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11 Sources of Business Finance Compared
Sources of business finance can come in so many different forms that sometimes it’s overwhelming.
From secured business loans, through invoice financing and specialist VAT loans, to the research-laden world of government loans and grants, the range of options available is truly staggering.
This wide range of products means that there is something out there that can suit a wide range of business needs.
Business Finance Sources at a Glance
Here are the 11 most common sources of business finance in the UK:
- Lines of Credit
- Merchant Cash Advances
- Invoice Financing
- Unsecured Business Loans
- Secured Business Loans
- Asset Finance
- Grants
- Crowdfunding
- Commercial Mortgages
- Venture Capital Funding
- Secured & Unsecured Long-term Loans
We've broken down these options into categories: short-term finance to help with cash flow, medium-term finance for business expansion, or long-term finance such as property investment.
Remember, not all finance sources are loans. Grants, investment, and asset finance are among the alternatives.
And working with a finance broker, such as our experts at Clifton Private Finance, can help you find the best financial product for your specific business needs.
See similar: How do business loans work? & Getting a business loan - 8 top tips
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Short Term Business Finance Sources
Medium-term Business Finance Sources
Long-Term Business Finance Sources
11. Secured & Unsecured Long-term Loans
Short Term Business Finance Sources
Short-term finance solutions are a common option for businesses. This is typically money that’s needed to help with cash flow issues you expect to resolve within a few months or a year.
Examples can include cash injections to help with bills while invoices are yet to be paid.
Others could help you take advantage of a business opportunity, or cover a dry season during the early years of a business.
Short-term business loans are typically smaller finance options that are repaid within a year, and they are often referred to as “working capital loans”.
Advantages:
- Often easier to obtain
- Decisions can be very quick
What to consider:
- Interest rates tend to be higher
- If poorly managed, short-term finance can become costly
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1 - Lines of Credit Finance: Credit Cards and Overdrafts
A “line of credit” typically has little to no defined repayment structure and can be paid back and reborrowed as the business needs.
The main types of lines of credit are credit cards and account overdrafts.
With both these types of finance, you can pay back as it best suits you, but typically with credit cards a minimum monthly repayment is enforced.
Both credit cards and overdrafts can be relatively easy to apply for and obtain, with a range of products designed for different types of customers.
They can also allow businesses with new or poor credit histories to build up a credit score without too much difficulty.
However, relying on lines of credit too often could put your business under strain. Where an unpaid overdraft or maxed-out credit card may become more of a burden than it is a help.
Interest is high and can be an unwanted drain on business capital.
If you choose one of these lines of credit, it’s advisable to manage your finances efficiently to ensure it remains a short-term solution and the debt doesn’t become a burden.
2 - Merchant Cash Advances
For businesses that rely on card transactions, merchant cash advances can be an excellent source of capital.
Merchant cash advances allow you to take out a loan for your business and repay it through a percentage of each card sale your business makes.
However, as with many forms of short-term finance, interest rates can be high.
It can be beneficial to research your options thoroughly before applying, pay attention to the interest rates you are offered, and make sure the amount you are borrowing can be paid back feasibly.
This can help you make sure your merchant cash advance doesn’t present too much of a financial burden.
While not all lenders provide the service, many do, and it can be obtained quite easily and without much fuss.
Merchant cash advances can be a convenient option for businesses that have peaks and troughs in their sales. Repayments are taken automatically, so managing them can be easy.
3 - Invoice Financing
Invoice financing fills a similar niche for B2B businesses as merchant cash advance does for B2C companies.
Here, you borrow from a lender using your accounts receivable (unpaid invoices) as collateral.
With many large companies imposing 30, 60, or even 90-day terms on invoice payments, smaller businesses with tighter cash flow can struggle during the period between issuing and invoice and the money clearing in the bank.
Invoice financing is specifically placed to bridge that gap.
As the accounts receivable are held as collateral for an invoice financing loan, it is considered a secured business loan, which may mean lower interest rates and better terms than an unsecured business loan of a similar size.
This makes it a popular choice for short-term business financing.
Read blog: Maximizing Cash Flow: A Guide to Invoice Finance for UK Business Owners
Invoice finances can be repaid in two primary ways:
Factoring
With invoice factoring, you sell your outstanding invoices to the lender.
- The lender will typically pay you an upfront percentage (often around 80-90%) of the total invoice amount immediately, providing quick access to funds.
