form of finance is perhaps the most commonly used in the UK, with a total of £516 billion being lent to businesses in 2023. A business loan is a sum of money borrowed by a business from a lender - typically a bank, credit union, or online lender - which is intended to be used for business purposes. The business agrees to repay the borrowed amount, along with interest, over a specified period. The loan terms depend on the lender’s assessment of the business’s creditworthiness, financial health, and overall risk. These loans can be used for various purposes, for example, expanding operations, purchasing equipment, managing cash flow, or covering operational expenses.

Business Credit Cards

Business credit cards are financial tools issued by banks or credit card companies specifically for business use. They allow businesses to make purchases, pay for services, and manage expenses on credit, up to a predetermined limit. A 2023 report revealed that over half the UK’s SMEs are relying on credit cards for their business's day-to-day operations.

Business credit cards often come with higher credit limits than personal credit cards and may offer features tailored to business needs, such as employee card issuance and spending controls. However, they typically require the business owner to provide a personal guarantee, making them personally liable for the debt.

Asset-Based Lending

Asset-based lending (ABL) is a type of financing where a business secures a loan or line of credit using its existing assets, such as accounts receivable, inventory, equipment, or real estate, as collateral. Asset-based lending is commonly used by businesses that have valuable assets but limited access to traditional financing, such as companies experiencing rapid growth or those with seasonal revenue fluctuations. It provides a flexible and accessible financing solution that leverages the value of the business's assets to support its financial needs.

Asset-based lending supported £314 billion of client sales in 2022, up from £276 billion in 2021, making it a popular and lucrative form of financing.

Business Bank Account Overdrafts

Relating to the previous source of business finance, a business bank account overdraft is a facility provided by banks that allows a business to withdraw more money than is currently available in its account, up to a pre-agreed limit. This can help businesses manage short-term cash flow issues, cover unexpected expenses, or bridge gaps between receivables and payables. However, they should be used responsibly, due to the potential for high interest costs and also the need to stay within the agreed limit.

The British Business Bank found that by the end of 2023, the amount of overdraft totalled £8.3bn, down from £8.9bn in 2022 and £8.7bn in 2021.

Asset Financing

Asset financing is a method of obtaining funds to purchase tangible assets like equipment, machinery, or vehicles, which are essential for business operations. Unlike asset-based lending where existing assets serve as security for the finance agreement, with asset financing it is the asset being acquired that serves as collateral for the loan, providing security for the lender. This type of financing allows businesses to invest in necessary assets without depleting their working capital.

Asset finance is a particularly useful option for start-ups, being valued at £3.8 billion in March 2024, the third-highest monthly total ever recorded.

Venture Capitalist (VC) Investments

By the end of 2025, the venture capital market is predicted to reach £3.3 billion, representing the amount of capital risks that venture capitalists take.

Venture capital is a form of financing provided by investors to startups and early-stage companies with high growth potential, typically looking for an investment of around £250k upwards (See Business Angels for smaller amounts). In exchange for funding, venture capitalists receive equity or ownership stakes in the business, meaning they can have a say in business decisions. Venture capital is crucial for companies needing substantial funding to scale rapidly and innovate, despite the inherent risks and potential loss of some control over business decisions.

Government-Backed Schemes

Government-backed finance solution schemes are financial assistance programs provided by the UK government to support businesses. These schemes assist businesses in accessing much-needed capital, promoting economic development, and encouraging entrepreneurship by mitigating some of the financial risks associated with business operations and expansion. This finance solution aims to facilitate access to funding for businesses that might struggle to secure conventional financing, due to insufficient credit history or lack of collateral, for example. One example of a UK government-backed finance scheme is the “Start-Up Loan Scheme”, which delivered over £1 billion in funding to over 100,000 small firms.

Local Authorities

Local authorities or councils can sometimes serve as a financial solution for businesses through grants and initiatives, usually aimed at start-ups who are looking to make a communal difference. These grants and initiatives are often designed to address specific needs within the community and foster economic development, job creation, and infrastructure improvements. This form of finance solution is similar to government-backed schemes, but on a smaller scale, aiming for individual community needs.

Crowdfunding

Crowdfunding for business finance is a method of raising capital by soliciting small contributions from a large number of individuals, typically through online platforms. Businesses seeking funding create a campaign detailing their project, product, or idea, and individuals can contribute funds in exchange for rewards, equity, or future products/services. Successful crowdfunding campaigns require effective marketing, compelling storytelling, and a strong value proposition to attract contributors. Perhaps the most successful type of crowdfunding comes in the form of “equity-based crowdfunding”, where investors buy stakes in the company.

In 2020, the total annual value of equity-based crowdfunding in the UK had risen to £550 million.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending is a method of debt financing that allows individuals or businesses to borrow money directly from investors through online platforms, bypassing traditional financial institutions such as banks. Unlike venture capital, the investors do not gain a stake in the business. P2P lending offers benefits such as streamlined loan application processes, potentially lower interest rates for borrowers, and investment opportunities for individuals seeking alternative investment options. However, borrowers should carefully evaluate the risks before participating in P2P lending, since there is a lack of government-backed insurance for the funds involved.

