Types of Business Funding: Which Option Is Right for You?

There are many different types of business funding available in the UK, from traditional business loans and equity investment to asset finance, invoice finance, grants and specialist acquisition funding.

The right option depends on why you need the money, how much funding you require, the financial position of the business and whether you are willing to take on debt or give up a share of ownership.

In this guide, we compare the main business funding options, how each works and the circumstances in which they may be most appropriate.

What Are the Main Types of Business Funding?

The main types of business funding include:

• Business loans and debt finance
• Equity finance
• Asset finance
• Invoice finance
• Working capital finance
• Business grants
• Acquisition finance
• Owner funding and retained profits
• Seller finance
• Alternative business finance

Most external business finance can broadly be divided into debt finance and equity finance.

Debt finance involves borrowing money that must normally be repaid with interest. Equity finance involves raising capital from investors in return for a share of the business.

Other funding options, such as grants, asset finance and invoice finance, may be appropriate depending on what the capital is needed for.

1. Business Loans and Debt Finance

Business loans are one of the most common business financing options.

A lender provides capital to the business, which is then repaid over an agreed period. Interest and potentially other fees are charged for providing the finance.

Debt finance can take several forms, including:

• Term loans
• Commercial loans
• Overdrafts
• Revolving credit facilities
• Acquisition loans
• Asset-backed lending
• Short-term business loans

The amount available and the terms offered will depend on the lender and the financial strength of the business.

Lenders may assess factors including turnover, profitability, cash flow, trading history, existing debt, security and what the money will be used for.

When can debt finance be useful?

Business loans may be suitable where a company has relatively predictable cash flow and can comfortably meet repayments.

They can be used to fund:

• Business growth
• New premises
• Recruitment
• Stock
• Expansion
• Acquisitions
• Equipment
• Working capital

One of the main advantages is that borrowing does not normally require the owners to give away shares in the company.

The trade-off is that the debt must be serviced regardless of how the business performs.

Read our guide to Business Loans and Debt Finance to understand the different forms of borrowing and how they work.

2. Equity Finance

Equity finance involves raising money from investors in exchange for an ownership interest in the business.

Rather than providing a loan that must be repaid each month, an investor provides capital with the expectation that their shareholding will increase in value or produce a financial return.

Sources of equity finance can include:

• Angel investors
• Venture capital firms
• Private equity firms
• Strategic investors
• Investment syndicates
• Existing shareholders
• Equity crowdfunding

Equity investment is often associated with high-growth companies, but it can also be used by established businesses and to support acquisitions.

When can equity finance be useful?

Equity funding may be suitable where:

• Significant capital is required
• The business is pursuing rapid growth
• Taking on substantial debt would place too much pressure on cash flow
• The owners want access to an investor's expertise or network
• An acquisition requires additional capital beyond what the buyer and lenders can provide

The major consideration is ownership.

An investor will usually receive shares and may have certain voting, governance or board rights.

Business owners therefore need to consider not only how much money they are raising, but how much of the company they are prepared to give up.

Read Equity Finance for Businesses: How It Works and When to Use It for more information.

3. Asset Finance

Asset finance helps businesses acquire equipment, machinery, vehicles and other assets without necessarily paying the full cost upfront.

Instead, the cost is financed over an agreed period.

Depending on the type of agreement, the business may ultimately own the asset or use it for the duration of the finance arrangement.

Asset finance is commonly used for:

• Manufacturing machinery
• Commercial vehicles
• Construction equipment
• Agricultural machinery
• IT systems
• Specialist equipment
• Office equipment
  
  

When can asset finance be useful?

Asset finance can be particularly helpful when a company needs to invest in expensive equipment but wants to preserve cash for other business requirements.

For example, rather than using £150,000 of working capital to purchase machinery outright, a business may decide to finance the asset and spread the cost.

This can help align the cost of the asset with the period over which it is being used.

Read Asset Finance: How It Works for UK Businesses for a more detailed explanation.

4. Invoice Finance

Invoice finance allows eligible businesses to access some of the cash tied up in unpaid customer invoices before those invoices are settled.

For example, a company may complete work today but give its customers 30, 60 or even 90 days to pay.

Meanwhile, the company still needs to pay employees, suppliers and other costs.

Invoice finance can help bridge this gap.

The two main forms are:

Invoice factoring

With invoice factoring, the finance provider may advance funds against eligible invoices and also take responsibility for collecting payments from customers.

Invoice discounting

Invoice discounting also provides finance against invoices, but the business typically remains responsible for managing its own customer collections.

When can invoice finance be useful?

Invoice financing is often suited to businesses that:

• Sell to other businesses on credit terms
• Have substantial sums tied up in unpaid invoices
• Are growing quickly
• Experience cash flow pressure because of long customer payment terms

It is fundamentally a cash flow tool rather than a substitute for a profitable underlying business model.