- The lender then takes over the responsibility of collecting payment from the client.
- Once the client pays the full invoice amount, your lender will pay you the remaining balance, minus a fee or discount that covers the service.
Invoice Discounting
- With invoice discounting, the lender typically offers you an advance of a certain percentage of the invoice value (usually 70-85%), providing immediate access to funds.
- You will remain responsible for collecting payment from your clients.
- Once your client pays, you can use the proceeds to repay the lender, along with any fees or interest charges.
- With this option, you retain a more control over how you manage your capital.
In both factoring and invoice discounting, the payment process involves the lender or factor disbursing funds to your business based on the value of outstanding invoices.
The specific terms and conditions, including fees and interest rates can vary depending on the lender and the agreement you have negotiated with them.
The choice between factoring and invoice discounting depends on your business's needs, and the nature of your client relationships.
Factoring provides a more hands-off approach, while invoice discounting allows the business to maintain control over customer interactions.
Related: The advantages and disadvantages of invoice discounting
Medium-term Business Finance Sources
A second category of business finance, medium-term finance is that where loans are typically repaid in one to five years.
Generally used for business growth rather than covering short-term cash flow issues, medium-term finance encompasses more than just loans.
Both lease financing and government grants can form a substantial part of a business’s medium-term finance planning.
Pros:
- Good for obtaining capital for expansion
- A huge range of options to suit a range of financial needs
Cons:
- Loans will put an ongoing strain on monthly income
- Leasing and grants come with conditions that your business will have to follow
To learn about business loans for limited companies, watch our short video below.
4 - Unsecured Business Loans
Perhaps the most understood type of business funding is the unsecured business loan.
As with most loans, a bank or other financial institution lends your business a specified sum to be repaid with interest over an agreed length of time.
Unsecured loans can be suitable for businesses in the early years, and those that work without many physical assets, as they are evaluated based on the business credit history and financial forecasts instead of using collateral.
There are a wide variety of unsecured business loan products available from a range of lenders.
To access the best offers, it is often worth utilising a business finance broker to determine the best loan for your businesses.
Doing so will save you considerably on the research time and can get you the best deal on the market for your circumstances.
5 - Secured Business Loans
A secured loan is one where assets are used as collateral to offset the risk undertaken by the lender.
- Guaranteeing your business loan through the company assets, such as equipment, vehicles, or property is beneficial for the lender.
- It is important to understand that the assets used to secure the loan will be locked; you may be unable to sell them without agreement from your lender.
- By using your assets as collateral, your lender reserves the right to take your assets to recuperate any funds if your fail to repay your loan.
While this might sound intimidating, secured loans are very common (mortgages are secured loans!) and offer the lender an advantage which may grant you more favourable loan terms.
Securing a loan can open up a larger range of finance products to you, or get you access to better interest rates.
If you are completely confident that you’ll be able to keep up with your loan repayments, secured loans may be a suitable option for your business.
6 - Asset Finance
Asset finance covers a range of financial products designed to help your business get access to the equipment and vehicles it needs without the need for taking out a loan directly.
Many types of asset finance are leasing agreements, meaning you have the use of the equipment but will have to give it back at the end of the lease financing term.
Depending on the type of asset finance, it may be possible to purchase the equipment in full at the end of the lease.
Asset finance is typically seen in vehicle lease agreements and for specialist equipment hire.
7 - Grants
A grant is money that is awarded to the business with no requirement to pay it back.
On the face of it, this “free money” seems to have no downside whatsoever.
The main advantage of a grant is that you have access to a cash injection that can help your business grow, without the burden of future loan repayments.
However, grants tend to be very specific in scope and can be difficult to obtain.
For businesses that can best benefit from the grant, they offer an excellent option to raise capital and fund business development.
But because the process of researching and applying for grants can be so time consuming, they may be a poor option for companies that do not meet the stringent criteria.
Grants can come from many different sources, including the UK government.
With grants designed to help fledgling businesses, young entrepreneurs, businesses involved in climate issues, and those with significant research potential, the UK government has a wide range of finance options available for the right businesses.
Other sources of grants are charitable organisations and corporations looking to partner with younger businesses for mutual benefit.
8 - Crowdfunding
More and more businesses have turned to the crowdfunding model in the last twenty years.
This unorthodox way of raising funds has several advantages over loans, including the fact that funds invested by the community don’t require direct repayment.