The P2P lending sector in the UK was predicted to grow by 1.6% in 2023, reaching a total value of £376.6m, so this is a commonly used method of finance.

Working Capital Loans

A working capital loan is a short-term loan designed to finance the day-to-day operations of a business. This type of loan helps businesses manage their cash flow, cover operational expenses, and meet short-term financial obligations, such as payroll, rent, and inventory purchases. They are particularly useful during periods of fluctuating income or unexpected expenses, such as businesses that operate in seasonal-trade-based industries, ensuring that the business can continue to function efficiently.

During a study concluding in 2023, the British Business Bank found that 61% of firms with turnover between £50k and £250k sought finance to help with working capital, making this finance solution a particularly effective one.

Traditional Bank Loans

Traditional bank loans for businesses in the UK are financing options provided by banks where a business borrows a lump sum of money and agrees to repay it over a set period, with interest. These loans are a reliable and widely-used form of business financing in the UK, typically used for a variety of purposes, such as expanding operations, purchasing equipment, or managing cash flow.

Traditional bank loans can have either fixed interest rates (remaining constant throughout the term) or variable rates, which can fluctuate based on current market conditions. Research from 2022-23 found that 70% of business bank loans were on variable rates, which were affected by increasing interest rates, representing that bank loans can sometimes leave businesses vulnerable.

Business Credit Lines (Revolving & Non-Revolving)

Business credit lines are flexible financing options that provide businesses with access to funds up to a specified limit. They come in two main types: revolving and non-revolving. A revolving credit line means a business can borrow, repay and re-borrow funds repeatedly up to the specified credit limit, similar to a credit card. For non-revolving credit lines, businesses can borrow funds up to the limit, but once repaid, the credit line does not replenish; this is more suitable to fund a specific project or one-time expense, for example. Both types of credit lines provide businesses with flexible financing options, but the choice between revolving and non-revolving depends on the business's ongoing funding needs and financial strategy.

Commercial Mortgages

Commercial mortgages are loans secured by commercial properties, such as office buildings, retail spaces or warehouses. These mortgages are used by businesses or investors to purchase or refinance commercial real estate for income-producing purposes. Commercial mortgages are offered by banks, credit unions, commercial mortgage lenders, and other financial institutions. They play a vital role in enabling businesses and investors to acquire and leverage commercial real estate assets for long-term growth and income generation. The commercial property being financed serves as collateral for the loan, with lenders typically financing a percentage of the property's appraised value, with the borrower providing a down payment for the remainder.

Invoice Finance

Invoice finance is a financial arrangement where a lender uses unpaid invoices as security for funding, offering fast access to a percentage of the invoice’s value, drawing similarities to asset-based lending. Invoice finance is particularly useful for businesses with long payment cycles, allowing them to bridge the gap between issuing invoices and receiving payment, thus maintaining steady cash flow. There are 2 main types of invoice financing - factoring and discounting. Invoice factoring involves the sale of unpaid invoices to a third-party finance company, in exchange for immediate cash. Invoice discounting is where a business uses its unpaid invoices as collateral to access funds from a finance provider, but unlike invoice factoring, the business retains control over its sales ledger, continuing to collect customer payments.

Merchant Cash Advance

A merchant cash advance (MCA) is a form of financing where a business receives a lump sum payment in exchange for a percentage of its future credit card or debit card sales. Rather than traditional loan repayments, the advance is repaid through a predetermined portion of the business's daily credit card transactions. Merchant cash advances can be a convenient option for businesses with fluctuating revenue streams or those unable to qualify for traditional loans. However, they can be more expensive compared to other forms of financing, so businesses should carefully consider the costs and terms before obtaining an MCA.

Angel Investors

If you have ever seen the TV series “Dragon’s Den” then you will be familiar with Angel Investment. Angel investors (also known as Business Angels) are affluent individuals who provide capital to startups or early-stage companies in exchange for ownership equity or convertible debt. These investors are typically experienced entrepreneurs, business professionals, or high-net-worth individuals seeking to invest in promising ventures and potentially earn a substantial return on their investment. Unlike Venture Capitalist funding, business angels typically look to invest between £50,000 to £250,000.

Angel investors play a crucial role in the startup ecosystem, providing not only financial capital but also mentorship, guidance, and access to valuable networks and resources that can help entrepreneurs succeed. Their investments can help fuel innovation, drive economic growth, and create opportunities for new businesses to thrive.

Friends & Family

Friends and family financing is a form of business finance where business owners raise capital from their personal network of friends and family members. This type of funding is often sought in the early stages of a business when traditional sources of financing, such as bank loans or venture capital, may be unavailable or difficult to obtain. While friends and family financing can provide valuable support and capital for start-up businesses, it's essential to approach these arrangements with caution and transparency. Clear communication, realistic expectations, and a well-thought-out business plan are crucial to maintaining positive relationships and ensuring the success of the business venture.

We Can Help Your Business Get the Finance Solution You Need

At Union Business Finance, we can assist your business in finding the right finance solution for your specific needs. Explore our range of financial solutions, or get in touch with us today to discuss your specific requirements.