This guide explains how business funding works in the UK, the main types of business finance available, what funders typically look for and how to choose a funding structure that supports your objectives.
Whether you're looking to grow an existing company, improve cash flow or finance a business acquisition, understanding your options is an important first step.
Open fast find
Close fast find
Business funding can provide the capital you need to start a company, support day-to-day operations, invest in growth or finance the purchase of an existing business.
But with business loans, equity investment, asset finance, invoice finance, grants and other funding options available, knowing which route is right for your business is not always straightforward.
Business funding is money provided to a business to help it achieve a particular financial or commercial objective.
The funding could be used to:
Business finance can come from a wide range of sources, including banks, specialist lenders, private investors, government-backed programmes and the business owners themselves.
The right form of funding depends on what the money is being used for, how much is required, the financial strength of the business and how the owners want the finance to be structured.
Most forms of external business funding fall broadly into two categories: debt finance and equity finance.
With debt finance, the business borrows money and normally repays it over an agreed period, usually with interest.
With equity finance, an investor provides capital in return for an ownership stake in the business.
However, there are several individual funding products within these categories, alongside grants and other forms of finance.
|
Funding Type |
How It Works |
Common Uses |
|
Business loans |
Borrow a fixed amount and repay it with interest |
Growth, acquisitions, investment and working capital |
|
Equity finance |
Raise capital in exchange for business ownership |
Growth, expansion and larger investment requirements |
|
Asset finance |
Finance equipment, machinery, vehicles or other assets |
Purchasing or replacing business assets |
|
Invoice finance |
Access funds against unpaid customer invoices |
Improving cash flow and working capital |
|
Working capital finance |
Short-term finance to support operational expenditure |
Payroll, stock, suppliers and cash flow |
|
Business grants |
Funding that generally does not need to be repaid, subject to scheme conditions |
Innovation, regional growth, R&D and specific projects |
|
Acquisition finance |
Funding structured around purchasing another business |
Business acquisitions, MBOs and expansion |
|
Owner investment |
Capital contributed directly by the business owner |
Start-ups, acquisitions and growth |
|
Alternative finance |
Finance from specialist or non-traditional providers |
Businesses requiring more flexible funding structures |
The best option depends on the business, the purpose of the funding and the amount required.
Our guide to Types of Business Funding explores each option in more detail.
Businesses seek finance for many different reasons.
Some require funding because they are just getting started. Others may already be profitable but need additional capital to pursue an opportunity that cannot be financed efficiently from existing cash reserves.
A new business may require capital before it generates sufficient income to support itself.
Initial funding could be needed for premises, technology, equipment, stock, professional fees, recruitment, marketing and working capital.
Start-ups have less financial history for lenders to assess, so the funding routes available can differ considerably from those available to an established company.
Read our guide to Startup Business Funding in the UK for more information.
Growth often requires investment before the financial benefit of that investment is realised.
A business may need finance to:
Appropriate business financing can allow the company to make these investments while preserving some of its existing cash.
A profitable company can still experience cash flow pressure.
For example, a business may have to pay employees and suppliers several weeks before receiving payment from customers.
Working capital facilities and invoice finance are commonly used to bridge these timing differences.
Equipment, vehicles, machinery and technology can require substantial upfront investment.
Asset finance allows businesses to spread the cost of certain assets rather than paying the entire purchase price immediately.
Funding can also be used to finance the acquisition of an existing company.
Depending on the transaction, buyers may combine their own capital with debt finance, seller finance, deferred consideration, equity investment or other sources of acquisition funding.
If you're considering an acquisition, read our guide to financing a business purchase.
Debt finance involves borrowing money that must be repaid under agreed terms.
For many established companies, this is one of the most familiar forms of business finance.
Debt funding can include:
The lender does not normally receive ownership in the business. Instead, the business agrees to repay the finance, usually with interest and potentially additional fees.
Potential benefits include:
Debt also creates a financial commitment.
Before taking on finance, businesses should consider:
The cheapest-looking headline rate is not necessarily the best funding solution. The overall structure and affordability of the finance are equally important.