Read Invoice Finance: Factoring and Invoice Discounting Explained for a complete comparison.

5. Working Capital Finance

Working capital finance is designed to support the everyday costs of running a business.

Working capital requirements can include:

• Payroll
• Stock
• Supplier payments
• Rent
• Utilities
• Marketing
• Seasonal expenditure
• Short-term operating expenses

A company can be profitable on paper while still experiencing periods where cash leaving the business does not align with cash coming in.

Working capital finance can provide additional liquidity during those periods.

Options may include:

• Overdrafts
• Revolving credit facilities
• Short-term loans
• Invoice finance
• Other working capital facilities

When can working capital funding be useful?

It may be appropriate where the business has a temporary or predictable funding requirement rather than a major long-term investment.

For example, a seasonal business may need to purchase substantial stock several months before the peak sales period generates the corresponding revenue.

Read Working Capital Finance: Funding Day-to-Day Business Needs for more information.

6. Business Grants

Business grants provide funding for eligible companies, projects or activities and generally do not need to be repaid provided the conditions of the grant are met.

That makes grants an attractive business funding option.

However, they can also be highly specific and competitive.

Funding programmes may support areas such as:

• Innovation
• Research and development
• Sustainability
• Energy efficiency
• Regional development
• Exporting
• Job creation
• Digital transformation
• Particular industries

Unlike a normal business loan, grant money may only be used for the purpose specified by the scheme.

Businesses may also need to provide evidence showing how the money has been spent and demonstrate that agreed outcomes have been achieved.

When can grant funding be useful?

Grants are worth investigating where the planned investment aligns closely with an available funding programme.

They should not necessarily be treated as guaranteed finance because applications can take time and there may be significant competition for available funding.

Read Business Grants and Government Funding in the UK for more information about finding suitable schemes.

7. Business Acquisition Finance

Business acquisition finance is funding specifically used to help purchase an existing business.

Unlike funding a new start-up, acquisition funders can assess the trading history, profitability and cash-generating ability of the company being purchased.

This can make the target business itself an important part of the funding assessment.

Funding a business purchase can involve:

• Acquisition loans
• Commercial debt
• Buyer capital
• Equity investment
• Seller finance
• Deferred consideration
• Asset finance
• Invoice finance
• A combination of several sources
  
  

Example of acquisition funding

Suppose an established business is being acquired for £1 million.

The transaction could potentially be structured as:

This is a simplified example, but it demonstrates why business purchases do not always need to be financed from one source.

The actual structure will depend on the target company's finances, the buyer, the lender's requirements and what the seller is willing to agree.

Read our guide to financing a business purchase for a detailed look at acquisition funding.

You can also read Debt Funded Purchase: How Does It Work? to understand how lenders assess debt capacity and affordability when financing an acquisition.

8. Owner Funding and Retained Profits

Not every business funding option involves an external provider.

Owners can finance a business using:

• Personal savings
• Capital introduced by shareholders
• Previous investment returns
• Retained profits generated by the company

Using your own capital can avoid interest charges and prevent equity dilution to external investors.

However, it also places more of your own money at risk.

Using retained profits

Established businesses may be able to reinvest profits rather than distributing them to shareholders.

This can be an efficient way to finance gradual growth without introducing external debt or investors.

The disadvantage is that growth is limited by the amount of cash the business can generate and retain.

For a major acquisition or expansion project, internal resources alone may not be sufficient.

9. Seller Finance and Deferred Consideration

Seller finance is particularly relevant when buying a business.

Instead of receiving the entire purchase price on completion, the seller agrees for part of the consideration to be paid later.

For example:

Purchase price: £800,000
Paid at completion: £600,000
Deferred consideration: £200,000

This reduces the amount the buyer needs to fund at completion.

Deferred consideration may be paid in fixed instalments or structured in another agreed way.

An earn-out is different in that some of the future consideration may depend on the business achieving agreed performance targets.

Why use seller finance?

Seller finance can:

• Reduce the upfront funding requirement
• Help bridge a funding gap
• Complement commercial debt
• Align the buyer and seller during a transition period
• Make certain transactions more achievable

However, it depends on the seller being comfortable accepting payment after ownership has transferred and requires carefully drafted transaction terms.

10. Alternative Business Finance

Businesses are no longer restricted to traditional high-street bank lending.

Alternative finance can include funding from:

• Specialist commercial lenders
• Private credit providers
• Peer-to-peer platforms
• Revenue-based finance providers
• Specialist asset-based lenders
• Private investors

These providers may use different assessment criteria or offer more flexible funding structures than conventional banks.

That does not automatically make alternative finance better.

The overall cost, security requirements, repayment terms and risks still need to be considered carefully.

Debt Finance vs Equity Finance: Which Should You Choose?