But there are some very specific business considerations to make when considering crowdfunding as a means to secure capital.
First, it is important to understand that crowdfunding may require a strong marketing team.
Your business is selling product to customers prior to its creation and this means generating excitement for your project is imperative.
This can be a significant hurdle for many businesses and failure to build a successful campaign can be costly in terms of the time and resources invested.
Secondly, crowdfunding capital is not free. Your many investors will expect a return on their investment, whether this is simply your product once it is ready, or a more complicated set of promised rewards.
It is key that you are able to make good on your crowdfunding promises.
For businesses that can overcome these obstacles, however, crowdfunding may be well worth considering when looking for expansion capital.
Long-Term Business Finance Sources
Enterprises looking for long-term solutions tend to be those with a strong existing business aiming to expand into property, or other large-scale investments.
Long-term business loans provide a stable source of capital that is typically available for an extended period, often several years or even decades.
Long-term financing is well-suited for funding significant growth initiatives, such as expanding into new markets, acquiring other businesses, or investing in large-scale projects.
In many cases, it will provide the necessary capital to facilitate these endeavours.
Pros:
- Lower interest rates and often better terms
- Long terms enable borrowing of significant sums
- Can support large scale business growth
Cons:
- Long-term financing must be factored into all future business plans
- Companies may become tied to assets such as commercial property
- The larger the loan, the larger your financial burden is
9 - Commercial Mortgages
Many expanding companies seek to buy their own premises. Structurally similar in almost every way to residential mortgages, commercial mortgages can allow businesses to replace expensive rents with strong property investments.
Commercial mortgages may require a substantial deposit to secure the loan.
A 30% deposit can be expected on any commercial or industrial building, so dedicated financial planning is necessary prior to attempting to obtain a commercial mortgage.
Find out more: Commercial mortgages for business
10 - Venture Capital Funding
Venture capital is money provided by investors in exchange for equity in your business.
- Unlike a loan, the money isn’t paid back through monthly repayments, but instead the investor owns a stake in your company.
- While it allows you capital to expand your business or boost cash flow, it may mean you have less control over your business.
- This will present differently at the discretion of your investor.
In some cases, an investor owning a stake in your business means that you simply have responsibility to facilitate some level of return on investment, however in other cases you may need to share the creative control and direction of your enterprise.
Venture capital funding is considered a long-term financial option because it can represent an ongoing partnership between your business and your investor. However, in many cases, venture capitalists will have an exit strategy that is more mid-term than long-term.
The involvement of a venture capitalist comes with additional benefits beyond the financial aspect.
The investor will often be extremely experienced and may be able to advise on your business growth. They may also have substantial connections and a network that can be used to your business’s advantage.
Obtaining venture capital funding can be difficult. You will need to have a strong business plan that shows the viability and growth potential of your enterprise.
11 - Long-Term Secured and Unsecured Business Loans
Long-term loans refer to loans with a repayment period typically exceeding five years, and usually require collateral.
Offering a large business loan on a long-term basis presents a certain amount of risk for lenders, so having collateral can help keep interest rates low.
But there are cases where you can get unsecured long-term loans at reasonable rates. For instance, if you have an established business with a proven track record of profitability and financial stability.
- If you have valuable assets, such as real property, equipment, or inventory that you are willing to pledge as collateral, a secured loan can allow you to borrow larger amounts at lower interest rates.
- Secured loans are often suitable for significant investments or asset purchases.
- If you don't have valuable assets to pledge as collateral or are unwilling to risk losing your assets, an unsecured loan is the only option.
It doesn't require collateral and instead relies on your creditworthiness. The choice between a secured or unsecured long-term loan depends on your specific financial situation, borrowing needs, and risk tolerance.
Both types of loans have their advantages and disadvantages, so it's essential to carefully consider your circumstances before making a decision.
As to whether or not a long term loan is right for your business, it can be beneficial to consider the impact of extended loan terms when determining what loan structure is best for them.
Work with us
At Clifton Private Finance, our team of specialist brokers are well-versed in every aspect of business finance.
We can advise you on the best path for your company and will help you find the financing that you need.
Whether it is a short-term solution for cash flow, or property finance for an international expansion, we have dedicated and experienced specialists ready to assist.
If you need business funding, call us on 0203 880 8890 or book a free no-obligation consultation below.