Read our guide to Debt Funded Purchases for a detailed explanation of how business borrowing works.
Equity finance involves raising money by giving an investor a share of ownership in the company.
Unlike a traditional business loan, the funding does not normally have scheduled capital and interest repayments.
Instead, investors participate in the future value and performance of the business through their equity stake.
Equity investors may include:
Equity finance can be particularly relevant where significant capital is required or where the company is pursuing substantial growth.
Potential advantages include:
Giving away equity has long-term implications.
Business owners should consider:
For some businesses, the strategic value an investor provides can be as important as the money itself.
Read our guide to Equity Finance for Businesses for a closer look at how equity investment works.
One of the most important funding decisions is whether to borrow money or raise investment.
Neither option is inherently better.
The right choice depends on the company's financial position, objectives and attitude towards ownership.
|
Debt Finance |
Equity Finance |
|
Money is borrowed |
Capital is invested |
|
Usually repaid with interest |
Usually no scheduled repayment |
|
Owners generally retain their shares |
Ownership is shared with investors |
|
Creates regular financial commitments |
Does not normally create loan repayments |
|
Lenders focus heavily on affordability |
Investors focus heavily on future value and growth |
|
Lender influence is normally limited by the finance agreement |
Investors may have voting or governance rights |
A profitable established company with predictable cash flow may prefer borrowing because it allows the owners to retain equity.
A high-growth company requiring substantial investment may decide that sharing ownership with an investor is preferable to taking on significant debt.
Some businesses use both.
Read Debt Finance vs Equity Finance for a full comparison.
Business loans remain one of the most recognisable forms of business funding in the UK.
A lender provides an agreed amount of capital and the borrower repays the loan according to the finance agreement.
The terms available will depend on factors such as:
Loans can be secured or unsecured and may be available from traditional banks as well as specialist and alternative lenders.
For businesses looking at acquisitions, lending may be assessed partly against the financial performance and cash-generating ability of the company being purchased.
Read more about how debt-funded business purchases work.
Asset finance allows businesses to acquire equipment, machinery, vehicles and other assets without necessarily paying the entire purchase cost upfront.
Instead, payments are spread over an agreed period.
Depending on the arrangement, the business may ultimately own the asset or simply use it for the duration of the agreement.
Asset finance can be useful where purchasing an asset outright would absorb working capital that could otherwise be used elsewhere in the business.
Common uses include financing:
Read our complete guide to Asset Finance for more information.
Businesses that invoice customers and wait for payment can sometimes release cash tied up in those invoices through invoice finance.
Instead of waiting 30, 60 or 90 days for a customer to pay, the business receives access to a proportion of the invoice value earlier.
Two common forms are:
With factoring, the finance provider may also manage the sales ledger and collect payments from customers.
With invoice discounting, the company typically retains control of customer collections while accessing funding secured against its receivables.
Invoice finance can be particularly useful for growing businesses where sales are increasing faster than available working capital.
Read Invoice Finance: Factoring and Invoice Discounting Explained for the differences between the two approaches.
Working capital is the money a business uses to meet its everyday operating requirements.
Companies may need additional working capital to cover:
Working capital finance is therefore generally used to support normal business operations rather than a major long-term capital investment.
Products can include overdrafts, revolving credit, short-term loans and other flexible finance facilities.
The appropriate structure depends on whether the requirement is temporary, seasonal or ongoing.
Read our guide to Working Capital Finance for more information.
Business grants can provide valuable funding because eligible businesses may not have to repay the money provided they comply with the conditions of the scheme.
However, grants are generally designed for specific purposes rather than acting as unrestricted business finance.
Funding programmes may target areas such as:
Eligibility varies considerably between schemes, and applications can be competitive.
The UK Government maintains a searchable database of business finance and support programmes, including grants, loans, equity schemes and other forms of assistance.
Read Business Grants and Government Funding in the UK to understand where to look and how grant funding differs from commercial finance.
Smaller businesses have access to many of the same funding categories as larger companies, although the products and eligibility requirements may differ.
