How to get funding for a business
There are lots of different ways of funding a business, with the majority falling into one of two categories: debt finance (loans) or equity finance.
Debt finance
Debt finance generally involves borrowing money which you then repay, plus interest, over an agreed period of time. There are a variety of debt finance options, including:
Term loan - this means borrowing a lump sum of money which you commit to pay back, plus interest, over a set period of time. A term loan can be unsecured or secured against an asset you own, such as property or equipment. Read our guide to small business loans to find out more.
Asset finance – if you need equipment to run and grow your business - whether it’s specialist machinery, vehicles, or even standard office equipment - asset finance allows you to spread the cost. There are two main types: equipment leasing and hire purchase. Equipment leasing is where the asset finance provider purchases the asset you need and rents it to you over a set period of time. Hire purchase works similarly, but it gives you the option to purchase and gain ownership of the asset once you’ve made the payments. To learn more, read our guide to asset finance.
Invoice finance – this allows you to release the money that’s tied up in outstanding invoices, helping to improve your cash flow. Rather than waiting for customers to pay, you get access to a pre-agreed percentage of the invoice amount upfront. The remainder is paid back to you when you receive payment from the customer, minus a percentage of the invoice amount that goes to the invoice finance provider.
Equity finance
Equity finance is where you raise money by selling shares in your business. There are various sources of equity finance, including:
Angel investors
Angel investors are generally high net worth individuals who use their personal wealth to invest in promising - often early-stage - businesses. They may invest on their own or as part of a “syndicate” (a group of angel investors).
Venture capital
Venture capital funds generally invest in early-stage companies with high growth potential. Unlike angel investors who use their own money to invest, venture capitalists most commonly work for venture capital firms that raise funds from outside investors, called ‘limited partners’.
Private equity
Private equity firms, like venture capitalists, raise capital from ‘limited partners’ which they invest into businesses, typically more mature and established companies. We explain the differences between private equity and venture capital in our article.
Equity crowdfunding
This involves raising relatively small amounts of money from a large number of people (the ‘crowd’) by listing your business on an equity crowdfunding online platform.
You don’t necessarily need to choose between debt and equity finance – many businesses choose to use a mixture of the two.
To learn more about equity and debt and the key differences between them, read our guide.
Other options
Other funding options you may want to consider include:
- Mezzanine finance – this sits between debt and equity, combining features of both.
- Business grant funding - a non-repayable sum of money awarded to your business, often for a specific purpose or project rather than for general business activities.
How do I determine which funding option is best for my business?
The best funding option will depend on your company’s specific needs and situation. These are a few questions to ask yourself when you’re considering your options:
- How much money do you need? Will this funding option cover the total amount or part of it? If only a part, will you be able to combine it with a different funding source?
- What’s the cost of the finance? Make sure to factor in all costs, including any interest and fees
- Are you looking just for money or do you also want the experience and expertise of an investor to help you grow your business?
- How quickly do you need the funding? Keep in mind that it can take a lot longer to raise funding from some sources than others
