Financing a business: Loans, credit cards, investment and other options

Once you have put together a business plan and worked out how much money you need to get your business off the ground or moving in a different direction, it is time to start thinking about where that money is going to come from. There are a lot of different means of financing a business including loans, credit cards, overdrafts, government grants, third-party investing and more. In this article, we break down the different funding options most likely to help your business, so that you can follow the path that matches up with what your company needs.

Borrowing options for financing a business

Here is a summary of each of the main options for financing your business:

Business loans

Your business will borrow money from a bank or specialist lender and then repay the money plus any interest and fees. You will usually need to explain why the money is needed and how it will be spent, plus how you will generate the revenue to pay it back. The money could be spent on day-to-day costs, unexpected expenses or growing the company. How much you can borrow will depend on the size of your business, but some business loans can be significant enough to fund expanding or restructuring your company.

Most types of business will be eligible for a business loan of some kind, though there are lenders that will only offer finance to limited companies. The provider will usually look at the business’s credit history and the loan may need to be guaranteed by a director. We go into more detail in our article 'How do business loans work?'.

Business credit cards

A business credit card allows you to fund day-to-day business costs without having to clear your balance until the end of the billing period, usually 56 days. However, there will be restrictions on where you can use the card and what you can use it for. Most providers will let a company apply for more than one card under the same account, which would allow multiple employees to use a card. There will be an overall credit limit that caps how much you can spend before the balance needs to be cleared, but this is typically higher than the credit limit on a personal credit card.

Keep in mind that there will be no interest to pay if the balance is paid off in full within the interest-free period, but what you owe can grow very quickly if it is not. This means that a credit card works best as a short-term borrowing option to help with cash flow, but can be an expensive way to borrow over the long term.

If you are a sole trader, you will have personal responsibility for the debt. This means that if you are late with any payments or are unable to pay back what has been borrowed, your personal credit is likely to be affected. If the business is a limited company, your personal credit should not be affected.

The best business credit cards allow you to earn cashback and rewards from your business spending, or benefit from perks such as free accounting software. We cover the best options in our article 'Compare the best and cheapest business credit cards'.

Business overdrafts

A business overdraft provides you with extra funds beyond what is actually in your bank account. It is a line of credit that your business takes out with the bank and can help cover any short-term cash flow issues with your business' current account. You will need to arrange an overdraft with the bank before you spend beyond what funds are in your account. The business will likely be charged a fee for using the overdraft facility, plus interest on how much it is overdrawn by.

Overdrafts are usually one of the more expensive ways to borrow as banks can charge a high rate of interest. However, there are the benefits of only paying interest on what you need and being able to repay the money whenever you are able to. You should be able to reduce your overdraft or apply for an increase at any time, so it is also a flexible way of borrowing, especially compared to a business loan.

Government grants and loans

Financing a business with government money will only be an option for a few types of business, but could be a great idea if you are eligible. The government offers both grants that do not need to be paid back and loans that do need to be repaid. Both are usually aimed at supporting a new business – such as the government Start Up Loan scheme – or funding a business that trades in an area of the country or an area of the economy that needs investment.

Clearly, grants are preferable to loans as you do not need to pay them back, but government loans can be one of the best-value ways of financing a business. The main downside is that there will be quite specific criteria that your business will have to fulfil in order to access government money. Here is a list of the different business grants across the UK and you can read our article ‘Startup business loans explained: Options, benefits & considerations’ to learn more about starting a business with government funding.

Crowdfunding

Crowdfunding is a way of financing a business through a high volume of low-impact, third-party investors. It could be to get a new idea off the ground or source day-to-day funding to keep your business going. Most businesses will post on an online crowdfunding site to explain why the company needs the money, often listing perks and rewards that investors can benefit from if they pay a certain amount. By appealing to a big 'crowd', you reduce how much each investor will need to contribute to help you reach your target. Keep in mind that you may need to pay fees to whichever crowdfunding site you use.

The most successful crowdfunders will have something that they can offer potential investors. This could be a really good business idea that they want to be involved in, or tangible rewards such as a discounted product. There is more useful information to help you kick off your crowdfunding journey on the UK Crowdfunding Association website.

Angel investors

While crowdfunding involves trying to get as many people as possible to invest in your business in exchange for small rewards, searching for an angel investor is the opposite. You are looking for one third-party investor to give your company all the money it needs, but in exchange for a large share of equity. A business may be able to attract more than one angel investor, but that could mean giving up even more equity in your company.

It is most common for angel investors to join a business at an early stage – especially if there are high start-up costs to be paid – but there is no reason why you could not try to attract one to your established business. Depending on the individual, they may be able to offer advice and expertise on how to grow your business, or provide useful insight and contacts within your industry.

The amount of money you can generate from an angel investor will likely come down to how well you can present your business ideas and how successful your company has been so far.

Self-investment

Also known as 'bootstrapping', this is a common way to get new businesses up and running, as it involves investing personal money into the company. Self-investment can be more beneficial than outside investment because you do not have to give up any equity or pay interest on the money, but it does come with personal risk. The money you put in cannot just be taken back out if you need it, so you will want to be in a stable financial position.

While most bootstrapping takes place when a business first starts up, you can continue to fund your company yourself on an ongoing basis or to keep it afloat in tough times. You could set up your self-investment as a loan to create more flexibility, but this will likely need to involve a loan agreement and should be discussed with an accountant first.

Asset finance

This is a form of secured borrowing that would suit a business looking to buy valuable assets, such as vehicles or machinery. You then repay the cost – with interest – over an agreed period of time. The asset is used as collateral to reduce the lender’s risk, as it can be sold to cover the debt if the business cannot repay the loan. This can help you access lower rates compared to a standard business loan, while the incremental payments can help with cash flow. You may also find that the reduced risk for the lender means it is easier to access asset finance than a standard business loan.

Invoice finance

A lender offers a business money in exchange for a percentage of an unpaid invoice. The funds function as a cash advance on money that is already owed to the business, so invoice finance would likely only suit an established company. In some cases, the lender will opt to take full control of the invoice and directly collect the money. The other option is that the business pays back the lender once the invoice is paid. Invoice financing is usually offered by banks, building societies and specialist lenders.

Pros and cons of each lending option

Here are the pros and cons of each business lending option we have covered:

Business Financing Options	Pros	Cons
Business loans	Access funds while keeping full operational control	A director may need to personally guarantee the loan
Business credit cards	Earn rewards or cashback on your company spending	High interest charges if you do not pay off the balance within the interest-free period (usually 56 days)
Business overdrafts	Only pay interest on what you borrow	High fees and interest charges, plus you will need to arrange the overdraft with your bank before you can use it
Government grants and loans	Borrow at a low rate of interest, or access funding that you do not need to repay through a grant	Only a limited range of businesses will be eligible
Crowdfunding	Test the popularity of your idea, plus individuals only need to contribute a relatively small amount	You will likely need to pay fees, and come up with attractive rewards and perks for your investors
Angel investment	Fund high upfront costs and access valuable advice	You will need to give up a share of your company, sometimes quite a significant one
Self-finance	Your business does not need to pay interest and you will not lose any control	Puts your personal financial situation at risk, as you may not get the money back if your business fails
Asset finance	Can be cheaper than a business loan and easier to be approved for	Missing payments could mean you lose the asset, which may be fundamental to your business
Invoice finance	Can be a quick way of accessing funds and solving cash flow problems if other credit options are not available	Can be more expensive than other forms of borrowing, especially if the invoice is paid late or not at all