For many businesses, the first major decision is whether the required capital should be borrowed or raised from investors.

Neither option is inherently better.

An established business with predictable cash flow might prefer debt because it can fund investment without reducing shareholder ownership.

A rapidly growing company requiring substantial capital may decide that bringing in an equity investor creates a more sustainable financial structure.

Some businesses combine both.

Read Debt Finance vs Equity Finance: Which Is Better for Your Business? for a detailed comparison.

Which Type of Business Funding Is Right for You?

Choosing between business funding options becomes easier if you start with the purpose of the funding rather than the products available.

If you need to buy equipment

Consider asset finance or a business loan.

If customers take a long time to pay

Consider invoice finance or another working capital facility.

If you need money for everyday operating costs

Consider working capital finance, an overdraft or revolving facility.

If you're funding substantial growth

Consider debt finance, equity finance or a combination of the two depending on the company's ability to support repayments.

If you're buying an established company

Consider acquisition finance, potentially combining buyer capital, commercial debt and seller finance.

If your project meets specific government or regional criteria

Investigate business grants and government funding.

If you want to retain complete ownership

Debt or internally generated funding may be preferable to equity, provided the business can comfortably afford the financial commitment.

Questions to Ask Before Choosing Business Finance

Before committing to any form of business funding, ask:

What exactly is the money for?

The funding structure should match the purpose.

A temporary working capital shortage should not necessarily be financed in the same way as a ten-year growth project or business acquisition.

How much funding do I actually need?

Calculate the requirement carefully.

Too little funding could leave the project incomplete, while taking more finance than necessary can create avoidable costs.

Can the business afford repayments?

For debt finance, affordability should be assessed against realistic cash flow rather than relying solely on optimistic forecasts.

How long do I need the funding for?

Try to match the duration of the finance to the useful life or purpose of the expenditure.

Am I prepared to give up ownership?

Equity can reduce repayment pressure, but giving away shares affects the future value and control of the business.

Is security required?

Some lenders may require security over company assets or personal guarantees from directors.

Understand what is at risk before accepting the finance.

What is the total cost?

Look beyond the headline interest rate.

Consider arrangement fees, legal costs, valuation fees, early repayment charges and other costs associated with the facility.

What happens if performance is weaker than expected?

A funding structure should ideally leave the business with enough headroom to cope with reasonable changes in revenue, margin or costs.

Can You Combine Different Types of Business Funding?

Yes.

Businesses frequently combine several funding options rather than relying on one source.

For example, a company investing in expansion could use:

• Retained profits for recruitment
• Asset finance for new machinery
• Invoice finance to support increased working capital

A business acquisition might combine:

• Buyer capital
• Acquisition debt
• Seller finance

Using multiple funding sources can help match different elements of the requirement to the most appropriate type of finance.

However, the complete funding structure still needs to be affordable.

Taking several facilities from different providers can create complexity and should not be used simply to maximise the amount of capital available.

How to Compare Business Funding Options

Once you have identified suitable types of business finance, compare potential options based on:

• Amount available
• Interest rate
• Fees
• Total amount repayable
• Repayment period
• Repayment frequency
• Security
• Personal guarantees
• Eligibility requirements
• Funding timescale
• Early repayment terms
• Flexibility
• Effect on ownership
• Impact on business cash flow

The right business financing option should support the commercial objective without creating unnecessary financial pressure or giving away more ownership than necessary.

Choosing the Right Funding for Your Business

There is no single best way to fund a business.

A business loan may be appropriate for one company, while another may benefit from invoice finance, equity investment, asset finance or a grant.

The most suitable funding option depends on:

• Why the funding is required
• The amount needed
• How quickly it is needed
• The financial performance of the business
• Available cash flow
• Existing debt
• Available security
• Willingness to share ownership
• Longer-term business objectives

In many cases, the best solution may involve more than one source of finance.

If you're looking specifically at buying an established company, understanding your potential funding structure early can also help determine the size and type of opportunity you can realistically pursue.

Explore our complete guide to business funding for an overview of the wider funding process, or visit our How to Buy a Business in the UK guide if you're considering an acquisition.

How Valius Can Help You Fund a Business Acquisition

If you are exploring business funding because you want to acquire an established company, understanding your finance options early can make the buying process much more straightforward.

At Valius, we help aspiring and experienced business buyers navigate the acquisition journey, from finding suitable opportunities through to understanding valuation, due diligence, deal structure and funding.

The right acquisition will often depend not just on the purchase price, but on how the deal can realistically be funded. That may involve a combination of your own capital, acquisition debt, seller finance, deferred consideration or other sources of business finance.

By thinking about your likely funding capacity before making an offer, you can focus on businesses that fit both your commercial objectives and your financial position.

Browse Businesses for Sale or Create Your Free Account to start exploring acquisition opportunities with Valius.