Options can include:
The right form of small business finance will depend heavily on the company's stage of development.
A small established company with several years of profitable trading has a very different funding profile from a business that began trading six months ago.
Read Small Business Funding: Finance Options for UK Businesses for a more detailed comparison.
New businesses can face additional challenges when raising finance because they have limited or no historical financial performance.
Instead, a funder may place greater emphasis on:
Possible startup funding routes include owner investment, loans, grants, angel investment and other forms of early-stage capital.
As the business develops a trading history, more conventional business finance options may become available.
Read Startup Funding in the UK: Options for New Businesses for a dedicated guide.
Another important distinction is whether the funding is secured or unsecured.
Secured finance uses an asset or other form of security to support the borrowing.
Depending on the arrangement, security could involve property, business assets or other collateral.
Because the lender has additional protection if the borrower fails to repay, secured finance may make larger funding amounts possible in suitable circumstances.
However, assets used as security can potentially be at risk if the finance agreement is not met.
Unsecured finance does not rely on a specific business asset in the same way.
Instead, the lender places greater emphasis on the financial strength and creditworthiness of the borrower.
Unsecured lending may still require a personal guarantee from directors or shareholders.
Read Secured vs Unsecured Business Finance for a detailed comparison.
A lender may ask one or more company directors to provide a personal guarantee when arranging business finance.
A personal guarantee is a legal commitment that can make the guarantor personally responsible for some or all of the outstanding borrowing if the business cannot meet its obligations, subject to the terms of the agreement.
This means directors should understand exactly what they are signing before providing one.
Questions to consider include:
Read Personal Guarantees for Business Funding: What Directors Need to Know before agreeing to a guarantee.
There is no universal maximum amount of business finance available.
The amount a funder is prepared to provide will depend on the type of finance and the risk of the application.
For debt funding, lenders may assess factors such as:
Equity investors will assess the opportunity differently and may focus more heavily on valuation, growth potential, market size, management and potential investment returns.
For acquisition finance, lenders may also assess the profitability and cash flow of the target business.
That is why asking "How much can I borrow?" without first understanding the business and the intended use of the funds rarely produces a meaningful answer.
Read How Much Business Funding Can You Get? for a detailed explanation of how funding capacity may be assessed.
Funding requirements vary between providers and products.
However, businesses should generally expect a funder to want evidence that the proposition is commercially credible and that the finance can be supported.
Information requested may include:
For acquisition funding, additional information about the target business and proposed transaction will usually be required.
This may include historic accounts, forecasts, valuation, deal structure and details of the buyer's personal contribution.
Read Business Funding Requirements: What Will You Need to Apply? for a full checklist.
Getting business funding generally involves more than completing an online application.
A well-prepared funding process can be broken down into several stages.
Be specific about why the money is required.
For example, "£250,000 to purchase new manufacturing equipment" creates a much clearer funding requirement than simply saying the business needs additional cash.
Borrowing too little can leave the project underfunded.
Borrowing substantially more than required may create unnecessary cost and repayment pressure.
Prepare a realistic funding requirement based on the actual project or transaction.
If you're borrowing, consider whether the business will comfortably generate enough cash to meet repayments.
Funding should support the business rather than place it under unsustainable financial pressure.
The right funding product depends on the purpose.
Financing a new vehicle, acquiring a competitor and covering a two-month working capital gap are very different requirements and may call for different forms of finance.
Strong applications are supported by clear, accurate and up-to-date financial information.
Different lenders and investors have different appetites.
A funder specialising in asset-backed established businesses may not be appropriate for a pre-revenue technology startup, and vice versa.
Do not evaluate finance on the headline interest rate alone.
Consider the total cost, repayment schedule, security, guarantees, fees, covenants and flexibility.
Our complete guide to How to Get Funding for a Business in the UK walks through the process step by step.
A funder needs to understand both the opportunity and the risk.
Your application should therefore clearly explain:
Where forecasts are provided, they should be supported by reasonable assumptions rather than simply presenting the most optimistic possible scenario.
Read How to Prepare a Strong Business Funding Application for a more detailed checklist.
