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Last updated: 8 November 2022

Small Business Funding Options

Find the Best Funding for Small Business in the UK

Funding for small business provides means through which entrepreneurs can start new ventures or expand already existing business. Funding for small business can be a vital source of money that enables business owners to purchase inventory and equipment or supports regular operational costs. However, the most distinct reason for getting a small business loan is to invest in an expansion opportunity for your company.

Suppliers of funding for small business differ greatly across the financial sector. Ranging from banks, government institutions, ending on the most widespread - online lenders, they provide variety of commercial loans suited specifically to your unique needs.

How Do Small Businesses Get Funding?

Getting a funding for small business will mostly depend on what stage of advancement your company is at, your credit score and how the funds will be allocated.

While established businesses tend to choose commercial loans based on bank credit and owner investments, newer firms rely on outside debt or equity, obtaining their funding from banks or online lenders. Some of the funding for small business and new business funding, also comes from personal and business savings.

Alongside the technology development, the entrepreneurial activity has thrived creating a significant increase in numbers of startups and small businesses. Similarly, it has created alternative sources of funding for small businesses, such as previously mentioned online lenders.

Getting small business loan is possible today through digital peer-2-peer platforms provided by companies like Kabbage, Funding Circle or Lending Club. These companies facilitate receiving funding for small business by quickly matching lenders with borrowers.

Crowdfunding on the other hand, is a funding option particularly attractive for those seeking new business funding. It provides the capital through rising financial contributions from large groups of people.

Different Types of Funding for Small Businesses

The general division of funding for small business falls into two categories:

DEBT financing

Debt financing means borrowing a sum of money that is to be paid back with an interest. Getting a small business loan often comes with a pledge in form of collateral e.g. car or a property. Funding for small business can be offered by banks, government institutions and online lenders. 

Debt Equity

EQUITY financing

Equity financing involves investors who could be anyone, starting from your friends and family, to venture capitalists and angel investors. It is most commonly used option by the start-ups who search for new business funding. Equity financing as a funding for small business is made available to you in exchange for an ownership share in the business. 

Take Out a Business Loan or Get an Investor 

It should take a good deal of research before you decide what type of funding for small business you will pursue. Bear in mind that it could be a business startup loan with quarterly or monthly instalments to pay back. Or, it could be an equity stake in which case you would “invite” an extra guest on board. In both cases, small business funding would come with some pros and cons:

Advantages of Debt Financing and Equity Financing

Debt Financing Equity Financing
  • Lender has no control over your business.
  • Relationship with your lender is temporary and it ends once you repay your business loan.
  • Tax deductible.
  • Variety of choices for debt financing.
  • Investor takes all the risk.
  • You keep more cash to grow your business.
  • Access to experience and knowledge of the investor.
  • If business fails, you are not required to pay back investments.

Disadvantages of Debt Financing and Equity Financing

Debt Financing Equity Financing
  • Depending on the credit score and financial health of your business, it might be difficult to get a business loan.
  • To be repaid on a regular schedule.
  • You might have to guarantee the loan with your
    privately held financial assets
  • If you fail to repay the debt, you might lose assets secured with collateral.
  • Finding investors, but also the investment process might take a long time.
  • Giving away ownership of your business. Sharing decision making process. 

When to Seek Funding for Small Business?

Even though some people are more risk-averse, and the term business loans scares them to their bones, there are many solid reasons that would make them feel otherwise. One of the options can be secured business loans.

Getting small business loan can help you create and expand your business to eventually turn it profitable. Remember that deciding on what funding for small business will you choose should be based on credible and reasonable grounds.

The most common reasons for getting small business loan include:

1) Growing the business and expanding operations

Getting small business loan is a good idea when you want to expand your business. Expansion however usually only happens if the firm is turning a profit and have positive forecasting numbers for the future. This way chances of having it approved by a bank and other lenders are much higher.

2) Acquiring equipment

Another time when funding for small business could be of a help to you would be in need of equipment. You can either buy it or lease it. Similarly to any credit loans, there can be a tax deduction on this type of a loan.

3) Hiring new talent

Funding for small business may often include hiring new employees. When you find yourself not managing with the tasks you already have, or you lack skills in accounting, think about potential new hires. You cannot possess all the necessary knowledge and skills to help you run your business, thus it might be a good idea to seek out some help.

4) Increasing working capital

Working capital involves money to manage day-to-day operation. Getting small business loan might help your company meet those daily operations until your earning assets are sufficient to cover your working capital needs.

How to Qualify for Funding for Small Business?

In all cases, qualification criteria will depend on the business loan provider you choose. As banks and online lenders are rather distant in their offerings, so will they also have different criteria.

If you are a startup searching for new business funding, initially you have to put your own money to start the business. The more equity, the more favourably potential lenders will look upon your request. In the beginning, your business may not have enough assets to put forward as collateral, therefore unsecured business loans may be a better option than secured loans.

Moreover, demonstrating your ability to repay the loan payments is extremely crucial. Your business plan is the tool to do so. Make it detailed and thorough and prove how you intend to generate revenue and what expenses are you anticipating.

Small Business

If you are an existing business, make sure to improve your personal and credit scores before applying for funding for small business. Subsequently, you also need to demonstrate your ability to repay.

This means that your business is making enough positive cash flow to pay the monthly payment, as well as cover your general operating expenses.

The next thing to bear in mind is your current level of debt. If a company has too much debt, it is probably directing its profits towards paying back its old loans, instead of building retained earnings in the business. These in turn can fund future growth.

As a result, lenders might be hesitant to approve your application and reject your chance for receiving funding for small business.

What If You Have a Bad Credit?

If you happen to have bad credit, there is a high probability it will negatively influence your chances. Regardless whether you are just starting, or you have been in the industry for a while, bad credit history is something you cannot hide or run away from.

Bad credit makes lenders see you as higher risk. It can imply that you mismanage your finances or fallen on hard times. That doesn't mean that there are no possibilities of business loans for bad credit.

What could you do is to try to get your score back on track. How? A smart maneuver would be to search for alternative ways of getting small business funding. Once you manage to increase your credit score, it will open up more doors in terms of business funding for small business.

Online sphere has particularly recently bloomed with hundreds of choices for funding for small business. This however involves many more hours spent on research.

But do not fear, just take your time and be aware of what your needs are and how long you can actually wait to get the small business loan. Moreover, make sure that the online lender you choose is a reputable one, with good reviews.

Business Research

Applying for small business funding online means less time spent on collecting necessary documents and filling out the application. The algorithms and data used on online lending platforms can easily link the data provided and match it with the best solution.

Bear in mind, however, that for borrowers who do not have strong credit scores, the interest rates on loans from these sources tend to be high.

Getting the Funding for Small Business 

Considering funding for small business is something every entrepreneur will sooner or later come across in his/her business ventures. Every starter, but also a veteran in business ownership, might need some support to further push their ideas. Getting a small business loan does not correspond to a failure, or a problem with your business.

Giving shape to your ideas and plans often requires that extra kick in the form of a loan, thus know your options and possibilities for small business funding. As you can see there are plenty out there. Be smart though, take your time to learn about them, and choose wisely.

All content in this website is for informational purposes only and it does not constitute financial advice and/or recommendations and it should not be relied upon as such.

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