Small business finance options explained: finding the cash to fast-track your goals

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If you’re hoping to start or scale a small business, you might need access to extra cash. There are several different finance options available to small businesses - from traditional bank loans to alternative funding sources. 

This quick guide will explain some small business funding options for you - including some pros and cons of each - plus practical tips for responsible borrowing.

Traditional vs alternative finance: what’s the difference?

Small business funding options typically fall into two camps: traditional and alternative finance. Traditional finance might be more familiar to you, but both can boost your small biz budget.

Traditional funding sources include business loans, venture capital and commercial mortgages. They’re tried-and-trusted funding options but can be restrictive if your business model doesn’t fit their criteria.

Alternative funding comes from less familiar sources, such as new financial institutions and initiatives. These include finance from peer-to-peer lending, crowdfunding, invoice-finance apps, and more.

There’s no right or wrong way to fund your small business ambitions, so explore all of your options to work out what’s right for you. 

Popular sources of small business finance

Family and friends

Many small business owners overlook this homegrown finance option. You might worry about asking for investment or letting people down. But with realistic expectations and some basic ground rules, it could be a viable option for a short term cash boost.

Borrowing from family and friends can be easier than accessing traditional lending, and may have more relaxed repayment requirements. But remember there’s more than just money at stake, relationships are on the line too. So make sure all parties understand the agreement - how much will be borrowed, when it will be repaid, if any interest will be due etc - and put it all in writing. 

Personal credit 

Another option for short-term finance is to make use of any credit facilities available to you - like your overdraft or credit card. For small sums, this can be quicker and easier than applying for a business loan. 

But don’t forget to do your math and make sure your investment will actually deliver returns. You need to be able to repay what you borrow before repayments or interest becomes problematic. And to avoid confusing personal and business funds, transfer a lump sum over to your business bank account rather than spending small sums here and there. 

Business loan

You can apply for a business loan from many high street banks. You’ll need to provide a robust plan that shows how you’ll use the money - and how it will generate returns so you can repay the loan. Business loans are a tried-and-trusted way to fund business growth. You’ll know exactly where you stand and have a clear repayment schedule. 

But they’re not available to everyone. Banks are risk-averse. They often favour limited companies over sole traders. And most banks require a few years’ trading history before they’ll consider lending, which rules out newer businesses. 

Startup loan

If your business is under two years old, you can apply for a Government-backed Start Up Loan. They’re available through delivery partners like Transmit Startups. Specifically designed for businesses with limited trading history, they let new businesses apply for £500 to £25,000.

You’ll need to write a business plan and prepare realistic financial projections to be considered. Good delivery partners will support you through this process. You’ll also get free mentoring for a year after you receive your loan. They’re a great option for new businesses looking for financial help as well as business startup support. 

Equity investment

You might not be ready to pitch on Dragons Den but you can still look for a personal dragon to support your business dreams. Equity investors put their money into businesses, in the expectation of making a profit by doing so. There are two main types of equity investors, particularly for early-stage businesses.

  • Angel investors are typically individuals who invest their own money and play a supportive role in developing your business, such as mentoring. They often take less of a share than venture capitalists. 
  • Venture capitalists are usually investing on behalf of a managed fund and take a very active role in your business, such as board membership. They usually take a higher share than angel investors.

You can find investors through agencies and by approaching potential investors directly. Take a look at UK Business Angels Association, The UK Angel Investment Network and The British Private Equity and Venture Capital Association.

Be aware that most investors will want an exit strategy - a plan for when they’ll withdraw their investment and profit from your business - as well as a say in how you run your business whilst they’re on board. 

Crowdfunding

Crowdfunding is when you raise money from a ‘crowd’ of small investors - usually via a dedicated crowdfunding site. It works best for businesses that already have an engaged audience of fans or followers, who'll be willing to make a small investment to see a new product come to market. 

Usually, you’ll offer something in return for people’s contribution. This might be receiving your new product once it's available (as with reward-based sites like Kickstarter and Indie GoGo) or an equity share in your business (with sites like Crowdcube and Seedrs). 

The downside of crowdfunding is that you have to secure the full amount you’re looking to raise. If you can’t, the investors will get their money back. 

Peer-to-peer lending

Peer-to-peer lending happens via online platforms (like Funding Circle and RateSetter). These sites allow individuals to anonymously invest in projects that need funding, and receive a certain % return on their money. 

For borrowers, peer-to-peer lending is much like any other loan. You apply for the money you need and - if successful - receive the money and commit to a regular repayment schedule, plus interest. It is a viable alternative to traditional funding methods like a business bank loan. 

Grants

Getting a grant is a dream scenario because you don’t have to pay it back. But free money is hard to come by. Non-repayable grants tend to be attached to specific objectives, such as digital transformation, environmental initiatives or social causes.

Sources of grants include the government, local authorities, enterprise hubs, the EU, and some private funds. If you do find a grant you’d like to apply for, be prepared to make a strong business case for the impact you’ll make. 

Tips for responsible business borrowing

Whichever funding route you choose, make sure you borrow responsibly. There can be serious consequences if you fail to make repayments on business borrowing. 

Follow these golden rules to protect yourself - and your business - against risk.

  • Never borrow more money than you’re confident you can repay - plus interest 
  • Only borrow what you need to fund a specific objective - don’t just borrow as much as you can
  • Make sure repayment options are affordable - even if your circumstances change
  • Even if your lender doesn’t require a business plan, write one - never borrow based on hunches and best guesses
  • Ensure any informal borrowing is properly documented - put everything in writing so all parties know when the money will be repaid and on what terms 

To help you follow the golden rules, small business funding experts - Transmit Startups - have some handy resources.

  • Complete a personal survival budget to work out your minimum financial requirements each month, so you can check finance repayments are affordable
  • Read this guide to writing a business plan, to make sure you’re business and financial goals are realistic before borrowing any money.
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Richard Myers
Commercial Director
Updated on
March 13, 2023

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