Small business funding – What are the main sources of finance?

Small businesses play a significant role in many economies, offering job opportunities and driving growth and innovation. However, one of business owners’ most important issues is securing the financing to start or expand their companies.

Fortunately, a wide range of funding for small business startup UK is available, from traditional bank loans to alternative forms of financing like crowdfunding and peer-to-peer lending.

Whether you are a new entrepreneur looking to launch an enterprise or an established small business owner seeking growth, knowing about the various financing options available can allow you to make educated choices about how to fund your business.

This blog post will examine some of the primary sources of finance for small businesses.

Hire small business accountants

Work with a UK-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.

Have a question? Call us on
0203 900 3500
Monday to Friday 9am – 5pm

Table of content

Small business funding: 7 Key sources of funding

1. Self-funding
Self-funding is using savings, investments, assets, or credit cards to fund a small business. Entrepreneurs with a substantial cash reserve or willing to incur personal debt to finance their firm will find this a good option.

Self-funding has the benefit of giving the business owner complete control over the company’s finances. They don’t have to pitch to investors or comply with lenders’ demands, which can save effort and time.

Self-funding can also increase investor confidence in a company because it demonstrates the entrepreneur’s dedication to the project and willingness to accept financial risk.

2. Bank loans
Bank loans are a prevalent source of finance for smaller firms. Banks offer different types of loans, like term loans and lines of credit, to provide smaller firms with capital. These loans are generally secured by collateral, like company assets or real estate, and may involve a personal guarantee from the owner.

Bank loans can be a viable finance source for smaller companies with a strong credit history and collateral to secure the loan. Examining and comparing various loan options is essential to find the one that best suits your company’s requirements and objectives.

Additionally, your firm should have a good business plan and up-to-date financial projections to demonstrate to the lender that your firm is a good investment.

3. Equity
Equity financing is another popular financing option for small businesses. This type of financing involves the sale of a portion of the company to investors in exchange for financing.

Equity financing can be obtained from various sources, such as venture capitalists, angel investors, and crowdfunding platforms.

Crowdfunding is another choice for small companies seeking equity capital. Crowdfunding platforms enable businesses to raise money from several people, often via online platforms. In exchange for their investment, investors may receive equity in the company or other rewards, like goods or services.

One of the benefits of equity financing is that it does not necessitate the business to take on debt, which can be a challenge for small businesses. Further, equity financing can provide substantial capital and bring valuable assets and knowledge to the industry through the investor’s network and expertise.

4. Grants
Grants are another funding option that smaller companies can explore. Government entities, non-profit organisations, or private foundations usually offer grants and can provide financing for particular projects or initiatives.

For small firms with limited resources, grants can be an ideal choice because they are not like loans and do not need to be repaid. However, the grant application process can be time-consuming and competitive, and not all companies are eligible for grant funding.

To be considered for a grant, businesses must submit a detailed plan outlining the grant’s intent, how the funds will be used, and the predicted outcomes of the project or initiative. Grants may have particular eligibility requirements, like the location of the business, the industry, or the project’s social impact.

5. Business incubators and accelerators
Business incubators and accelerators are initiatives designed to support and cultivate the development of small enterprises. Incubators and accelerators may offer a range of resources and assistance that can help smaller companies succeed, such as mentorship, funding, networking opportunities, and access to advanced facilities or equipment.

Sometimes, incubators can also provide financing through grants or equity investments.

On the other hand, accelerators are designed to assist companies that have advanced development to expand and scale their operations quickly.

Accelerators generally provide a more intensive program of mentoring and support, mainly over a short period, and provide financing in exchange for a stake in the company.

6. Microloans
Microloans are small loans usually provided by non-profit organisations, government entities, and other community-based lending institutions to help small enterprises, particularly those owned by women, minorities, and individuals from disadvantaged communities.

Microloans are frequently given to companies that need help to obtain traditional bank loans. They are typically designed to fund small capital expenditures or working capital. Microloans also have more flexible repayment plans and lower interest rates than conventional bank loans.

7. Working capital loans
If your company is facing a shortage of funds to pay its daily operating costs, you can consider a working capital loan. Such loans are especially suitable for addressing immediate cash flow issues and generally do not require any collateral for approval.

However, it’s worth noting that working capital loans frequently come with higher interest rates than other types of business loans. Moreover, the repayment period may be as short as a few months, meaning you should be confident in your company’s ability to repay the loan before applying for one.

Hire small business accountants

Work with a UK-based accountant for tax, accounting, payroll, & EIS/ SEIS needs.

Have a question? Call us on
0203 900 3500
Monday to Friday 9am – 5pm

Final thoughts

Launching, growing, or investing in a company presents a unique set of possibilities, risks, and challenges. One of the small businesses’ biggest obstacles is acquiring sufficient capital to support their business activities. The early stages of a company are crucial, and receiving quick business funding is vital to gain momentum in the market.

Financing for small businesses comes in different forms, such as loans, grants, investments, or crowdfunding. You can hire a small business accountant to evaluate your funding options and create a financial plan that aligns with your company objectives so that you have the required resources to succeed.

    Learn more about Accounting , Bookkeeping and Tax

    Subscribe to get our monthly dose of accounting, bookkeeping, tax and startup knowledge, inspiration and news.

    Receive the latest news

    Subscribe To Our Monthly Newsletter

    Get notified about new articles