A rejected application does not always mean a business cannot obtain finance.
Different funders have different criteria and risk appetites.
Common issues that can make an application more difficult include:
Where an application is declined, understanding the reason can help determine whether the business needs to improve its position, provide additional information or consider another form of finance.
Read Why Business Funding Applications Are Rejected for the most common reasons and what to do next.
The cost of business finance depends on much more than the advertised interest rate.
Depending on the facility, costs may include:
The interest rate itself can be influenced by factors including the size and duration of the finance, borrower risk, available security and wider market conditions.
Businesses should therefore compare the total cost of finance, not just the headline rate.
Read Business Funding Costs: Interest Rates, Fees and Total Cost for a detailed breakdown.
Funding an acquisition differs from taking out finance for ordinary operating expenditure.
When buying an established business, lenders can examine the target company's historic financial performance and ability to generate cash.
A typical transaction may involve several sources of capital rather than one.
For example:
Purchase price: £1,000,000
Buyer capital: £200,000
Acquisition debt: £500,000
Deferred consideration or seller finance: £300,000
The exact structure will depend on the transaction.
Potential sources of acquisition funding include:
Lenders will commonly look at the target company's profitability, cash flow and ability to service the proposed debt, alongside the buyer's experience, contribution and overall transaction structure.
If acquisition funding is your main objective, read our dedicated guide to financing a business purchase and our detailed explanation of debt-funded purchases.
The best finance is not necessarily the cheapest finance or the one offering the largest amount.
It should be appropriate for the purpose of the funding and sustainable for the business.
Before choosing a funding route, ask:
Match the funding term to the purpose wherever possible.
A short-term cash flow requirement should not automatically be financed in the same way as a long-term acquisition.
Build the requirement from realistic costs rather than choosing an arbitrary funding amount.
Some funding routes can be arranged relatively quickly, while equity investment, grants and larger structured finance transactions may require a more involved process.
If the funding is debt, model the repayments under realistic and less favourable trading scenarios.
Equity may remove conventional debt repayments, but it means sharing ownership and potentially future decision-making.
Available assets and guarantees may affect both the funding options available and their terms.
Consider what happens if you need to repay early, borrow additional money or restructure the finance later.
Compare all fees, interest and other financial obligations across the full term.
Businesses do not always have to choose a single funding route.
Combining different sources of finance can sometimes create a more appropriate structure.
For example, an acquisition could combine:
A growing company might combine:
A high-growth business could potentially combine:
This is sometimes referred to as a funding stack or capital structure.
The important point is that each component should serve a clear purpose and that the total financial commitment remains sustainable.
The UK business finance market includes high street banks, challenger banks, specialist lenders, asset finance providers, invoice finance providers, private investors, private equity firms and government-backed programmes.
The British Business Bank also provides a Finance Finder designed to help businesses research potential finance options based on factors such as what the funding is for and how much is required.
When comparing providers, consider more than whether funding is available.
Assess:
For more complex funding requirements, particularly acquisitions, professional financial, legal and tax advice can be valuable before committing to a structure.
For business buyers, arranging funding should not be treated as the final step after finding a company.
Your funding capacity can influence:
Understanding this early can help prevent buyers from pursuing opportunities they cannot finance.
If you're planning an acquisition, our complete guide to buying a business in the UK explains the wider process from defining your acquisition criteria through to valuation, due diligence, funding and completion.
There is no single business funding option that is right for every company.
The right solution depends on why the funding is required, the amount involved, the financial strength of the business, available security, affordability and the owners' longer-term objectives.
For some businesses, a straightforward loan may be appropriate. Others may benefit from asset finance, invoice finance, equity investment or a combination of several funding sources.
And for buyers looking to acquire an established company, the funding structure can become an important part of the transaction itself.
At Valius, we help aspiring and experienced business owners navigate the acquisition journey with carefully curated opportunities and practical guidance covering valuation, due diligence, funding, negotiation and completion.
Browse Businesses for Sale or Create Your Free Account to start exploring your next opportunity.
Frequently Asked Questions
Suggested Blog Posts
